3Q 2013 Earnings Presentation - IBM · 2014. 6. 10. · 2000 & 2001 segments not restated for stock based compensation; 2000-2010 Segment PTI is reclassified to conform with 2012

www.ibm.com/investor

3Q 2013 Earnings PresentationOctober 16, 2013

www.ibm.com/investor 2

Forward Looking Statements and Non-GAAP Information

Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company's filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together.

In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including "operating earnings" and other "operating" financial measures. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information are included in supplemental materials entitled “Non-GAAP Supplemental Materials” that are linked to the Company’s investor relations web site at http://www.ibm.com/investor/events/3q13.phtml The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated October 16, 2013.


3Q 2013

� Total Services returned to revenue growth @CC, led by GBS

� Software Key Branded Middleware grew mid-single digits @CC

� Hardware mainframe growth more than offset by declines in Power, System x

and Storage

�Major markets yr/yr performance improved; growth markets declined

� Continued strong performance in growth initiatives that address key market trends

• Smarter Planet revenue +20% YTD

• Business Analytics +8% YTD

• Cloud +>70% YTD; >$1B in revenue for first time in a quarter

� Expanded gross and net margins

Revenue $23.7B -4%, -2% yr/yr @CC

Operating (Non-GAAP) EPS $3.99 10% yr/yr

Continue to expect 2013 Operating EPS of at least $16.25,$16.90 excluding 2Q Workforce Rebalancing charge


Key Financial Metrics

P&L Ratios(Operating)

3Q13B/(W)Yr/Yr

GP Margin 49.1% 1.0 pts

PTI Margin 22.3% Flat

NI Margin 18.5% 1.7 pts

Tax Rate 17.0% 7.7 pts

P&L Highlights

3Q13B/(W)Yr/Yr

Revenue $23.7 (4%)

@CC (2%)

PTI – Operating $5.3 (4%)

NI – Operating $4.4 6%

EPS – Operating $3.99 10%

Cash Highlights3Q13

Last12 Mos.

Free Cash Flow (excl GF Receivables) $2.2 $16.1

Share Repurchase (Gross) 1.9 11.1

Dividends 1.0 4.0

Cash Balance @ Sept. 30 10.2

$ in Billions, except EPS


Revenue by Geography

3Q13B/(W) Yr/Yr

Rptd @CC

Americas $10.3 (1%) Flat

Europe/ME/A 7.3 1% (2%)

Asia Pacific 5.5 (15%) (4%)

Total Geographies $23.2 (4%) (2%)

IBM $23.7 (4%) (2%)

Major Markets (3%) (1%)

Growth Markets (9%) (5%)

BRIC Countries (15%) (12%)

$ in Billions

APac

U.S.

-1%

EMEA

Canada/

LA

Japan

+5%

@CC

OEM

Flat

Major markets yr/yr performance improved; growth markets declined


Revenue and Gross Profit Margin by Segment

3Q13B/(W) Yr/Yr Rptd @CC 3Q13

B/(W)Yr/Yr Pts

Global Technology Services $9.5 (4%) (1%) 39.0% 1.7 pts

Global Business Services 4.6 Flat 5% 32.9% 1.8 pts

Software 5.8 1% 2% 88.0% Flat

Systems & Technology 3.2 (17%) (16%) 33.6% (3.6 pts)

Global Financing 0.5 6% 9% 47.2% 1.4 pts

Total Revenue & Op. GP Margin $23.7 (4%) (2%) 49.1% 1.0 pts

$ in Billions

OperatingGross Profit MarginRevenue

Margin expansion driven by Services and mix to Software


Expense Summary

3Q13B/(W)Yr/Yr Currency Acq.* Base

SG&A – Operatingexcl. Workforce Rebalancing**

$5.1 10%3%

2 pts (2 pts) 10 pts

RD&E – Operating 1.5 6% 0 pts (2 pts) 8 pts

IP and Development Income (0.2) (37%)

Other (Income)/Expenseexcl. 3Q12 RSS Sale Gain***

(0.1) (90%)(62%)

Interest Expense 0.1 22%

Operating Expense & Other Income $6.4 Flat 1 pts (2 pts) 2 pts

$ in BillionsB/(W) Yr/Yr Drivers

* Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges

** Excludes $407M of Workforce Rebalancing in 3Q12 and $13M in 3Q13

*** Excludes $447M Retail Store Solutions sale gain


B/(W) Yr/Yr

3Q13 Rptd @CC

Revenue (External) $9.5 (4%) (1%)

Gross Margin (External) 39.0% 1.7 pts

Pre-Tax Income $1.9 12%

PTI Margin 19.4% 2.8 pts

Services SegmentsGlobal Technology Services (GTS) Global Business Services (GBS)

Total Services returned to revenue growth @CC

3Q13 Revenue(% of Total Services)

$ in BillionsB/(W) Yr/Yr

3Q13 Rptd @CC

Revenue (External) $4.6 Flat 5%

Gross Margin (External) 32.9% 1.8 pts



$ in Billions

3Q13 Revenue Yr/Yr

GTS Rptd @CC

GTS Outsourcing (6%) (3%)

Integrated Technology Services (1%) 2%

Maintenance (2%) Flat

GBS

GBS Outsourcing (2%) 3%

Consulting & Systems Integration 1% 5%

3Q13

Services Backlog $141B 2% 6%

GTS

Outsourcing

38%

GBS C&SI

25%

Maint.

13%

ITS

17%

GBS

Outsourcing

7%


Software SegmentB/(W) Yr/Yr

3Q13 Rptd @CC

Revenue (External) $5.8 1% 2%

Gross Margin (External) 88.0% Flat



3Q13 Revenue Yr/Yr

Rptd @CC

WebSphere Family Flat 1%

Information Management 2% 3%

Tivoli 2% 3%

Social Workforce Solutions 14% 15%

Rational 12% 14%

Key Branded Middleware 3% 4%

Total Middleware 1% 2%

Total Software 1% 2%

3Q13 Revenue (% of Total Software)

Key Branded

Middleware 64% Operating

Systems 10%

Other Middleware

18%

Other 8%

$ in Billions

Mid-single digit growth in Key Branded Middleware


Systems & Technology Segment

B/(W) Yr/Yr

3Q13 Rptd @CC

Revenue (External) $3.2 (17%) (16%)

Gross Margin (External) 33.6% (3.6 pts)

Pre-Tax Income ($0.2) nm

PTI Margin (4.9%) (7.9 pts)

$ in Billions

3Q13 Revenue(% of Total Sys & Tech)3Q13 Revenue Yr/Yr

Rptd @CC

System z 6% 7%

Power Systems (38%) (37%)

System x (18%) (16%)

Storage (11%) (10%)

Total Systems (19%) (18%)

Microelectronics OEM 1% 1%

Total Systems & Technology (17%) (16%)

System z driven by double-digit growth in major markets; other brands declined

Servers

65%

Storage

20%


Cash Flow Analysis

3Q13B/(W)Yr/Yr

YTD3Q13

B/(W)Yr/Yr

Net Cash from Operations $3.8 ($0.8) $11.0 ($2.3)

Less: Global Financing Receivables 0.5 0.2 1.6 0.4

Net Cash from Operations (excluding GF Receivables)

3.3 (0.9) 9.3 (2.7)

Net Capital Expenditures (1.0) 0.0 (2.7) 0.6

Free Cash Flow (excluding GF Receivables) 2.2 (0.9) 6.6 (2.0)

Acquisitions (2.4) (2.0) (2.6) (0.3)

Divestitures 0.2 (0.3) 0.2 (0.3)

Dividends (1.0) (0.1) (3.0) (0.2)

Share Repurchases (Gross) (1.9) 1.1 (8.1) 0.9

Non-GF Debt 1.4 0.7 1.6 (0.7)

Other (includes GF A/R & GF Debt) 1.4 0.4 4.3 1.5

Change in Cash & Marketable Securities ($0.1) ($1.2) ($0.9) ($1.2)

$ in Billions


Sept. ‘12 Dec. ‘12 Sept. ‘13

Cash & Marketable Securities $12.3 $11.1 $10.2

Non-GF Assets* 71.2 70.6 73.0

Global Financing Assets 32.3 37.5 34.7

Total Assets 115.8 119.2 117.8

Other Liabilities 60.4 67.0 61.7

Non-GF Debt* 10.3 8.8 10.4

Global Financing Debt 23.3 24.5 25.8

Total Debt 33.7 33.3 36.2

Total Liabilities 94.1 100.2 97.8

Equity 21.7 19.0 20.0

Non-GF Debt / Capital 36% 36% 39%

Global Financing Leverage 7.1 7.0 7.1

Balance Sheet Summary

$ in Billions

* Includes eliminations of inter-company activity


3Q12

Operating EPS

Revenue Growth

@ Actual

Margin

Expansion

Share

Repurchases

3Q13

Operating EPS

Operating EPS Bridge – 3Q12 to 3Q13Operating EPS Bridge – 3Q12 to 3Q13

$3.62 ($0.15)$0.35

$0.17 $3.99


'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13e '14e '15e

Hardware / Financing Services Software

Sum of external segment pre-tax income not equal to IBM pre-tax income

* Non-GAAP: Excludes acquisition-related charges and non-operating retirement-related charges2000 & 2001 segments not restated for stock based compensation; 2000-2010 Segment PTI is reclassified to conform with 2012 operating presentation

Operating PTI / EPS *

Segment Operating PTI

Operating EPS

At Least$20

3Q 2013 Summary

$15.25

At Least$16.25

Continue to expect 2013 Operating EPS of at least $16.25,$16.90 excluding 2Q Workforce Rebalancing charge

$3.32



Supplemental Materials

� Currency – Year/Year Comparison

� Supplemental Segment Information – Global Services

� Supplemental Segment Information – Systems & Technology, Software

� Pre-Tax Income by Segment

� Global Financing Portfolio

� Revenue by Key Industry Sales Unit

� Cash Flow (FAS 95)

� Non-GAAP Supplemental Materials

• Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency

• Cash Flow, Debt-to-Capital Ratio, Retail Store Solutions (RSS) Divestiture, Workforce Rebalancing

• Reconciliation of Operating Earnings Per Share

• GAAP to Operating (Non-GAAP) Bridge – 3Q 2013

• GAAP to Operating (Non-GAAP) Bridge – 3Q 2012

• Reconciliation of Operating EPS Bridge – 3Q 2012 to 3Q 2013

• GAAP to Operating (Non-GAAP) Bridge – 3Q 2013 and 3Q 2012

• Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q 2013

• Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 9/30/13,3 months ended 9/30/12

• Reconciliation of Revenue Growth

• Reconciliation of Debt-to-Capital Ratio

• Global Financing Return on Equity – 3Q 2013

• Reconciliation of Consolidated EPS

Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding



Currency – Year/Year ComparisonQuarterly Averages per US $


1Q13 Yr/Yr 2Q13 Yr/Yr 3Q13 Yr/Yr10/15Spot 4Q13 FY13 1Q14 2Q14

Euro 0.76 1% 0.77 2% 0.75 6% 0.74 4% 3% 2% 3%

Pound 0.65 (1%) 0.65 (3%) 0.64 (2%) 0.63 (1%) (2%) 3% 4%

Yen 92 (16%) 99 (23%) 99 (26%) 99 (21%) (22%) (7%) 0%

Impact (2 pts) (2 pts) (2.5 pts) ~(2 pts) (2 pts) ~(1 pts) 0-1 pts

3Q13 (US$B) Yr/Yr

$23.7 (4%)

(0.6) (2.5 pts)

(2%)

10/15 Spot

Revenue As Reported

Currency Impact

Revenue @CC


Supplemental Segment Information – 3Q 2013

$ in Billions Backlog

3Q13 Yr/Yr @CC

Total Backlog $141 2% 6%

Change in Backlog due to Currency

Quarter-to-Quarter $3

Year-to-Year ($4)

Outsourcing Backlog $90 1% 4%

Signings

3Q13 Yr/Yr @CC

Outsourcing $6.1 (17%) (14%)

- GTS O/S, GBS O/S (AMS)

Transactional 6.2 5% 8%

- ITS, Consulting & AMS SI (incl. US Federal)

Total Signings $12.3 (7%) (4%)

Note: Actual backlog calculated using September 30 currency spot rates

Revenue Growth

Yr/Yr @CC

GTS Outsourcing (6%) (3%)

Integrated Tech Services (1%) 2%


Total GTS (4%) (1%)

GBS Outsourcing (2%) 3%

GBS C&SI 1% 5%

Total GBS Flat 5%

Total Outsourcing (6%) (2%)

Total Transactional Flat 4%


Global Services Revenue Global Services Backlog / Signings



Supplemental Segment Information – 3Q 2013

Revenue Growth

Yr/Yr @CC GP% Share

System z 6% 7% =Power Systems (38%) (37%) =System x (18%) (16%) =Storage (11%) (10%)

Total Systems (19%) (18%)

Microelectronics OEM 1% 1%

Total Sys & Tech (17%) (16%)


Systems & Technology Software

Revenue Growth

Yr/Yr @CC

WebSphere Family Flat 1%

Information Management 2% 3%

Tivoli 2% 3%

Social Workforce Sols. 14% 15%

Rational 12% 14%

Key Branded Middleware 3% 4%

Other Middleware (5%) (3%)

Total Middleware 1% 2%

Operating Systems (4%) (2%)

Other Software/Services 1% 2%

Total Software 1% 2%


Pre-Tax Income by Segment

$ in Billions

3Q13PTI $

B/(W)Yr/Yr

B/(W) Yr/YrExcl. WFR*

3Q13PTI %

B/(W)Yr/Yr

B/(W) Yr/YrExcl. WFR*

Global Technology Services $1.9 12% 3% 19.4% 2.8 pts 1.4 pts

Global Business Services 0.9 28% 12% 20.0% 4.4 pts 2.0 pts

Software 2.4 2% (1%) 36.8% 1.2 pts (0.2 pts)

Systems & Technology (0.2) nm nm (4.9%) (7.9 pts) (9.0 pts)

Global Financing 0.5 4% 3% 48.7% (0.7 pts) (1.0 pts)

Segment PTI $ Segment PTI Margin

* Yr/Yr excludes Workforce Rebalancing from both years for comparison purposes



Global Financing Portfolio3Q13 – $27.9B Net External Receivables


3Q13 2Q13 3Q12

Identified Loss Rate 1.0% 0.8% 0.9%

Anticipated Loss Rate 0.3% 0.4% 0.4%

Reserve Coverage 1.3% 1.2% 1.3%

Client Days Delinquent Outstanding 3.0 3.4 2.9

Commercial A/R > 30 Days $ 44 M $ 67 M $ 36 M

Non-Investment Grade41%

Investment Grade59%

21%

38%

20%

12%7% 2%

0%

10%

20%

30%

40%

50%

AAA to A- BBB+ to BBB- BB+ to BB BB- to B+ B to B- CCC+ to D


3Q13B/(W) Yr/Yr* Rptd @CC

Financial Services $6.4 (1%) 3%

Public 2.9 (2%) (2%)

Industrial 1.8 (2%) 2%

Distribution 1.6 (6%) (5%)

Communications 1.7 (13%) (12%)

General Business 8.1 (5%) (3%)

Total IBM $23.7 (4%) (2%)

Revenue by Key Industry Sales Unit

$ in Billions

General

Business

Comms

Distribution

Industrial

Public

Financial

Services


* Reclassified to conform with 2013 presentation; reflects coverage model change in certain geographies


Cash Flow (FAS 95)QTD3Q13

QTD3Q12

YTD3Q13

YTD3Q12

Net Income from Operations $4.0 $3.8 $10.3 $10.8

Depreciation / Amortization of Intangibles 1.2 1.2 3.5 3.5

Stock-based Compensation 0.1 0.2 0.5 0.5

Working Capital / Other (2.1) (1.0) (4.9) (2.8)

Global Financing A/R 0.5 0.3 1.6 1.2

Net Cash provided by Operating Activities 3.8 4.5 11.0 13.2

Capital Expenditures, net of payments & proceeds (1.0) (1.0) (2.7) (3.3)

Divestitures, net of cash transferred 0.2 0.6 0.2 0.6

Acquisitions, net of cash acquired (2.4) (0.3) (2.6) (2.3)

Marketable Securities / Other Investments, net 0.6 (0.2) 0.6 0.1

Net Cash used in Investing Activities (2.5) (1.0) (4.4) (4.9)

Debt, net of payments & proceeds 2.0 1.2 3.4 2.4

Dividends (1.0) (1.0) (3.0) (2.8)

Common Stock Repurchases (1.9) (3.0) (8.1) (9.0)

Common Stock Transactions - Other 0.2 0.3 0.8 1.2

Net Cash used in Financing Activities (0.8) (2.5) (6.9) (8.2)

Effect of Exchange Rate changes on Cash 0.1 0.0 0.0 (0.2)

Net Change in Cash & Cash Equivalents $0.5 $1.0 ($0.3) $0.0

$ in Billions



Non-GAAP Supplemental MaterialsIn an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, the following Non-GAAP information which management believes provides useful information to investors.

Operating (Non-GAAP) Earnings Per Share and Related Income Statement ItemsManagement presents certain financial measures excluding the effects of certain acquisition-related charges, non-operating retirement-related costs, and any related tax impacts. Management uses the term "operating" to describe this view of the company's financial results and other financial information. For acquisitions, these measures exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses, and tax charges related to acquisition integration. For retirement-related costs, the company has characterized certain items as operating and others as non-operating. The company includes service cost, amortization of prior service cost and the cost of defined contribution plans in its operating results. Non-operating retirement-related costs include interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements, multi-employer plan costs, pension insolvency costs, and other costs. Non-operating costs primarily relate to changes in pension plan assets and liabilities which are tied to market performance, and management considers these costs to be outside the operational performance of the business. Management’s calculation of these operating measures, as presented, may differ from similarly titled measures reported by other companies.

Overall, management believes that providing investors with an operating view as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans, improves visibility to management decisions and their impacts on operational performance, enables better comparison to peer companies, and allows the company to provide a long term strategic view of the business going forward. For the 2015 earnings per share roadmap, the company is utilizing an operating view to establish its objectives and track its progress. The company’s segment financial results and performance reflect operating earnings, consistent with the company’s management and measurement system.

Constant Currency Management refers to growth rates at constant currency or adjusting for currency so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates.



Non-GAAP Supplemental MaterialsCash FlowManagement uses a free cash flow measure to evaluate the company’s operating results, plan share repurchase levels, evaluate strategic investments and assess the company’s ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and cash flow from operations that exclude the effect of Global Financing receivables.

Debt-to-Capital RatioManagement presents its debt-to-capital ratio excluding the Global Financing business. A financing business is managed on a leveraged basis. The company funds its Global Financing segment using a debt-to-equity ratio target of approximately7 to 1. Given this significant leverage, the company presents a debt-to-capital ratio which excludes the Global Financing segment debt and equity because the company believes this is more representative of the company’s core business operations.

Retail Store Solutions (RSS) DivestitureOn April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba Tec for the sale of its RSS business to Toshiba Tec. Management presents certain financial results excluding the effects of the RSS divestiture. Management believes that presenting financial information regarding revenue without this item is more representative of operational performance and provides additional insight into, and clarifies the basis for, historical and/or future performance,which may be more useful to investors.

Workforce RebalancingOn April 18, 2013, the company announced it expected to take most of its workforce rebalancing actions for 2013 in the second quarter as compared to 2012 when these actions were distributed across the four quarters of the year. The company took a $1 billion workforce rebalancing charge in the second quarter. Management believes that presenting certain financial information without this item is most indicative of operational trajectory.



Non-GAAP Supplemental MaterialsReconciliation of Operating Earnings Per Share

Non-GAAP Supplemental MaterialsReconciliation of Operating Earnings Per Share

IBM Operating EPS (Non-GAAP)

Acquisition-Related Charges *

Amortization of Purchased Intangibles

Other Acquisition-Related Charges

Non-Operating Retirement-Related Items

IBM GAAP EPS

Adjustments

2013 Expectations

$15.01+

$16.25+

$0.58

$0.57

$0.01

$0.66

The above serves to reconcile the Non-GAAP financial information contained in “ 3Q 2013” and “3Q 2013 Summary” discussions in the company’s earnings presentation. See Slides 24-25 of this presentation for additional information on the use of these Non-GAAP financial measures.


* Includes acquisitions through September 30, 2013

2013 Expectations excl.

2Q Workforce Rebal.

$16.90+


Non-GAAP Supplemental MaterialsGAAP to Operating (Non-GAAP) Bridge – 3Q 2013

$ in Millions, except EPS

GAAP

Acquisition-related

Adjustments*

Retirement-related

Adjustments**Operating(Non-GAAP)

Gross Profit $11,380 $102 $154 $11,636

SG&A 5,255 (111) (89) 5,055

RD&E 1,468 0 (14) 1,454

Other Income & Expense (62) (1) 0 (63)

Total Operating Expense & Other Income

6,567 (112) (103) 6,352

Pre-Tax Income 4,812 214 257 5,284

Tax *** 772 48 77 897

Net Income 4,041 166 181 4,387

Diluted Earnings Per Share $3.68 $0.15 $0.16 $3.99

* Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges.

** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance.

***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2013”, “Key Financial Metrics” and “Expense Summary”discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.



Non-GAAP Supplemental MaterialsGAAP to Operating (Non-GAAP) Bridge – 3Q 2012

$ in Millions, except EPS

GAAP

Acquisition-related

Adjustments*

Retirement-related

Adjustments**Operating(Non-GAAP)

Gross Profit $11,732 $95 $67 $11,894

SG&A 5,908 (88) (196) 5,625

RD&E 1,534 0 5 1,539

Other Income & Expense (606) (5) 0 (611)

Total Operating Expense & Other Income

6,657 (92) (191) 6,374

Pre-Tax Income 5,074 188 258 5,520

Tax *** 1,251 47 67 1,364

Net Income 3,824 141 191 4,155

Diluted Earnings Per Share $3.33 $0.12 $0.17 $3.62

* Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges.

** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance.

***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2013”, “Key Financial Metrics” and “Expense Summary”discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.



* Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs

and acquisition integration tax charges.

** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other

settlements, curtailments, multi-employer plans and insolvency insurance.

Non-GAAP Supplemental MaterialsReconciliation of Operating EPS Bridge – 3Q 2012 to 3Q 2013

The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 3Q12 to 3Q13” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.

GAAP

Acquisition-related

Adjustments*

Retirement-related Adjustments** Operating

(Non-GAAP)

3Q12 EPS $3.33 $0.12 $0.17 $3.62

Revenue growth @ actual

(0.14) (0.00) (0.01) (0.15)

Margin expansion 0.33 0.02 0.00 0.35

Share repurchases

0.16 0.01 0.00 0.17

3Q13 EPS $3.68 $0.15 $0.16 $3.99



3Q 2013 GAAP

Acquisition-related

Adjustments*

Retirement-related

Adjustments **Operating(Non-GAAP)

Gross Profit Margin 48.0% 0.4 pts 0.6 pts 49.1%

PTI Margin 20.3% 0.9 pts 1.1 pts 22.3%

Tax Rate *** 16.0% 0.3 pts 0.7 pts 17.0%

Net Income Margin 17.0% 0.7 pts 0.8 pts 18.5%

3Q 2012

Gross Profit Margin 47.4% 0.4 pts 0.3 pts 48.1%

PTI Margin 20.5% 0.8 pts 1.0 pts 22.3%

Tax Rate *** 24.6% 0.0 pts 0.1 pts 24.7%

Net Income Margin 15.5% 0.6 pts 0.8 pts 16.8%

* Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results.

The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” , “Operating non-GAAP results” and “Pre-Tax Income’ discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.

Non-GAAP Supplemental MaterialsGAAP to Operating (Non-GAAP) Bridge – 3Q 2013 and 3Q 2012



GAAPNon-GAAP Adjustments

Operating(Non-GAAP)

SG&A

Currency 2 pts 0 pts 2 pts

Acquisitions (2 pts) 0 pts (2 pts)

Base 12 pts (1 pts) 10 pts

RD&E



Base 7 pts 1 pts 8 pts

Operating Expense & Other Income



Base 3 pts 1 pts 2 pts

Non-GAAP Supplemental Materials

The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.


Reconciliation of B/(W) Yr/Yr Expense Drivers – 3Q 2013



12 months

ended

9/30/13

3 months

ended

9/30/12

Net Cash from Operations $17.3 $4.5

Less: Global Financing Receivables (2.5) 0.3

Net Cash from Operations (excluding GF

Receivables)

19.8 4.2

Net Capital Expenditures (3.7) (1.0)

Free Cash Flow (excluding GF

Receivables)

$16.1 $3.1

$ in Billions

Reconciliation of Free Cash Flow (excluding GF Receivables)

The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussion in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures.




Americas

Europe/ME/A

Japan

Major Markets

China

China S&T Segment contribution to:

IBM Growth Rate

Growth Markets Growth Rate

As Rptd

(3%)

Flat

(5%)

@CC

(3%)

(1%)

(2%)

Reconciliation of Revenue Growth

2Q13 Yr/Yr

The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography,” “Software Segment,” and “Systems & Technology Segment” discussions in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.


3Q13 Yr/Yr

As Rptd

(17%)

(20%)

As Rptd

(1.1 pts)

(4.3 pts)

@CC

5%

(22%)

@CC

(1.2 pts)

(4.9 pts)

3Q13 Yr/Yr


Reconciliation of Debt-to-Capital Ratio

Sept. 2013 Dec. 2012 Sept. 2012

Non-Global Financing Debt / Capital

IBM Consolidated Debt / Capital

39%

64%

36%

64%

36%

61%

The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion in the company’s earnings presentation. See Slide 25 of this presentation for additional information on the use of these Non-GAAP financial measures.




* Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is

determined on a consolidated basis.

** Average of the ending equity for Global Financing for the three months ended September 30, 2013.

Non-GAAP Supplemental MaterialsGlobal Financing Return on Equity – 3Q 2013

The above serves to reconcile the Non-GAAP financial information contained in the “Revenue and Gross Profit Margin by Segment” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.

Numerator:

Global Financing after tax income* $333

Annualized after tax income (A) $1,331

Denominator:

Annualized Global Financing equity (B)** $3,543

Global Financing return on equity (A)/(B) 37.6%



Non-GAAP Supplemental MaterialsReconciliation of Consolidated EPS

The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2013 Summary” discussion in the company’s earnings presentation. See Slide 24 of this presentation for additional information on the use of these Non-GAAP financial measures.

EPS(As Reported)

Acquisition-Related

Non-OperatingRetirement-Related

OperatingEPS

2000 $3.88 $0.05 ($0.62) $3.32

2012 14.37 0.55 0.33 15.25



Documents

3Q 2013 Earnings Presentation - IBM · 2014. 6. 10. · 2000 & 2001 segments not restated for stock based compensation; 2000-2010 Segment PTI is reclassified to conform with 2012