Please i need help!

1.Using the Dupont formula from class, calculate IBM's Q3 2016 and Q3 2017 ROE - Use period-end balance sheet as averages (Just use the end of period balance sheet numbers - don't try to calculate an average asset or average equity number)

2.Based on our formula, what were the main drivers of the change in ROE?

3.Assuming a 30% payout ratio, compare IBM's potential growth rate in 2017 vs. 2016.

4.Using your knowledge of the linkages between ROE, Price to Book and the Gordon Growth model (P=D1/r-g), how would you expect IBM's P/B to respond to the trend in ROE? (Would you expect it to increase or decrease and justify using the relationship between P/B and ROE)

5.Reading from the TEXT of IBM's Q3 2017 release, use the industry lifecycle framework to PLACE and JUSTIFY where the following 2 IBM businesses should be: Strategic Imperatives and Global Business Services (excluding strategic imperatives)

IBM REPORTS 2016 THIRD-QUARTER EARNINGS Continued Strong Growth in Strategic Imperatives Led by IBM Cloud, Analytics Highlights Diluted EPS: GAAP of $2.98; Operating (non-GAAP) of $3.29 Revenue from continuing operations of $19.2 billion Strategic imperatives revenue of $31.8 billion over the last 12 months represents 40 percent of IBM revenue - Strategic imperatives revenue of $8.0 billion in the quarter, up 16 percent year to year (up 15 percent adjusting for currency) Cloud revenue of $12.7 billion over the last 12 months - Cloud as-a-Service annual run rate of $7.5 billion in the quarter, up 66 percent year to year (up 65 percent adjusting for currency) ARMONK, N.Y., October 17, 2016 . . . IBM (NYSE: IBM) today announced third-quarter 2016 earnings results. "IBM's third-quarter performance, led by continued double-digit growth in our strategic imperatives, is a testament to our leadership in cognitive solutions and cloud," said Ginni Rometty, IBM chairman, president and chief executive officer. "Our ability to apply deep expertise and breakthrough technology, led by Watson and the IBM Cloud, to massive amounts of data is enabling us to build new markets and transform industries. Whether it is banks implementing IBM blockchain solutions, hospitals leveraging Watson to fight cancer, or retailers using cognitive apps built on the IBM Cloud to transform the customer experience, clients across all industries are tapping into a new kind of innovation value from IBM." THIRD QUARTER 2016 Diluted EPS Net Income Gross Profit Margin GAAP from Continuing Operations Year/Year $2.98 -1% $2.9B -4% 46.9% -2.1Pts Operating (Non-GAAP) Year/Year $3.29 -1% $3.1B -4% 48.0% -2.1Pts REVENUE Total IBM Strategic Imperatives Cloud As reported (US$) Year/Year $19.2B 0% $8.0B 16% $3.4B 44% -1% 15% 42% Year/Year adjusting for currency "Throughout the year, we have continued to invest where we see the greatest opportunities to create new markets and strengthen our enterprise IT leadership position," said Martin Schroeter, IBM senior vice president and chief financial officer. "This has included more than $12 billion across capital expenditures, R&D and acquisitions so far this year. At the same time, we have returned more than $6 billion to shareholders through dividends and share repurchases." Strategic Imperatives Third-quarter revenues from the company's strategic imperatives --- cloud, analytics, mobility and security --- increased 16 percent year to year (up 15 percent adjusting for currency). Cloud revenues (public, private and hybrid) for the quarter increased 44 percent (up 42 percent adjusting for currency). Cloud revenue over the trailing 12 months was $12.7 billion. The annual run rate for cloud as-a-Service revenue --- a subset of total cloud revenue --- increased to $7.5 billion from $4.5 billion in the third quarter of 2015. Revenues from analytics increased 15 percent (up 14 percent adjusting for currency). Revenues from mobile increased 19 percent and revenues from security increased 11 percent. Full-Year 2016 Expectations The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.50 and GAAP diluted earnings per share of at least $12.23. Operating (non-GAAP) diluted earnings per share exclude $1.27 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges. There is no change to IBM's previouslyprovided free cash flow guidance. Cash Flow and Balance Sheet The company generated net cash from operating activities of $4.2 billion; or $3.3 billion excluding Global Financing receivables. IBM's free cash flow was $2.4 billion in the third quarter. IBM returned $1.3 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of September 2016, IBM had $3.0 billion remaining in the current share repurchase authorization. IBM ended the third-quarter 2016 with $10.0 billion of cash on hand. Debt, including Global Financing debt of $26.1 billion, totaled $42.5 billion. Core (non-Global Financing) debt totaled $16.4 billion. The balance sheet remains strong and is well positioned to support the business over the long term. Segment Results Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.2 billion, up 4.5 percent. Cloud revenue within the segment grew 74 percent (up 75 percent adjusting for currency), and Solutions Software grew 8 percent. Global Business Services (includes consulting, global process services, application management) -revenues of $4.2 billion, down 0.4 percent (down 1.6 percent adjusting for currency). Strategic imperatives revenue within the segment was up 13 percent (up 12 percent adjusting for currency). Technology Services & Cloud Platforms (includes infrastructure services, technical support services, integration software) -- revenues of $8.7 billion, up 2.4 percent (up 1.4 percent adjusting for currency). Growth of 45 percent (up 42 percent adjusting for currency) in strategic imperatives revenue within the segment was driven by strong hybrid cloud services performance. Systems (includes systems hardware and operating systems software) -- revenues of $1.6 billion, down 21.0 percent (down 21.5 percent adjusting for currency). Revenue reflects z Systems product cycle dynamics. Global Financing (includes financing and used equipment sales) -- revenues of $412 million, down 7.9 percent (down 9.2 percent adjusting for currency). Year-To-Date 2016 Results Diluted earnings per share from continuing operations were $7.67, down 15 percent compared to the 2015 period. Net income from continuing operations for the nine months ended September 30, 2016 was $7.4 billion compared with $8.9 billion in the year-ago period, a decrease of 17 percent. Consolidated net income was $7.4 billion compared to $8.7 billion in the year-ago period. Consolidated diluted earnings per share were $7.67 compared to $8.85, down 13 percent year to year. Revenues from continuing operations for the nine-month period totaled $58.1 billion, a decrease of 3 percent year to year (down 2 percent adjusting for currency) compared with $59.7 billion for the first nine months of 2015. Operating (non-GAAP) diluted earnings per share from continuing operations were $8.59 compared with $10.09 per diluted share for the 2015 period, a decrease of 15 percent. Operating (nonGAAP) net income from continuing operations for the nine months ended September 30, 2016 was $8.3 billion compared with $10.0 billion in the year-ago period, a decrease of 17 percent. Forward-Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of 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. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company's failure to meet growth and productivity objectives, a failure of the company's innovation initiatives; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company's pension plans; ineffective internal controls; the company's use of accounting estimates; the company's ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company's ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form 10-Qs, Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. Presentation of Information in this Press Release In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors: IBM results - presenting operating (non-GAAP) earnings per share amounts and related income statement items; adjusting for free cash flow; adjusting for currency (i.e., at constant currency). Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. The company views Global Financing receivables as a profit-generating investment, which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric. The rationale for management's use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8-K that includes this press release and is being submitted today to the SEC. Conference Call and Webcast IBM's regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/3q16.html. Presentation charts will be available shortly before the Webcast. Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts). Contact: IBM Ian Colley, 914-434-3043 colley@us.ibm.com John Bukovinsky, 732-618-3531 jbuko@us.ibm.com INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2016 2015* 2016 2015* $4,235 4,191 8,748 1,558 412 81 19,226 $4,052 4,206 8,541 1,973 447 60 19,280 $12,889 12,578 26,029 5,184 1,245 223 58,149 $12,616 12,869 25,993 6,656 1,386 162 59,682 9,013 9,436 27,401 29,278 GROSS PROFIT MARGIN Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing 80.4% 28.8% 42.0% 51.1% 37.8% 84.4% 29.7% 42.2% 55.9% 48.4% 81.5% 27.0% 41.5% 55.1% 39.6% 84.9% 28.2% 42.2% 55.8% 47.5% TOTAL GROSS PROFIT MARGIN 46.9% 48.9% 47.1% 49.1% EXPENSE AND OTHER INCOME S,G&A 4,732 4,731 16,093 15,273 R,D&E 1,397 1,287 4,320 3,885 Intellectual property and custom development income (528) (188) (1,110) (489) (8) (133) 158 117 473 340 5,751 5,815 20,056 18,431 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Pre-tax margin 3,263 17.0% 3,621 18.8% 7,345 12.6% 10,846 18.2% Provision for / (Benefit) from income taxes Effective tax rate 409 12.5% 659 18.2% (31) (0.4%) 1,943 17.9% INCOME FROM CONTINUING OPERATIONS $2,854 $2,962 $7,375 $8,904 (1) (12) (4) (176) $2,853 $2,950 $7,371 $8,727 $2.98 $0.00 $2.98 $3.02 ($0.01) $3.01 $7.67 $0.00 $7.67 $9.03 ($0.18) $8.85 $2.99 $0.00 $2.99 $3.04 ($0.01) $3.03 $7.70 $0.00 $7.70 $9.07 ($0.18) $8.89 REVENUE Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Other TOTAL REVENUE GROSS PROFIT Other (income) and expense Interest expense TOTAL EXPENSE AND OTHER INCOME DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes NET INCOME EARNINGS PER SHARE OF COMMON STOCK: Assuming Dilution Continuing Operations Discontinued Operations TOTAL Basic Continuing Operations Discontinued Operations TOTAL WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): Assuming Dilution Basic * Recast to conform with 2016 segment presentation. 957.3 954.0 979.0 975.1 281 960.7 957.7 (578) 986.0 981.8 (Dollars in Millions) INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) At September 30, 2016 At December 31, 2015 ASSETS: Current Assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade, net Short-term financing receivables, net Other accounts receivable, net Inventory Prepaid expenses and other current assets $9,039 929 8,291 16,032 873 1,729 4,539 $7,686 508 8,333 19,020 1,201 1,551 4,205 Total Current Assets 41,433 42,504 Property, plant and equipment, net Long-term financing receivables, net Prepaid pension assets Deferred taxes Goodwill and intangibles, net Investments and sundry assets 11,104 8,936 3,487 4,289 41,282 5,075 10,727 10,013 1,734 4,822 35,508 5,187 $115,606 $110,495 Current Liabilities: Taxes Short-term debt Accounts payable Deferred income Other liabilities $2,137 6,920 5,271 10,815 9,304 $2,847 6,461 6,028 11,021 7,913 Total Current Liabilities 34,447 34,269 Long-term debt Retirement related obligations Deferred income Other liabilities 35,563 16,688 3,611 8,138 33,428 16,504 3,771 8,099 Total Liabilities 98,447 96,071 53,759 149,585 (158,170) (28,164) 53,262 146,124 (155,518) (29,607) 17,010 14,262 149 162 Total Assets LIABILITIES: EQUITY: IBM Stockholders' Equity: Common stock Retained earnings Treasury stock -- at cost Accumulated other comprehensive income/(loss) Total IBM stockholders' equity Noncontrolling interests Total Equity Total Liabilities and Equity 17,159 14,424 $115,606 $110,495 INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited) (Dollars in Millions) Three Months Ended September 30, 2016 Net Cash Provided by Operating Activities per GAAP: Less: change in Global Financing (GF) Receivables Capital Expenditures, Net Free Cash Flow Acquisitions Divestitures Dividends Share Repurchase Non-GF Debt Other (includes GF Receivables and GF Debt) $4,213 Nine Months Ended September 30, 2015 $4,235 2016 $13,301 2015 $11,729 934 (851) 749 (934) 3,647 (2,801) 1,962 (2,764) 2,428 2,553 6,854 7,003 (40) 0 (1,337) (856) (1,696) 853 (112) (568) (1,271) (1,542) 379 1,370 (5,445) 35 (3,927) (2,632) 3,365 3,523 (821) (488) (3,636) (3,846) 770 2,108 ($648) $808 $1,773 $1,091 Change in Cash, Cash Equivalents and Short-term Marketable Securities INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited) (Dollars in Millions) Net Income from Operations Depreciation/Amortization of Intangibles Stock-based Compensation Working Capital / Other Global Financing A/R Loss on Microelectronics Business Disposal Net Cash Provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Acquisitions, net of cash acquired Marketable Securities / Other Investments, net Net Cash Used in Investing Activities Debt, net of payments & proceeds Dividends Common Stock Repurchases Common Stock Transactions - Other Net Cash Used in Financing Activities Effect of Exchange Rate changes on Cash Net Change in Cash & Cash Equivalents Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 $2,853 1,126 142 (842) 934 0 $4,213 (851) 0 (40) (159) ($1,050) (2,041) (1,337) (856) 52 ($4,182) 41 $2,950 936 111 (522) 749 12 $4,235 (934) (568) (112) 272 ($1,343) 915 (1,271) (1,542) 51 ($1,848) 42 $7,371 3,253 403 (1,373) 3,647 0 $13,301 (2,801) 35 (5,445) 610 ($7,600) 1,888 (3,927) (2,632) 166 ($4,504) 155 $8,727 2,865 369 (2,243) 1,962 48 $11,729 (2,764) (488) (821) 1,358 ($2,714) (607) (3,636) (3,846) 271 ($7,818) (194) $1,087 $1,352 $1,004 ($978) INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) THIRD - QUARTER 2016 Cognitive Solutions & Industry Services (Dollars in Millions) Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Revenue External Internal $4,235 667 $4,191 93 $8,748 180 $1,558 176 $412 352 Total Segment Revenue $4,902 $4,284 $8,929 $1,734 $763 1,574 544 1,288 136 32.1% 12.7% 14.4% 7.8% 46.5% 4.5% 4.5% (0.4)% (1.6)% 2.4% 1.4% (21.0)% (21.5)% (7.9)% (9.2)% Pre-tax Income from Continuing Operations Pre-tax margin Change YTY Revenue - External Change YTY Revenue - External @constant currency 355 THIRD - QUARTER 2015* Cognitive Solutions & Industry Services (Dollars in Millions) Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Revenue External Internal $4,052 528 $4,206 120 $8,541 161 $1,973 209 $447 584 Total Segment Revenue $4,580 $4,326 $8,702 $2,182 $1,031 1,596 664 1,317 248 562 34.9% 15.4% 15.1% 11.4% 54.5% Pre-tax Income from Continuing Operations Pre-tax margin * Recast to conform with 2016 segment presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) NINE - MONTHS 2016 Cognitive Solutions & Industry Services (Dollars in Millions) Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Revenue External Internal $12,889 1,929 $12,578 310 $26,029 501 $5,184 594 $1,245 1,340 Total Segment Revenue $14,818 $12,888 $26,530 $5,778 $2,585 4,039 1,210 2,825 354 1,208 27.3% 9.4% 10.6% 6.1% 46.7% 2.2% 2.9% (2.3)% (2.2)% 0.1% 1.0% (22.1)% (21.9)% (10.2)% (8.5)% Pre-tax Income from Continuing Operations Pre-tax margin Change YTY Revenue - External Change YTY Revenue - External @constant currency NINE - MONTHS 2015* Cognitive Solutions & Industry Services (Dollars in Millions) Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Revenue External Internal $12,616 1,695 $12,869 380 $25,993 500 $6,656 571 $1,386 1,874 Total Segment Revenue $14,311 $13,249 $26,493 $7,226 $3,261 4,949 1,895 3,861 1,048 1,690 34.6% 14.3% 14.6% 14.5% 51.8% Pre-tax Income from Continuing Operations Pre-tax margin * Recast to conform with 2016 segment presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) THIRD - QUARTER 2016 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Operating (Non-GAAP) Gross Profit $9,013 $129 $79 $9,221 Gross Profit Margin 46.9% 0.7Pts 0.4Pts 48.0% S,G&A 4,732 (138) (53) 4,541 R,D&E 1,397 - (7) 1,390 Other (Income) & Expense Total Expense & Other (Income) Pre-tax Income from Continuing Operations Pre-tax Income Margin from Continuing Operations (2) - (10) (140) (60) 5,550 3,263 269 139 3,671 17.0% 1.4Pts 0.7Pts 19.1% Provision for Income Taxes*** Effective Tax Rate (8) 5,751 409 73 40 521 12.5% 1.1Pts 0.7Pts 2,854 197 99 3,149 Income Margin from Continuing Operations 14.8% 1.0Pts 0.5Pts 16.4% Diluted Earnings Per Share: Continuing Operations $2.98 $0.21 $0.10 $3.29 Income from Continuing Operations 14.2% THIRD - QUARTER 2015 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Operating (Non-GAAP) Gross Profit $9,436 $89 $118 $9,643 Gross Profit Margin 48.9% 0.5Pts 0.6Pts 50.0% S,G&A 4,731 (76) (74) 4,581 R,D&E 1,287 - (12) 1,275 Other (Income) & Expense (133) - (133) Total Expense & Other (Income) 5,815 (76) (86) 5,652 Pre-tax Income from Continuing Operations 3,621 165 204 3,991 18.8% 0.9Pts 1.1Pts 20.7% Pre-tax Income Margin from Continuing Operations Provision for Income Taxes*** Effective Tax Rate Income from Continuing Operations Income Margin from Continuing Operations Diluted Earnings Per Share: Continuing Operations 0 659 (5) 64 718 18.2% -0.9Pts 0.7Pts 18.0% 2,962 170 140 3,272 15.4% 0.9Pts 0.7Pts 17.0% $3.02 $0.18 $0.14 $3.34 * Includes amortization of purchased intangible assets, 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. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations 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. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) NINE - MONTHS 2016 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Gross Profit Operating (Non-GAAP) $27,401 $371 $238 $28,010 Gross Profit Margin 47.1% 0.6Pts 0.4Pts 48.2% S,G&A 16,093 (365) (183) 15,545 R,D&E 4,320 - (23) 4,297 Other (Income) & Expense Total Expense & Other (Income) 281 20,056 Pre-tax Income from Continuing Operations Pre-tax Income Margin from Continuing Operations 743 444 8,532 1.3Pts 0.8Pts 14.7% (31) 201 106 (0.4)% 2.5Pts 1.4Pts 3.2% 7,375 542 338 8,255 12.7% 0.9Pts 0.6Pts 14.2% $7.67 $0.57 $0.35 $8.59 Diluted Earnings Per Share: Continuing Operations NINE - MONTHS 2015 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Gross Profit 274 19,478 7,345 Income from Continuing Operations Income Margin from Continuing Operations (206) 12.6% Provision for / (Benefit) from Income Taxes*** Effective Tax Rate (7) (372) 277 Operating (Non-GAAP) $29,278 $268 $350 $29,896 Gross Profit Margin 49.1% 0.4Pts 0.6Pts 50.1% S,G&A 15,273 (230) (445) 14,598 R,D&E 3,885 - (36) 3,849 Other (Income) & Expense (578) (5) - (583) Total Expense & Other (Income) 18,431 (235) (481) 17,715 Pre-Tax Income from Continuing Operations 10,846 503 831 12,181 Pre-tax Income Margin from Continuing Operations 18.2% 0.8Pts 1.4Pts 20.4% 1,943 52 234 2,228 17.9% -0.3Pts 0.7Pts 18.3% Provision for Income Taxes*** Effective Tax Rate Income from Continuing Operations Income Margin from Continuing Operations Diluted Earnings Per Share: Continuing Operations 8,904 452 597 9,953 14.9% 0.8Pts 1.0Pts 16.7% $9.03 $0.46 $0.60 $10.09 * Includes amortization of purchased intangible assets, 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. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations 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. INTERNATIONAL BUSINESS MACHINES CORPORATION RECONCILIATION OF OPERATING EARNINGS PER SHARE (Unaudited) EPS Guidance 2016 Expectations IBM GAAP EPS at least $12.23 IBM Operating EPS (non-GAAP) at least $13.50 Adjustments Acquisition related charges * $0.84 Non-Operating Retirement-Related Items $0.43 * Includes acquisitions through September 30, 2016 IBM REPORTS 2017 THIRD-QUARTER RESULTS Highlights Diluted EPS from continuing operations: GAAP of $2.92; Operating (non-GAAP) of $3.30 Revenue of $19.2 billion Strategic imperatives revenue of $34.9 billion over the trailing 12 months, up 10 percent; represents 45 percent of IBM revenue Third-quarter revenue up 11 percent (up 10 percent adjusting for currency) Cloud revenue of $15.8 billion over the trailing 12 months, up 25 percent year to year (up 26 percent adjusting for currency) As-a-service annual exit run rate of $9.4 billion in the quarter, up 25 percent year to year (up 24 percent adjusting for currency) Maintains full-year EPS and free cash flow expectations ARMONK, N.Y., October 17, 2017 . . . IBM (NYSE: IBM) today announced third-quarter earnings results. "In the third quarter we achieved double-digit growth in our strategic imperatives, extended our enterprise cloud leadership, and expanded our cognitive solutions business," said Ginni Rometty, IBM chairman, president and chief executive officer. "There was enthusiastic adoption of IBM's new z Systems mainframe, which delivers breakthrough security capabilities to our clients." THIRD QUARTER 2017 Diluted EPS Net Income Gross Profit Margin GAAP from Continuing Operations Year/Year $2.92 -2% $2.7B -4% 45.9% -0.9Pts Operating (Non-GAAP) Year/Year $3.30 0% $3.1B -2% 47.6% -0.4Pts Total IBM Strategic Imperatives Cloud As-a-service annual exit run rate $19.2B $8.8B $4.1B $9.4B 0% 11% 20% 25% -1% 10% 20% 24% REVENUE As reported (US$) Year/Year Year/Year adjusting for currency "During the first three quarters of the year, our strong free cash flow has enabled us to maintain our R&D investments and to expand IBM's cloud and cognitive capabilities through capital investments," said Martin Schroeter, IBM senior vice president and chief financial officer. "In addition, we have returned nearly $8 billion to shareholders through dividends and share repurchases." Strategic Imperatives Revenue Third-quarter cloud revenues increased 20 percent to $4.1 billion. Cloud revenue over the last 12 months was $15.8 billion, including $8.8 billion delivered as-a-service and $7.0 billion for hardware, software and services to enable IBM clients to implement comprehensive cloud solutions. The annual exit run rate for as-a-service revenue increased to $9.4 billion from $7.5 billion in the third quarter of 2016. In the quarter, revenues from analytics increased 5 percent. Revenues from mobile increased 7 percent and revenues from security increased 51 percent (up 49 percent adjusting for currency). Full-Year 2017 Expectations The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80 and GAAP diluted earnings per share of at least $11.95. Operating (non-GAAP) diluted earnings per share exclude $1.85 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges. IBM continues to expect free cash flow to be relatively flat year to year. Cash Flow and Balance Sheet In the third quarter, the company generated net cash from operating activities of $3.6 billion, or $3.3 billion excluding Global Financing receivables. IBM's free cash flow was $2.5 billion. IBM returned $1.4 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of September 2017, IBM had $1.5 billion remaining in the current share repurchase authorization. IBM ended the third quarter of 2017 with $11.5 billion of cash on hand. Debt totaled $45.6 billion, including Global Financing debt of $29.4 billion. The balance sheet remains strong and is well positioned over the long term. Segment Results for Third Quarter Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.4 billion, up 4 percent (up 3 percent adjusting for currency), driven by solutions software, including security and analytics, and transaction processing software. Global Business Services (includes consulting, global process services and application management) -- revenues of $4.1 billion, down 2 percent. Strategic imperatives revenue grew 10 percent led by the cloud practice. Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $8.5 billion, down 3 percent (down 4 percent adjusting for currency). Strategic imperatives revenue grew 12 percent, driven by hybrid cloud services, security and mobile. Systems (includes systems hardware and operating systems software) -- revenues of $1.7 billion, up 10 percent, driven by growth in z Systems and storage. Global Financing (includes financing and used equipment sales) -- revenues of $427 million, up 4 percent (up 3 percent adjusting for currency). Expense and Other Income Third-quarter GAAP expense and other income year-to-year performance reflects lower IP income of $221 million, an impact of $105 million year to year related to several commercial disputes and a benefit of $91 million resulting from the favorable resolution of pension-related litigation in the U.K. Operating (non-GAAP) expense and other income for the third quarter of 2017 compared to 2016 reflects lower IP income of $221 million and an impact of $105 million year to year related to several commercial disputes. Tax Rate IBM's third-quarter effective GAAP and operating (non-GAAP) tax rates were 11.0 percent and 14.7 percent, respectively. The company continues to expect a full-year effective operating (non-GAAP) tax rate of 15 percent, plus or minus 3 points, excluding discrete items. Year-To-Date 2017 Results Consolidated diluted earnings per share were $7.24 compared to $7.67, down 6 percent year to year. Consolidated net income was $6.8 billion compared to $7.4 billion in the year-ago period, a decrease of 8 percent. Revenues from continuing operations for the nine-month period totaled $56.6 billion, a decrease of 3 percent year to year (decrease of 2 percent adjusting for currency) compared with $58.1 billion for the first nine months of 2016. Operating (non-GAAP) diluted earnings per share from continuing operations were $8.64 compared with $8.59 per diluted share for the 2016 period, an increase of 1 percent. Operating (non-GAAP) net income for the nine months ended September 30, 2017 was $8.1 billion compared with $8.3 billion in the year-ago period, a decrease of 2 percent. Forward-Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of 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. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company's failure to meet growth and productivity objectives, a failure of the company's innovation initiatives; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company's pension plans; ineffective internal controls; the company's use of accounting estimates; the company's ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company's ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form 10Qs, Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. Presentation of Information in this Press Release In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors: IBM results - presenting operating (non-GAAP) earnings per share amounts and related income statement items; adjusting for free cash flow; adjusting for currency (i.e., at constant currency). Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. The company views Global Financing receivables as a profit-generating investment, which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric. The rationale for management's use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8-K that includes this press release and is being submitted today to the SEC. Conference Call and Webcast IBM's regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/3q17.html. Presentation charts will be available shortly before the Webcast. Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts). IBM Contact: Ian Colley, 914-434-3043 colley@us.ibm.com John Bukovinsky, 732-618-3531 jbuko@us.ibm.com INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $4,400 4,093 8,457 1,721 427 56 19,153 $4,235 4,191 8,748 1,558 412 81 19,226 $13,021 12,196 25,079 4,863 1,246 192 56,597 $12,889 12,578 26,029 5,184 1,245 223 58,149 8,800 9,013 25,365 27,401 GROSS PROFIT MARGIN Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing 78.7% 27.3% 41.1% 53.6% 25.2% 80.4% 28.8% 42.0% 51.1% 37.8% 78.4% 25.3% 40.2% 51.5% 29.2% 81.5% 27.0% 41.5% 55.1% 39.6% TOTAL GROSS PROFIT MARGIN 45.9% 46.9% 44.8% 47.1% EXPENSE AND OTHER INCOME S,G&A 4,648 4,732 14,959 16,093 R,D&E 1,342 1,397 4,360 4,320 Intellectual property and custom development income (308) (528) (1,118) (1,110) Other (income) and expense (114) (8) (218) 281 168 158 451 473 5,735 5,751 18,434 20,056 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Pre-tax margin 3,065 16.0% 3,263 17.0% 6,931 12.2% 7,345 12.6% Provision for / (Benefit from) income taxes Effective tax rate 339 11.0% 409 12.5% 120 1.7% (31) (0.4%) INCOME FROM CONTINUING OPERATIONS $2,726 $2,854 $6,811 $7,375 (0) (1) (3) (4) $2,726 $2,853 $6,807 $7,371 $2.92 $0.00 $2.92 $2.98 $0.00 $2.98 $7.24 $0.00 $7.24 $7.67 $0.00 $7.67 $2.93 $0.00 $2.93 $2.99 $0.00 $2.99 $7.28 $0.00 $7.28 $7.70 $0.00 $7.70 933.2 929.4 957.3 954.0 940.2 935.6 960.7 957.7 REVENUE Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing Other TOTAL REVENUE GROSS PROFIT Interest expense TOTAL EXPENSE AND OTHER INCOME DISCONTINUED OPERATIONS Income/(Loss) from discontinued operations, net of taxes NET INCOME EARNINGS PER SHARE OF COMMON STOCK: Assuming Dilution Continuing Operations Discontinued Operations TOTAL Basic Continuing Operations Discontinued Operations TOTAL WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): Assuming Dilution Basic (Dollars in Millions) INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) At September 30, 2017 At December 31, 2016 ASSETS: Current Assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade, net Short-term financing receivables, net Other accounts receivable, net Inventory Prepaid expenses and other current assets $10,915 600 8,150 18,050 926 1,711 4,389 $7,826 701 9,182 19,006 1,057 1,553 4,564 Total Current Assets 44,742 43,888 Property, plant and equipment, net Long-term financing receivables, net Prepaid pension assets Deferred taxes Goodwill and intangibles, net Investments and sundry assets 11,057 8,459 4,521 7,289 40,763 4,806 10,830 9,021 3,034 5,224 40,887 4,585 $121,636 $117,470 Current Liabilities: Taxes Short-term debt Accounts payable Deferred income Other liabilities $3,038 4,299 5,442 10,649 8,270 $3,235 7,513 6,209 11,035 8,283 Total Current Liabilities 31,697 36,275 Long-term debt Retirement related obligations Deferred income Other liabilities 41,327 17,554 3,579 7,723 34,655 17,070 3,600 7,477 101,879 99,078 54,395 155,565 (162,812) (27,521) 53,935 152,759 (159,050) (29,398) 19,627 18,246 130 146 19,757 18,392 $121,636 $117,470 Total Assets LIABILITIES: Total Liabilities EQUITY: IBM Stockholders' Equity: Common stock Retained earnings Treasury stock -- at cost Accumulated other comprehensive income/(loss) Total IBM stockholders' equity Noncontrolling interests Total Equity Total Liabilities and Equity INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited) (Dollars in Millions) Three Months Ended September 30, 2017 Net Cash Provided by Operating Activities per GAAP: Less: change in Global Financing (GF) Receivables Capital Expenditures, Net Free Cash Flow Acquisitions Divestitures Dividends Share Repurchase Non-GF Debt Other (includes GF Receivables and GF Debt) Change in Cash, Cash Equivalents and Short-term Marketable Securities $3,570 Nine Months Ended September 30, 2016 $4,118 * ** 258 (780) 835 * (851) 2,532 2,431 ** 2017 $10,991 2,468 (2,347) 6,176 2016 $13,105 * ** 3,336 * (2,801) 6,969 ** (274) 6 (1,396) (949) (467) (233) (40) 0 (1,337) (856) (1,696) 850 * ** (442) 35 (4,119) (3,674) 1,896 3,117 (5,445) 35 (3,927) (2,632) 3,365 3,408 * ** ($780) ($648) $2,988 $1,773 * Revised classification of certain financing receivables. ** Reclassified to reflect adoption of the FASB guidance on stock-based compensation. INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited) (Dollars in Millions) Net Income from Operations Depreciation/Amortization of Intangibles Stock-based Compensation Working Capital / Other Global Financing A/R Net Cash Provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Acquisitions, net of cash acquired Marketable Securities / Other Investments, net Net Cash Used in Investing Activities Debt, net of payments & proceeds Dividends Common Stock Repurchases Common Stock Transactions - Other Net Cash Used in Financing Activities Effect of Exchange Rate changes on Cash Net Change in Cash & Cash Equivalents Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $2,726 1,175 123 (713) 258 $3,570 (780) 6 (274) (875) ($1,923) (446) (1,396) (949) 35 ($2,756) 328 ($781) $2,853 1,126 142 (839) 835 $4,118 (851) (40) (60) ($951) (2,041) (1,337) (856) 49 ($4,185) 41 ($978) $6,807 3,392 388 (2,064) 2,468 $10,991 (2,347) 35 (442) (523) ($3,278) 2,310 (4,119) (3,674) (15) ($5,499) 875 $3,089 $7,371 3,253 403 (1,258) 3,336 $13,105 (2,801) 35 (5,445) 921 ($7,289) 1,888 (3,927) (2,632) 52 ($4,619) 155 $1,352 * Revised classification of certain financing receivables. ** Reclassified to reflect adoption of the FASB guidance on stock-based compensation. ** * * ** * * ** ** ** * * ** * * ** ** INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) THIRD - QUARTER 2017 Cognitive Solutions & Industry Services (Dollars in Millions) Revenue External Internal Total Segment Revenue Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing $4,400 629 $5,030 $4,093 92 $4,185 $8,457 164 $8,621 $1,721 227 $1,948 $427 272 $698 Pre-tax Income from Continuing Operations 1,649 453 1,192 339 244 Pre-tax margin 32.8% 10.8% 13.8% 17.4% 34.9% 10.4% 9.6% 3.7% 2.8% Change YTY Revenue - External Change YTY Revenue - External @constant currency 3.9% 3.0% (2.3)% (2.2)% (3.3)% (4.1)% THIRD - QUARTER 2016 Cognitive Solutions & Industry Services (Dollars in Millions) Revenue External Internal Total Segment Revenue Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing $4,235 667 $4,902 $4,191 93 $4,284 $8,748 180 $8,929 $1,558 176 $1,734 $412 352 $763 Pre-tax Income from Continuing Operations 1,574 544 1,288 136 355 Pre-tax margin 32.1% 12.7% 14.4% 7.8% 46.5% INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) NINE - MONTHS 2017 Cognitive Solutions & Industry Services (Dollars in Millions) Revenue External Internal Total Segment Revenue Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing $13,021 2,001 $15,022 $12,196 271 $12,467 $25,079 497 $25,576 $4,863 571 $5,434 $1,246 925 $2,171 Pre-tax Income from Continuing Operations 4,539 1,065 2,888 227 836 Pre-tax margin 30.2% 11.3% 4.2% 38.5% Change YTY Revenue - External Change YTY Revenue - External @constant currency 1.0% 1.3% 8.5% (3.0)% (1.9)% (3.7)% (3.3)% (6.2)% (5.9)% 0.1% (0.4)% NINE - MONTHS 2016 Cognitive Solutions & Industry Services (Dollars in Millions) Revenue External Internal Total Segment Revenue Pre-tax Income from Continuing Operations Pre-tax margin Cognitive Solutions Global Business Services Technology Services & Cloud Platforms Systems Global Financing $12,889 1,929 $14,818 $12,578 310 $12,888 $26,029 501 $26,530 $5,184 594 $5,778 $1,245 1,340 $2,585 4,039 1,210 2,825 354 1,208 27.3% 9.4% 10.6% 6.1% 46.7% INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) THIRD - QUARTER 2017 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Gross Profit $8,800 $114 Operating (Non-GAAP) $203 $9,116 Gross Profit Margin 45.9% 0.6Pts 1.1Pts S,G&A 4,648 (125) (53) 4,470 R,D&E 1,342 - (51) 1,291 Other (Income) & Expense (114) Total Expense & Other (Income) 5,735 Pre-tax Income from Continuing Operations 3,065 Pre-tax Income Margin from Continuing Operations 16.0% Provision for / (Benefit from) Income Taxes*** 339 0 47.6% - (114) (103) 5,507 238 306 3,609 1.2Pts 1.6Pts 18.8% (125) 79 113 531 2.2Pts 14.7% 159 193 3,079 0.8Pts 1.0Pts 16.1% $0.21 $3.30 Effective Tax Rate 11.0% Income from Continuing Operations 2,726 Income Margin from Continuing Operations 14.2% Diluted Earnings Per Share: Continuing Operations $2.92 $0.17 1.5Pts THIRD - QUARTER 2016 CONTINUING OPERATIONS AcquisitionRelated Adjustments* GAAP Operating (Non-GAAP) $129 $79 Gross Profit Margin 46.9% 0.7Pts 0.4Pts S,G&A 4,732 (138) (53) 4,541 R,D&E 1,397 - (7) 1,390 (2) - Gross Profit Other (Income) & Expense $9,013 RetirementRelated Adjustments** (8) $9,221 48.0% (10) Total Expense & Other (Income) 5,751 (140) (60) 5,550 Pre-tax Income from Continuing Operations 3,263 269 139 3,671 Pre-tax Income Margin from Continuing Operations 17.0% 1.4Pts 0.7Pts 19.1% Provision for / (Benefit from) Income Taxes*** 409 73 1.1Pts 40 0.6Pts 521 Effective Tax Rate 12.5% Income from Continuing Operations 2,854 197 Income Margin from Continuing Operations 14.8% 1.0Pts 0.5Pts 16.4% Diluted Earnings Per Share: Continuing Operations $2.98 $0.21 $0.10 $3.29 99 * Includes amortization of purchased intangible assets, 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. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations 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. 14.2% 3,149 INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts) NINE - MONTHS 2017 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Gross Profit Gross Profit Margin $25,365 44.8% Operating (Non-GAAP) $349 $591 $26,305 0.6Pts 1.0Pts 46.5% S,G&A 14,959 (393) (326) 14,240 R,D&E 4,360 - (148) 4,212 (7) - 18,434 (218) (401) (474) Pre-tax Income from Continuing Operations 6,931 750 1,065 8,746 Pre-tax Income Margin from Continuing Operations 12.2% 1.3Pts 1.9Pts 15.5% 120 212 288 621 1.7% 2.3Pts 3.1Pts 537 777 Other (Income) & Expense Total Expense & Other (Income) Provision for / (Benefit from) Income Taxes*** Effective Tax Rate Income from Continuing Operations 6,811 (225) 17,559 7.1% 8,125 Income Margin from Continuing Operations 12.0% 0.9Pts 1.4Pts 14.4% Diluted Earnings Per Share: Continuing Operations $7.24 $0.57 $0.83 $8.64 NINE - MONTHS 2016 CONTINUING OPERATIONS AcquisitionRetirementRelated Related Adjustments* Adjustments** GAAP Gross Profit Gross Profit Margin $27,401 47.1% Operating (Non-GAAP) $371 $238 0.6Pts 0.4Pts $28,010 (365) (183) 15,545 48.2% S,G&A 16,093 R,D&E 4,320 - (23) 4,297 281 (7) - 274 Other (Income) & Expense 20,056 (372) (206) 19,478 Pre-Tax Income from Continuing Operations 7,345 743 444 8,532 Pre-tax Income Margin from Continuing Operations 12.6% 1.3Pts 0.8Pts 14.7% 201 106 277 2.4Pts 1.3Pts 3.2% Total Expense & Other (Income) Provision for / (Benefit from) Income Taxes*** (31) Effective Tax Rate (0.4)% Income from Continuing Operations 7,375 542 338 8,255 Income Margin from Continuing Operations 12.7% 0.9Pts 0.6Pts 14.2% Diluted Earnings Per Share: Continuing Operations $7.67 $0.57 $0.35 $8.59 * Includes amortization of purchased intangible assets, 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. *** Tax impact on operating (non-GAAP) pre-tax income from continuing operations 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. INTERNATIONAL BUSINESS MACHINES CORPORATION RECONCILIATION OF OPERATING EARNINGS PER SHARE (Unaudited) EPS Guidance 2017 Expectations IBM GAAP EPS at least $11.95 IBM Operating EPS (non-GAAP) at least $13.80 Adjustments Acquisition-related charges * $0.75 Non-Operating Retirement-Related Items $1.10 * Includes acquisitions through September 30, 2017