10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2014

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York	13-0871985
(State of incorporation)	(IRS employer identification number)

Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-499-1900

(Registrant’s telephone number)

               Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes  ý        No ☐

               Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ýNo ☐

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)

              Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ý 

        The registrant had 1,012,183,432 shares of common stock outstanding at March 31, 2014.

Index

	Page
Part I - Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statement of Earnings for the three months ended March 31, 2014 and 2013	3
Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 and 2013	4
Consolidated Statement of Financial Position at March 31, 2014 and December 31, 2013	5
Consolidated Statement of Cash Flows for the three months ended March 31, 2014 and 2013	7
Consolidated Statement of Changes in Equity for the three months ended March 31, 2014 and 2013	8
Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	38
Item 4. Controls and Procedures	67
Part II - Other Information:
Item 1. Legal Proceedings	67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of  Equity Securities	67
Item 6. Exhibits	68

2

Part I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

			Three Months Ended March 31,
(Dollars in millions except per share amounts)			2014		2013
Revenue:
	Services	$	13,982	$	14,274
	Sales		7,984		8,629
	Financing		517		505
Total revenue			22,484		23,408
Cost:
	Services		9,101		9,526
	Sales		2,561		2,931
	Financing		278		273
Total cost			11,941		12,730
Gross profit			10,543		10,678
Expense and other (income):
	Selling, general and administrative		6,289		5,577
	Research, development and engineering		1,501		1,644
	Intellectual property and custom development income		(207)		(183)
	Other (income) and expense		(126)		(60)
	Interest expense		105		94
Total expense and other (income)			7,563		7,072
Income before income taxes			2,980		3,606
Provision for income taxes			596		574
Net income		$	2,384	$	3,032
Earnings per share of common stock:
	Assuming dilution	$	2.29	$	2.70
	Basic	$	2.30	$	2.72
Weighted-average number of common shares outstanding: (millions)
	Assuming dilution		1,041.8		1,124.0
	Basic		1,035.2		1,113.7
Cash dividend per common share		$	0.95	$	0.85
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

3

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

			Three Months Ended March 31,
(Dollars in millions)				2014		2013
Net income			$	2,384	$	3,032
Other comprehensive income/(loss), before tax:
	Foreign currency translation adjustments			(61)		(405)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period		0		(3)
		Reclassification of (gains)/losses to net income		4		1
		Subsequent changes in previously impaired securities arising during the period		—		1
	Total net changes related to available-for-sale securities			4		(1)
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period		88		360
		Reclassification of (gains)/losses to net income		(1)		(56)
	Total unrealized gains/(losses) on cash flow hedges			87		305
	Retirement-related benefit plans:
		Prior service costs/(credits)		1		33
		Net (losses)/gains arising during the period		32		(15)
		Curtailments and settlements		4		—
		Amortization of prior service (credits)/cost		(29)		(30)
		Amortization of net (gains)/losses		649		886
	Total retirement-related benefit plans			656		875
Other comprehensive income/(loss), before tax				687		773
Income tax (expense)/benefit related to items of other comprehensive income				(241)		(480)
Other comprehensive income/(loss)				446		293
Total comprehensive income/(loss)			$	2,830	$	3,325
(Amounts may not add due to rounding)
(The accompanying notes are an integral part of the financial statements)

4

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)

ASSETS

				At March 31,		At December 31,
(Dollars in millions)				2014		2013
Assets:
	Current assets:
		Cash and cash equivalents		$	9,409	$	10,716
		Marketable securities			295		350
		Notes and accounts receivable - trade (net of allowances of $305
			in 2014 and $291 in 2013)		9,682		10,465
		Short-term financing receivables (net of allowances of $317 in 2014
			and $308 in 2013)		18,329		19,787
		Other accounts receivable (net of allowances of $36 in 2014 and
			$36 in 2013)		1,650		1,584
		Inventories, at lower of average cost or market:
			Finished goods		472		444
			Work in process and raw materials		1,984		1,866
		Total inventories			2,456		2,310
		Deferred taxes			1,708		1,651
		Prepaid expenses and other current assets			4,430		4,488
	Total current assets				47,959		51,350
	Property, plant and equipment				40,478		40,475
		Less: Accumulated depreciation			26,795		26,654
	Property, plant and equipment — net				13,683		13,821
	Long-term financing receivables (net of allowances of $93 in 2014
		and $80 in 2013)			11,918		12,755
	Prepaid pension assets				6,110		5,551
	Deferred taxes				3,034		3,051
	Goodwill				31,214		31,184
	Intangible assets — net				3,698		3,871
	Investments and sundry assets				5,030		4,639
	Total assets			$	122,646	$	126,223
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

5

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION – (CONTINUED)
(UNAUDITED)

LIABILITIES AND EQUITY

(Dollars in millions)			At March 31,		At December 31,
			2014		2013
Liabilities:
	Current liabilities:
		Taxes	$	2,245	$	4,633
		Short-term debt		9,312		6,862
		Accounts payable		6,865		7,461
		Compensation and benefits		3,664		3,893
		Deferred income		13,681		12,557
		Other accrued expenses and liabilities		5,292		4,748
	Total current liabilities			41,058		40,154
	Long-term debt			34,668		32,856
	Retirement and nonpension postretirement benefit obligations			16,031		16,242
	Deferred income			4,042		4,108
	Other liabilities			10,106		9,934
	Total liabilities			105,906		103,294
Equity:
IBM stockholders’ equity:
	Common stock, par value $0.20 per share, and additional paid-in capital			51,943		51,594
		Shares authorized: 4,687,500,000
		Shares issued: 2014 - 2,210,627,775
		2013 - 2,207,522,548
	Retained earnings			131,431		130,042
	Treasury stock - at cost			(145,612)		(137,242)
		Shares: 2014 - 1,198,444,343
		2013 - 1,153,131,611
	Accumulated other comprehensive income/(loss)			(21,156)		(21,602)
	Total IBM stockholders’ equity			16,607		22,792
Noncontrolling interests				133		137
Total equity				16,740		22,929
Total liabilities and equity			$	122,646	$	126,223
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

6

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

		Three Months Ended March 31,
(Dollars in millions)			2014		2013
Cash flows from operating activities:
Net income		$	2,384	$	3,032
Adjustments to reconcile net income to cash provided by operating activities
	Depreciation		802		822
	Amortization of intangibles		339		331
	Stock-based compensation		124		144
	Net (gain)/loss on asset sales and other		(161)		(62)
	Changes in operating assets and liabilities, net of acquisitions/divestitures		(162)		(244)
Net cash provided by operating activities			3,326		4,023
Cash flows from investing activities:
	Payments for property, plant and equipment		(849)		(714)
	Proceeds from disposition of property, plant and equipment		74		123
	Investment in software		(112)		(139)
	Acquisition of businesses, net of cash acquired		(264)		(58)
	Divestitures of businesses, net of cash transferred		391		10
	Non-operating finance receivables — net		665		732
	Purchases of marketable securities and other investments		(477)		(2,136)
	Proceeds from disposition of marketable securities and other investments		608		1,169
Net cash provided by/(used in) investing activities			35		(1,012)
Cash flows from financing activities:
	Proceeds from new debt		4,875		2,685
	Payments to settle debt		(1,507)		(857)
	Short-term borrowings/(repayments) less than 90 days — net		845		(1,359)
	Common stock repurchases		(8,166)		(2,593)
	Common stock transactions — other		270		356
	Cash dividends paid		(990)		(948)
Net cash used in financing activities			(4,673)		(2,716)
Effect of exchange rate changes on cash and cash equivalents			5		(121)
Net change in cash and cash equivalents			(1,307)		173
Cash and cash equivalents at January 1			10,716		10,412
Cash and cash equivalents at March 31		$	9,409	$	10,585
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

7

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)

	Common
	Stock and							Accumulated
	Additional							Other			Total IBM			Non-
		Paid-in		Retained		Treasury			Comprehensive			Stockholders'			Controlling		Total
(Dollars in millions)		Capital		Earnings		Stock			Income/(Loss)			Equity			Interests		Equity
Equity - January 1, 2014		$	51,594	$	130,042	$	(137,242)		$	(21,602)		$	22,792		$	137	$	22,929
Net income plus other
comprehensive income/(loss)
Net income					2,384								2,384					2,384
Other comprehensive income/(loss)										446			446					446
Total comprehensive income/(loss)												$	2,830				$	2,830
Cash dividends paid –
common stock					(990)								(990)					(990)
Common stock issued under
employee plans (3,105,227 shares)			333										333					333
Purchases (488,203 shares) and
sales (328,673 shares) of  treasury
stock under employee plans – net					(5)		(46)						(51)					(51)
Other treasury shares purchased,
not retired (45,153,202 shares)							(8,324)						(8,324)					(8,324)
Changes in other equity			16										16					16
Changes in noncontrolling interests																(4)		(4)
Equity - March 31, 2014		$	51,943	$	131,431	$	(145,612)		$	(21,156)		$	16,607		$	133	$	16,740
	Common
	Stock and							Accumulated
	Additional							Other			Total IBM			Non-
		Paid-in		Retained		Treasury			Comprehensive			Stockholders'			Controlling		Total
(Dollars in millions)		Capital		Earnings		Stock			Income/(Loss)			Equity			Interests		Equity
Equity - January 1, 2013		$	50,110	$	117,641	$	(123,131)		$	(25,759)		$	18,860		$	124	$	18,984
Net income plus other
comprehensive income/(loss)
Net income					3,032								3,032					3,032
Other comprehensive income/(loss)										293			293					293
Total comprehensive income/(loss)												$	3,325				$	3,325
Cash dividends paid –
common stock					(948)								(948)					(948)
Common stock issued under
employee plans (3,726,163 shares)			361										361					361
Purchases (629,550 shares) and
sales (648,990 shares) of  treasury
stock under employee plans – net					(12)		(53)						(65)					(65)
Other treasury shares purchased,
not retired (12,318,883 shares)							(2,493)						(2,493)					(2,493)
Changes in other equity			52										52					52
Changes in noncontrolling interests																(1)		(1)
Equity - March 31, 2013		$	50,522	$	119,713	$	(125,677)		$	(25,466)		$	19,092		$	122	$	19,214
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)

8

Notes to Consolidated Financial Statements:

1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company's management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company's results of operations, financial position and cash flows.

      The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See the company's 2013 Annual Report on pages 67 to 70 for a discussion of the company's critical accounting estimates.

      Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company's 2013 Annual Report.

      Noncontrolling interest amounts in income of $(0.5) million and $1.4 million, net of tax, for the three months ended March 31, 2014 and 2013, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

      Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

2. Accounting Changes:In April 2014, the Financial Accounting Standards Board (FASB) issued guidance that changes the criteria for reporting a discontinued operation. According to the new guidance, only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results is a discontinued operation. The new guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The guidance is effective beginning January 1, 2015 with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. The impact to the company will be dependent on any transaction that is within the scope of the new guidance.

       In July 2013, the FASB issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014, and was adopted by the company in the first quarter. The guidance is a change in financial statement presentation only and had no material impact in the consolidated financial results.

  In March 2013, the FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance was effective January 1, 2014 and did not have a material impact in the Consolidated Statement of Financial Position.  

     In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples include debt arrangements, other contractual obligations and settled litigation matters. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus additional amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance was effective January 1, 2014 and did not have a material impact in the consolidated financial results.

9

Notes to Consolidated Financial Statements – (continued)

3. Financial Instruments:

Fair Value Measurements

       Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

·Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

·Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·Level 3—Unobservable inputs for the asset or liability.

       The guidance requires the use of observable market data if such data is available without undue cost and effort.

       When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

       The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

       In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

·Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

·Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

        As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

       Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.

       Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. See Note A, “Significant Accounting Policies - Impairment,” on page 88 in the company’s 2013 Annual Report for additional information. There were no material impairments of non-financial assets for the three months ended March 31, 2014and 2013, respectively.

       Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

       The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013.

10

Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)
At March 31, 2014				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,619	$	—	$	4,619
		Commercial paper		—		559		—		559
		Money market funds		988		—		—		988
		U.S. government securities		—		599		—		599
		Canadian government securities		—		226		—		226
		Other securities		—		40		—		40
	Total			988		6,044		—		7,032	(6)
	Debt securities - current (2)			—		295		—		295	(6)
	Debt securities - noncurrent (3)			1		8		—		9
	Trading securities investments (3)			—		77		—		77
	Available-for-sale equity investments (3)			4		—		—		4
	Derivative assets (4)
		Interest rate contracts		—		363		—		363
		Foreign exchange contracts		—		297		—		297
		Equity contracts		—		17		—		17
	Total			—		678		—		678	(7)
Total assets			$	993	$	7,102	$	—	$	8,095	(7)
Liabilities:
	Derivative liabilities (5)
		Foreign exchange contracts	$	—	$	427	$	—	$	427
		Equity contracts		—		2		—		2
		Interest rate contracts		—		12		—		12
Total liabilities			$	—	$	441	$	—	$	441	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of   

      Financial Position.

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments        

      and sundry assets in the Consolidated Statement of Financial Position at March 31, 2014 were $202 million and       

      $476 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other        

      liabilities in the Consolidated Statement of Financial Position at March 31, 2014 were $370 million and $71         

      million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

      Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $221

      million each.

11

Notes to Consolidated Financial Statements – (continued)

(Dollars in millions)
At December 31, 2013				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,754	$	—	$	4,754
		Commercial paper		—		1,507		—		1,507
		Money market funds		1,728		—		—		1,728
		Other securities		—		8		—		8
	Total			1,728		6,269		—		7,997	(6)
	Debt securities - current (2)			—		350		—		350	(6)
	Debt securities - noncurrent (3)			1		7		—		9
	Available-for-sale equity investments (3)			18		—		—		18
	Derivative assets (4)
		Interest rate contracts		—		308		—		308
		Foreign exchange contracts		—		375		—		375
		Equity contracts		—		36		—		36
	Total			—		719		—		719	(7)
Total assets			$	1,747	$	7,345	$	—	$	9,092	(7)
Liabilities:
	Derivative liabilities (5)
		Interest rate contracts	$	—	$	13	$	—	$	13
		Foreign exchange contracts		—		484		—		484
		Equity contracts		—		4		—		4
Total liabilities			$	—	$	501	$	—	$	501	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of   

      Financial Position. 

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments

      and sundry assets in the Consolidated Statement of Financial Position at December 31, 2013 were $318 million and

      $401 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other

      liabilities in the Consolidated Statement of Financial Position at December 31, 2013 were $375 million and $126 

      million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

     Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $251

     million each.

There were no transfers between Levels 1 and 2 for the three months ended March 31, 2014 and the year ended December 31, 2013.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.  

Loans and Long-term Receivables

       Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At March 31, 2014 and December 31, 2013, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

12

Notes to Consolidated Financial Statements – (continued)

Long-term Debt

       Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $34,668 million and $32,856 million, and the estimated fair value was $36,808 million and $34,555 million at March 31, 2014 and December 31, 2013, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Debt and Marketable Equity Securities

The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position.

       During the quarter, the company acquired equity investments in conjunction with the sale of the customer care business which are classified as trading securities. At March 31, 2014, unrealized gains related to trading securities of $6 million were recorded in other (income) and expense in the Consolidated Statement of Earnings.

       The following tables summarize the company’s noncurrent debt and marketable equity securities which are also considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At March 31, 2014:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	8	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	2	$	2	$	0	$	4
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2013:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	7	$	1	$	—	$	9
Available-for-sale equity investments(1)	$	20	$	2	$	4	$	18
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

       Based on an evaluation of available evidence as of March 31, 2014 and December 31, 2013, the company believes that unrealized losses on debt and available-for-sale equity investments were temporary and did not represent a need for an other-than-temporary impairment.    

       Sales of debt and available-for-sale equity investments during the period were as follows:

(Dollars in millions)
For the three months ended March 31:		2014		2013
Proceeds	$	14	$	18
Gross realized gains (before taxes)		—		3
Gross realized losses (before taxes)		4		4

(Dollars in millions)
For the three months ended March 31:		2014		2013
Net unrealized gains/(losses) arising during the period	$	0	$	$ (1)
Net unrealized (gains)/losses reclassified to net income*		3		0
* There were no writedowns for the three months ended March 31, 2014 and 2013.

     The contractual maturities of substantially all available-for-sale debt securities are less than one year at March 31, 2014.

13

Notes to Consolidated Financial Statements – (continued)

Derivative Financial Instruments

       The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

       As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

       The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at March 31, 2014 and December 31, 2013 was $201 million and $216 million, respectively, for which no collateral was posted at March 31, 2014 and December 31, 2013.  Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of March 31, 2014 and December 31, 2013 was $678 million and $719 million, respectively. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure was reduced by $221 million and $251 million at March 31, 2014 and December 31, 2013, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at March 31, 2014 and December 31, 2013, this exposure was reduced by $23 million and $29 million of cash collateral, respectively, received by the company. At March 31, 2014 and December 31, 2013, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $434 million and $439 million, respectively.  At March 31, 2014 and December 31, 2013, the net amount related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $220 million and $250 million, respectively. 

       In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at March 31, 2014 or December 31, 2013 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral totaled $23 million and $29 million at March 31, 2014 and December 31, 2013, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. No amount was rehypothecated at March 31, 2014 or at December 31, 2013.  At March 31, 2014 and December 31, 2013, no amounts of non-cash collateral were held.   

       The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

       In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps and cross-currency swaps, depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

14

Notes to Consolidated Financial Statements – (continued)

       A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

       The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolios. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2014 and December 31, 2013, the total notional amount of the company’s interest rate swaps was $5.9 billion and $3.1 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2014 and December 31, 2013 was approximately 9.5 years and 10.6 years, respectively.

Forecasted Debt Issuance

       The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at March 31, 2014 and December 31, 2013.

       At March 31, 2014 and December 31, 2013, net gains of approximately $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, gains of less than $1 million, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

       A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments designated as net investment hedges was $3.4 billion and $3.0 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2014 and December 31, 2013 was approximately 0.4 years for both periods.

Anticipated Royalties and Cost Transactions

       The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is four years. At March 31, 2014 and December 31, 2013, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.2 billion with a weighted-average remaining maturity of 0.7 years for both periods.

       At March 31, 2014 and December 31, 2013, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $169 million and $252 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $155 million and $166 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

15

Notes to Consolidated Financial Statements – (continued)

Foreign Currency Denominated Borrowings

       The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. Currently, the maximum length of time over which the company has hedged its exposure to variability in future cash flows is approximately seven years.  At March 31, 2014 and December 31, 2013, the total notional amount of cross currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.2 billion for both periods.

       At March 31, 2014 and December 31, 2013, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses of $6 million (before taxes) and $9 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $3 million of losses in both periods is expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.           

Subsidiary Cash and Foreign Currency Asset/Liability Management

       The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $16.3 billion and $14.7 billion, respectively.

Equity Risk Management

       The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion and $1.3 billion, respectively.

Other Risks

       The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at March 31, 2014 and December 31, 2013.

       The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at March 31, 2014 and December 31, 2013.

       The following tables provide a quantitative summary of the derivative and non-derivative instrument- related risk management activity as of March 31, 2014 and December 31, 2013 as well as for the three months ended March 31, 2014 and 2013, respectively:

16

Notes to Consolidated Financial Statements – (continued)

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of March 31, 2014 and December 31, 2013
(Dollars in millions)	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
	Classification	3/31/2014		12/31/2013		Classification	3/31/2014		12/31/2013
Designated as hedging
instruments:
Interest rate contracts:	Prepaid expenses and					Other accrued
	other current assets	$	—	$	—	expenses and liabilities	$	—	$	0
	Investments and sundry
	assets		363		308	Other liabilities		12		13
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets		110		187	expenses and liabilities		270		331
	Investments and sundry
	assets		54		26	Other liabilities		55		112
Fair value of derivative						Fair value of derivative
assets		$	528	$	522	liabilities	$	337	$	456
Not designated as
hedging instruments:
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets	$	74	$	94	expenses and liabilities	$	98	$	40
	Investments and sundry
	assets		59		67	Other liabilities		4		1
Equity contracts:	Prepaid expenses and					Other accrued
	other current assets		17		36	expenses and liabilities		2		4
Fair value of derivative						Fair value of derivative
assets		$	151	$	197	liabilities	$	104	$	45
Total debt designated as
hedging instruments:
	Short-term debt		N/A		N/A		$	—	$	190
	Long-term debt		N/A		N/A			6,116		6,111
Total		$	678	$	719		$	6,557	$	6,802
N/A-not applicable

17

Notes to Consolidated Financial Statements – (continued)

The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the three months ended March 31, 2014 and 2013
(Dollars in millions)		Gain (Loss) Recognized in Earnings
		Consolidated
		Statement of	Recognized on				Attributable to Risk
		Earnings Line Item	Derivatives(1)				Being Hedged(2)
For the three months ended March 31:				2014		2013		2014		2013
Derivative instruments in fair value hedges:
Interest rate contracts		Cost of financing	$	48	$	(20)	$	(23)	$	46
		Interest expense		33		(13)		(15)		30
Derivative instruments not designated as
	hedging instruments(1):
Foreign exchange contracts		Other (income)
		and expense		(34)		(439)		N/A		N/A
Equity contracts		SG&A expense		21		85		N/A		N/A
Total			$	68	$	(387)	$	(38)	$	76

		Gain (Loss) Recognized in Earnings and Other Comprehensive Income
						Consolidated					(Ineffectiveness) and
		Effective Portion				Statement of	Effective Portion Reclassified				Amounts Excluded from
		Recognized in OCI				Earnings Line Item	from AOCI				Effectiveness Testing(3)
For the three months
	ended March 31:	2014		2013			2014		2013		2014		2013
Derivative instruments
	in cash flow hedges:
Interest rate contracts		$	—	$	—	Interest expense	$	—	$	—	$	—	$	—
						Other (income)
Foreign exchange			88		360	and expense		29		37		(0)		1
	contracts					Cost of sales		(26)		9		—		—
						SG&A expense		(2)		10		—		—
Instruments in net
	investment hedges(4):
Foreign exchange
	contracts		(26)		219	Interest expense		—		—		0		(1)
Total		$	62	$	579		$	1	$	56	$	(0)	$	0

N/A-not applicable

Note: OCI represents Other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.

(1)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.

(4)Instruments in net investment hedges include derivative and non-derivative instruments.

      For the three months ending March 31, 2014 and 2013, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

18

Notes to Consolidated Financial Statements – (continued)

      Refer to the company’s 2013 Annual Report, Note A, “Significant Accounting Policies – Derivative Financial Instruments,” on pages 90 to 91 for additional information.

4. Financing Receivables:The following table presents financing receivables, net of allowances for credit losses, including residual values.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Current:
Net investment in sales-type and direct financing leases	$	4,096	$	4,004
Commercial financing receivables		7,024		8,541
Client loan receivables		5,797		5,854
Installment payment receivables		1,412		1,389
Total	$	18,329	$	19,787
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,152	$	5,700
Commercial financing receivables		—		—
Client loan receivables		6,147		6,360
Installment payment receivables		619		695
Total	$	11,918	$	12,755

       Net investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $698 million and $737 million at March 31, 2014 and December 31, 2013, respectively, and is reflected net of unearned income of $634 million and $672 million, and net of the allowance for credit losses of $131 million and $123 million at those dates, respectively.

       Commercial financing receivables, net of allowance for credit losses of $16 million and $23 million at March 31, 2014 and December 31, 2013, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

       Client loan receivables, net of allowance for credit losses of $222 million and $201 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.

       Installment payment receivables, net of allowance for credit losses of $41 million and $41 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

       Client loan receivables and installment payment receivables financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.

       The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $756 million and $769 million at March 31, 2014 and December 31, 2013, respectively.

       The company did not have any financing receivables held for sale as of March 31, 2014 and December 31, 2013.

Financing Receivables by Portfolio Segment

       The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial financing receivables and other miscellaneous current financing receivables at March 31, 2014 and December 31, 2013. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the

19

Notes to Consolidated Financial Statements – (continued)

portfolio into two classes: major markets and growth markets. For additional information on the company’s accounting policies for the allowance for credit losses, see the company’s 2013 Annual Report on pages 92 and 93.

(Dollars in millions)		Major		Growth
At March 31, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,356	$	2,235	$	8,591
	Loan receivables		9,980		4,259		14,239
Ending balance		$	16,336	$	6,494	$	22,831
Collectively evaluated for impairment		$	16,223	$	6,270	$	22,494
Individually evaluated for impairment		$	113	$	224	$	337
Allowance for credit losses:
Beginning balance at January 1, 2014
	Lease receivables	$	42	$	80	$	123
	Loan receivables		95		147		242
Total		$	137	$	228	$	365
	Write-offs		(5)		(3)		(8)
	Provision		3		36		39
	Other		(0)		(1)		(1)
Ending balance at March 31, 2014		$	134	$	260	$	394
	Lease receivables	$	41	$	90	$	131
	Loan receivables	$	93	$	171	$	263
Collectively evaluated for impairment		$	41	$	47	$	89
Individually evaluated for impairment		$	93	$	213	$	306

(Dollars in millions)		Major		Growth
At December 31, 2013		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,796	$	2,200	$	8,996
	Loan receivables		10,529		4,012		14,542
Ending balance		$	17,325	$	6,212	$	23,537
Collectively evaluated for impairment		$	17,206	$	6,013	$	23,219
Individually evaluated for impairment		$	119	$	199	$	318
Allowance for credit losses:
Beginning balance at January 1, 2013
	Lease receivables	$	59	$	55	$	114
	Loan receivables		121		84		204
Total		$	180	$	138	$	318
	Write-offs		(23)		(10)		(33)
	Provision		(21)		105		84
	Other		1		(6)		(5)
Ending balance at December 31, 2013		$	137	$	228	$	365
	Lease receivables	$	42	$	80	$	123
	Loan receivables	$	95	$	147	$	242
Collectively evaluated for impairment		$	45	$	48	$	93
Individually evaluated for impairment		$	93	$	179	$	272

       When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon creditrating, probability of default, term, characteristics (lease/loan) and loss history.

20

Notes to Consolidated Financial Statements – (continued)

Financing Receivables on Non-Accrual Status

       Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts forwhich it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables.

       The following table presents the recorded investment in financing receivables which were on non-accrual status at March 31, 2014 and December 31, 2013.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Major markets	$	24	$	25
Growth markets		62		34
Total lease receivables	$	85	$	59
Major markets	$	41	$	40
Growth markets		116		92
Total loan receivables	$	157	$	132
Total receivables	$	242	$	191

Impaired Loans

      The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status.

      The following tables present impaired client loan receivables.

	At March 31, 2014							At December 31, 2013
	Recorded				Related			Recorded				Related
(Dollars in millions)	Investment				Allowance			Investment				Allowance
Major markets	$	75			$	63		$		79		$		67
Growth markets		147				136				122				116
Total	$	222			$	199		$		201		$		183
											Interest
			Average				Interest				Income
(Dollars in millions)			Recorded				Income				Recognized on
For the three months ended March 31, 2014:			Investment				Recognized				Cash Basis
Major markets			$	77			$		0		$		0
Growth markets				134					0				0
Total			$	211			$		0		$		0
											Interest
			Average				Interest				Income
(Dollars in millions)			Recorded				Income				Recognized on
For the three months ended March 31, 2013:			Investment				Recognized				Cash Basis
Major markets			$	79			$		0		$		0
Growth markets				79					0				0
Total			$	158			$		0		$		0

Credit Quality Indicators

       The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Standard & Poor’s Ratings Services credit ratings as shown below. Standard & Poor’s does not provide credit ratings to the company on its customers.

21

Notes to Consolidated Financial Statements – (continued)

       The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at March 31, 2014 and December 31, 2013. Receivables with a credit quality indicator ranging from AAA to BBB- are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At March 31, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	648	$	63	$	1,017	$	119
	A+ – A-		1,243		168		1,952		320
	BBB+ – BBB-		2,172		1,025		3,411		1,953
	BB+ – BB		1,349		333		2,119		634
	BB- – B+		519		350		814		666
	B – B-		354		218		555		414
	CCC+ – D		71		80		111		152
Total		$	6,356	$	2,235	$	9,980	$	4,259

       At March 31, 2014, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (15 percent), Manufacturing (13 percent), Retail (9 percent), Services (8 percent), Communications (6 percent), Healthcare (5 percent) and Other (4 percent).

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2013:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	743	$	68	$	1,151	$	125
	A+ – A-		1,513		168		2,344		307
	BBB+ – BBB-		2,111		957		3,271		1,745
	BB+ – BB		1,393		350		2,158		638
	BB- – B+		595		368		922		672
	B – B-		365		214		565		391
	CCC+ – D		76		74		118		134
Total		$	6,796	$	2,200	$	10,529	$	4,012

       At December 31, 2013, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (14 percent), Manufacturing (14 percent), Retail (8 percent), Services (8 percent), Healthcare (6 percent), Communications (6 percent) and Other (4 percent).

Past Due Financing Receivables

       The company views receivables as past due when payment has not been received after 90 days, measured from the billing date.

22

Notes to Consolidated Financial Statements – (continued)

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At March 31, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	6,348	$	6,356	$	8
Growth markets		17		2,218		2,235		10
Total lease receivables	$	25	$	8,566	$	8,591	$	18
Major markets	$	11	$	9,969	$	9,980	$	11
Growth markets		31		4,228		4,259		6
Total loan receivables	$	43	$	14,197	$	14,239	$	18
Total	$	68	$	22,763	$	22,831	$	35
* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	6,789	$	6,796	$	5
Growth markets		19		2,181		2,200		11
Total lease receivables	$	25	$	8,970	$	8,996	$	16
Major markets	$	9	$	10,520	$	10,529	$	6
Growth markets		34		3,979		4,012		18
Total loan receivables	$	43	$	14,499	$	14,542	$	25
Total	$	68	$	23,469	$	23,537	$	41
* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

       The company did not have any troubled debt restructurings during the three months ended March 31, 2014 and for the year ended December 31, 2013.

5. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings:

(Dollars in millions)
For the three months ended March 31:		2014		2013
Cost	$	31	$	31
Selling, general and administrative		88		99
Research, development and engineering		14		14
Other (income) and expense*		(9)		—
Pre-tax stock-based compensation cost		124		144
Income tax benefits		(41)		(50)
Total stock-based compensation cost	$	83	$	94
* Reflects the one-time effects related to the divestiture of the customer care business.

23

Notes to Consolidated Financial Statements – (continued)

       The decrease in pre-tax stock-based compensation cost for the three months ended March 31, 2014, as compared to the corresponding period in the prior year, was due to decreases related to restricted stock units ($9 million), performance share units ($7 million) and the company’s assumption of stock-based awards previously issued by acquired entities ($4 million).

       As of March 31, 2014, the total unrecognized compensation cost of $853 million related to non-vested awards is expected to be recognized over a weighted-average period of approximately 2.4 years.

There was no significant capitalized stock-based compensation cost at March 31, 2014 and 2013.

6.Segments:   The table on page 25 reflects the results of operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income. These results are used, in part, by senior management, both in evaluating the performance of, and in allocating resources to, each of the segments.

24

Notes to Consolidated Financial Statements – (continued)

SEGMENT INFORMATION
				Global Services
			Global			Global
			Technology			Business										Systems and			Global			Total
(Dollars in millions)			Services			Services					Software					Technology			Financing			Segments
For the three months
	ended March 31, 2014:
External revenue			$	9,330		$	4,483				$	5,661				$	2,391		$	512		$	22,376
Internal revenue				241			141					932					168			617			2,099
Total revenue			$	9,570		$	4,624				$	6,593				$	2,559		$	1,129		$	24,476
Pre-tax income			$	1,345		$	628				$	1,918				$	(660)		$	596		$	3,828
Revenue year-to-year change				(2.9)	%		(0.9)			%		3.0			%		(20.7)	%		8.6	%		(2.8)	%
Pre-tax income year-to-year
	change			(15.1)	%		(10.6)			%		(4.7)			%		(63.1)	%		10.7	%		(13.7)	%
Pre-tax income margin				14.1	%		13.6			%		29.1			%		(25.8)	%		52.8	%		15.6	%
nm - not meaningful
For the three months
	ended March 31, 2013:
External revenue			$	9,605		$	4,484				$	5,572				$	3,106		$	499		$	23,266
Internal revenue				248			180					831					120			541			1,919
Total revenue			$	9,852		$	4,664				$	6,403				$	3,226		$	1,040		$	25,185
Pre-tax income			$	1,585		$	703				$	2,014				$	(405)		$	538		$	4,435
Pre-tax income margin				16.1	%		15.1			%		31.5			%		(12.5)	%		51.8	%		17.6	%
Reconciliations to IBM as Reported:
(Dollars in millions)
For the three months ended March 31:								2014					2013
Revenue:
Total reportable segments								$	24,476				$	25,185
Eliminations of internal transactions									(2,099)					(1,919)
Other revenue adjustments									107					142
		Total IBM Consolidated						$	22,484				$	23,408
Pre-tax income:
Total reportable segments								$	3,828				$	4,435
Amortization of acquired intangible assets									(194)					(183)
Acquisition-related charges									(8)					(11)
Non-operating retirement-related (costs)/income									(123)					(283)
Eliminations of internal transactions									(524)					(339)
Unallocated corporate amounts									0					(13)
		Total IBM Consolidated						$	2,980				$	3,606

25

Notes to Consolidated Financial Statements – (continued)

7. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2014:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(61)	$	10	$	(51)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	0	$	(0)	$	0
		Reclassification of (gains)/losses to other (income) and expense		4		(2)		3
		Subsequent changes in previously impaired securities arising during
		the period		—		—		—
	Total net changes related to available-for-sale securities		$	4	$	(2)	$	3
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	88	$	(33)	$	54
		Reclassification of (gains)/losses to:
		Cost of sales		26		(10)		16
		SG&A expense		2		0		2
		Other (income) and expense		(29)		11		(18)
		Interest expense		0		(0)		0
	Total unrealized gains/(losses) on cash flow hedges		$	87	$	(32)	$	55
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	1	$	(0)	$	0
		Net (losses)/gains arising during the period		32		(11)		21
		Curtailments and settlements		4		(1)		3
		Amortization of prior service (credits)/costs		(29)		10		(20)
		Amortization of net (gains)/losses		649		(214)		434
	Total retirement-related benefit plans		$	656	$	(217)	$	439
Other comprehensive income/(loss)			$	687	$	(241)	$	446
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

26

Notes to Consolidated Financial Statements – (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2013:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(405)	$	(84)	$	(489)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	(3)	$	1	$	(2)
		Reclassification of (gains)/losses to other (income) and expense		1		(0)		0
		Subsequent changes in previously impaired securities arising during
		the period		1		(0)		1
	Total net changes related to available-for-sale securities		$	(1)	$	0	$	(0)
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	360	$	(128)	$	232
		Reclassification of (gains)/losses to:
		Cost of sales		(9)		3		(6)
		SG&A expense		(10)		3		(7)
		Other (income) and expense		(37)		14		(23)
		Interest expense		0		—		0
	Total unrealized gains/(losses) on cash flow hedges		$	305	$	(108)	$	197
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	33	$	(11)	$	22
		Net (losses)/gains arising during the period		(15)		5		(10)
		Curtailments and settlements		—		—		—
		Amortization of prior service (credits)/costs		(30)		10		(20)
		Amortization of net (gains)/losses		886		(293)		594
	Total retirement-related benefit plans		$	875	$	(289)	$	586
Other comprehensive income/(loss)			$	773	$	(480)	$	293
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

27

Notes to Consolidated Financial Statements – (continued)

Accumulated Other Comprehensive Income/(Loss) (net of tax)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2014		$	(165)	$	332	$	(21,767)	$	(1)	$	(21,602)
Other comprehensive income before
	reclassifications		54		(51)		21		0		24
Amount reclassified from accumulated
	other comprehensive income		1		0		417		3		421
Total change for the period			55		(51)		439		3		446
March 31, 2014		$	(111)	$	281	$	(21,328)	$	2	$	(21,156)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2013		$	(90)	$	1,733	$	(27,406)	$	4	$	(25,759)
Other comprehensive income before
	reclassifications		232		(489)		12		(1)		(245)
Amount reclassified from accumulated
	other comprehensive income		(35)		0		574		0		539
Total change for the period			197		(489)		586		(0)		293
March 31, 2013		$	107	$	1,243	$	(26,820)	$	4	$	(25,466)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

8. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the total retirement-related benefit plans’ impact on income before income taxes:

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Retirement-related plans – cost
	Defined benefit and contribution pension plans – cost	$	474	$	674		(29.6)	%
	Nonpension postretirement plans – cost		67		80		(16.0)
	Total	$	541	$	754		(28.2)	%

28

Notes to Consolidated Financial Statements – (continued)

The following tables provide the components of the cost/(income) for the company’s pension plans:

Cost/(Income) of Pension Plans
(Dollars in millions)		U.S. Plans				Non-U.S. Plans
For the three months ended March 31:		2014		2013		2014		2013
Service cost		$	—	$	—	$	116	$	131
Interest cost			555		496		390		382
Expected return on plan assets			(1,024)		(995)		(572)		(554)
Amortization of prior service costs/(credits)			2		2		(29)		(31)
Recognized actuarial losses			269		451		360		404
Curtailments and settlements			—		—		4		0
Multi-employer plans/other costs			—		—		79		30
Total net periodic pension (income)/cost of defined
	benefit plans		(198)		(46)		348		363
Cost of defined contribution plans			191		206		133		151
Total defined benefit and contribution plans cost recognized
	in the Consolidated Statement of Earnings	$	(7)	$	160	$	481	$	514

       On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contributions plans. See page 35 for additional information. As a result of the ruling, the company recorded an additional pre-tax retirement-related obligation of $55 million in the first quarter of 2014 in selling, general and administrative expense in the Consolidated Statement of Earnings. This charge is not reflected in operating (non-GAAP) expense. This obligation is reflected in "Non-U.S. Plans - Multi-employer plans/other costs" in the table above. To date, the rulings in this case are declaratory only and there have been no quantifications of any individual remedies.

       In March 2014, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2014 target asset allocation was modified, primarily by reducing equity securities from 42 percent to 32 percent, and increasing debt securities from 47 percent to 57 percent of total plan assets, respectively. The asset allocation change was substantially completed by March 31, 2014. This change is designed to reduce the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2015 expected long-term rate of return on assets to approximately 7.75 percent. See note S, "Retirement-Related Benefits," on page 135 in the company's 2013 Annual Report for additional information regarding the company's investment strategy.

       In 2014, the company expects to contribute to its non-U.S. defined benefit and multi-employer plans approximately $600 million, which will be mainly contributed to the defined benefit pension plans in Japan, the UK, Switzerland and the Netherlands. This amount represents the legally mandated minimum contributions. Total net contributions to the non-U.S. plans in the first three months of 2014 were $126 million.

The following table provides the components of the cost/(income) for the company's nonpension postretirement plans:
Cost of Nonpension Postretirement Plans
		U.S. Plan				Non-U.S. Plans
(Dollars in millions)		2014		2013		2014		2013
For the three months ended March 31:
Service cost		$	7	$	9	$	2	$	3
Interest cost			45		42		16		16
Expected return on plan assets			0		(0)		(2)		(2)
Amortization of prior service costs/(credits)			(2)		—		(1)		(1)
Recognized actuarial losses			0		8		3		6
Total nonpension postretirement plan cost recognized in
	Consolidated Statement of Earnings	$	50	$	58	$	17	$	22

29

Notes to Consolidated Financial Statements – (continued)

In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the ‘Act’), the company qualified to receive a subsidy through 2013. Due to benefit plan changes effective January 1, 2014, the company no longer qualifies for the subsidy as of that date. The company is expected to receive additional subsidies after 2013 to true up the final subsidy amount due to IBM under the Act. The company received a $5.4 million subsidy in the first quarter of 2014 and a $6.1 million subsidy in the first quarter of 2013.For further information related to the Act, see page 141 in the company’s 2013 Annual Report.

9. Acquisitions/Divestitures:  

Acquisitions: During the three months ended March 31, 2014, the company completed two acquisitions at an aggregate cost of $286 million.

The Software segment completed acquisitions of two privately held companies in the first quarter: Aspera, Inc. (Aspera) and Cloudant, Inc. (Cloudant).Bothacquisitions were for 100 percent of the acquired companies.

       The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of March 31, 2014:

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	21
Fixed assets/noncurrent assets					18
Intangible assets:
	Goodwill		N/A		239
	Completed technology		7		33
	Client relationships		7		1
	Patents/trademarks		5-7		8
Total assets acquired					319
Current liabilities					(11)
Noncurrent liabilities					(22)
Total liabilities assumed					(33)
Total purchase price				$	286
N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings.  Aspera’s technology makes cloud computing faster, more predictable and more cost effective for big data transfers such as enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity.  The acquisition of Cloudant will extend the company’s mobile and cloud platforms by enabling developers to easily and quickly create next generation mobile and web-based applications.Purchase price consideration for these acquisitions as reflected in the table above, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

       The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled work-force, neither of which qualify as an amortizable intangible asset. The overall weighted-average life of the identified amortizable intangible assets acquired is 6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $239 million has been assigned to the Software segment. It is expected that none of the goodwill will be deductible for tax purposes.

On April 10, 2014, the company announced that it had entered into a definitive agreement to acquire Silverpop, a privately held company based in Atlanta, GA. Silverpop is a provider of cloud-based capabilities that deliver personalized customer engagements in highly scalable environments.  The acquisition is expected to close in the second quarter of 2014.

30

Notes to Consolidated Financial Statements – (continued)

Divestitures:

On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo will acquire the company’s x86 server portfolio for $2.3 billion, consisting of approximately $2 billion in cash, with the balance in Lenovo stock. The stock will represent less than 5 percent equity ownership in Lenovo. The company will sell to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.

  IBM and Lenovo plan to enter into a strategic relationship which will include a global OEM and reseller agreement for sales of IBM’s industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions. Following the closing of the transaction, Lenovo will assume related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time.

  The transaction will be completed as soon as is practical, subject to the satisfaction of regulatory requirements, customary closing conditions and any other required approvals. At March 31, 2014, the company is engaged in the regulatory review process and in the activities necessary to separate the tangible assets in order to close the transaction. The transaction is expected to be completed in phases, with the initial closing expected in the second half of 2014. Subsequent local closings will occur subject to similar conditions, agreements and the information and consultation process in applicable countries.

  The company expects to recognize a total pre-tax gain on the sale of approximately $1 billion. This gain will be recognized consistent with the closing schedule for the transaction. The exact amount of the gain and the breakdown by closing date is not yet determinable. The variables that can impact the final gain include the valuation of the final balance sheet transferred, the valuation of other related agreements and transaction-related expenses.

  The company’s worldwide x86 business is reported in the Systems and Technology segment, and the associated maintenance operations are part of the Global Technology Services segment. In 2013, this combined business delivered approximately $4.6 billion of revenue, was essentially breakeven on a pre-tax income basis and had approximately $100 million in tangible assets.

       On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX will acquire the company’s worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX stock, which represents less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and Concentrix, SYNNEX’s outsourcing business, has become an IBM strategic business partner for global customer care business process outsourcing services.

The transaction is being completed in phases – the initial closing was completed on January 31, 2014, with subsequent closings expected to be completed in the second quarter of 2014, subject to customary closing conditions, local agreements and the information and consultation process in applicable countries. The company expects to recognize a total pre-tax gain on the sale of between $200 million and $225 million. The gain recognized in the first quarter of 2014 was $98 million. The company’s worldwide customer care business process outsourcing services and industry process services was reported in the Global Technology Services segment. In 2013, the divested business delivered approximately $1.3 billion of revenue, approximately $0.1 billion of pre-tax income and had approximately $50 million in tangible assets.

       On April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba TEC for the sale of its Retail Store Solutions business. As part of the transaction, the company agreed to transfer the maintenance business to Toshiba TEC within three years of the original closing of the transaction.

       In first quarter 2014, the company completed the first phase of the transfer of the maintenance workforce to Toshiba. Subsequent wave closings are scheduled to be completed through the first quarter of 2015 along with associated parts and inventory transfer. The first phase transfer and an assessment of the ongoing contractual terms of the overall transaction resulted in the recognition of an additional pre-tax gain of $34 million in the first quarter of 2014.

       The company expects to close the final phase of the divestiture in the first quarter of 2015. Overall, the company expects to recognize a cumulative total pre-tax gain on the sale of approximately $508 million.

31

Notes to Consolidated Financial Statements – (continued)

10. Intangible Assets Including Goodwill:  The following table details the company’s intangible asset balances by major asset class:

	At March 31, 2014
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,471	$	(696)	$	775
Client relationships		2,149		(1,050)		1,099
Completed technology		2,935		(1,312)		1,623
In-process R&D		2		—		2
Patents/trademarks		366		(169)		198
Other*		7		(5)		2
Total	$	6,929	$	(3,231)	$	3,698
	At December 31, 2013
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,494	$	(699)	$	794
Client relationships		2,148		(977)		1,171
Completed technology		2,910		(1,224)		1,687
In-process R&D		13		—		13
Patents/trademarks		358		(154)		204
Other*		7		(5)		2
Total	$	6,930	$	(3,059)	$	3,871

* Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.

     The net carrying amount of intangible assets decreased $173 million during the first quarter of 2014, primarily due to amortization, partially offset by intangible asset additions resulting from acquisitions. The aggregate intangible amortization expense for acquired intangibles (excluding capitalized software) was $339 million and $331 million for the quarters ended March 31, 2014 and 2013, respectively. In addition, in the first three months of 2014, the company retired $164 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. 

     The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at March 31, 2014:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2014 (for Q2-Q4)	$	377	$	619	$	997
2015		294		642		936
2016		96		601		697
2017		8		479		487
2018		—		328		328

     The change in the goodwill balances by reportable segment, for the three months ended March 31, 2014 and for the year ended December 31, 2013 are as follows:

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other			Balance
Segment	01/01/14		Additions		Adjustments		Divestitures		Adjustments			3/31/14
Global Business Services	$	4,334	$	—	$	—	$	—		$	4	$	4,337
Global Technology Services		4,129		—		—		(52)			16		4,094
Software		21,121		239		0		—			(170)		21,190
Systems and Technology		1,601		—		—		—			(8)		1,593
Total	$	31,184	$	239	$	0	$	(52)		$	(158)	$	31,214

32

Notes to Consolidated Financial Statements – (continued)

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other		Balance
Segment	01/01/13		Additions		Adjustments		Divestitures		Adjustments		12/31/13
Global Business Services	$	4,357	$	—	$	(0)	$	(3)	$	(21)	$	4,334
Global Technology Services		2,916		1,246		17		—		(50)		4,129
Software		20,405		987		11		(4)		(279)		21,121
Systems and Technology		1,568		13		33		—		(14)		1,601
Total	$	29,247	$	2,246	$	61	$	(7)	$	(363)	$	31,184

     Purchase price adjustments recorded in the first three months of 2014 and full year 2013 were related to acquisitions that were completed on or prior to December 31, 2013 or December 31, 2012, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded during the first three months of 2014 or the full year of 2013 and the company has no accumulated impairment losses.

11. Restructuring-Related Liabilities: The following table provides a roll forward of the current and noncurrent liabilities for special restructuring-related actions taken prior to 2006.

		Liability						Liability
		as of				Other		as of
(Dollars in millions)		01/01/14		Payments		Adjustments*		3/31/2014
Current:
	Workforce	$	27	$	(7)	$	8	$	28
Total current		$	27	$	(7)	$	8	$	28
Noncurrent:
	Workforce	$	440	$	—	$	(3)	$	437
Total noncurrent		$	440	$	—	$	(3)	$	437
*   Other Adjustments principally include the reclassification of noncurrent to current, remeasurement of actuarial assumptions,
foreign currency translation adjustments and interest accretion.

12.Contingencies:As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise. 

       The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended March 31, 2014 were not material to the Consolidated Financial Statements. 

       In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations. 

       With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the

33

Notes to Consolidated Financial Statements – (continued)

strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter. 

       Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters. 

       The following is a summary of the more significant legal matters involving the company. 

       The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. On August 25, 2009, the U.S. Bankruptcy Court for the District of Delaware approved the appointment of a Trustee of SCO. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case.  On July 10, 2013, the Court entered an order dismissing seven of SCO's ten claims, specifically its breach of contract and copyright claims, and one tortious interference claim.

       On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. The State terminated the contract, claiming that IBM was in breach, and the State is seeking damages. IBM believes the State’s claims against it are without merit and is seeking payment of termination amounts specified in the contract. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. This matter remains pending in the Indiana courts.    

       On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claims $2.5 billion in damages for lost profits. Iusacell’s complaint relates to a contractual dispute in Mexico, which is the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement.

       IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK is seeking a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK

34

Notes to Consolidated Financial Statements – (continued)

defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. On April 4, 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. This judgment contemplates a future hearing to determine what remedies are available. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK and are currently stayed. 

       In a separate but related proceeding, in March 2011, the Trustee of the IBM UK Trust was granted leave to initiate a claim before the High Court in London against IBM UK and one member of the UK Trust membership, seeking an order modifying certain documents and terms relating to retirement provisions in IBM UK’s largest defined benefit plan (the C Plan) dating back to 1983. The trial of these proceedings began in May 2012 and finished in early June. On October 12, 2012, the High Court in London issued its ruling, holding that the 1983 Trust Deeds and Rules should be modified to allow certain categories of current IBM UK employees who are members of the C Plan to retire from the age of 60 (rather than from the age of 63) without actuarial reduction of their defined benefit pension. In a supplementary ruling on December 13, 2012, the Court declined to similarly modify the Trust Deeds and Rules for former employees who were C Plan members and who left the company prior to retirement.  On February 7, 2013, the Court issued an order agreed to by all parties, under which there will be no appeals of the October 2012 and December 2012 judgments.  As a result of the October 2012 ruling, IBM recorded an additional pre-tax retirement-related obligation of $162 million in the third quarter of 2012.

       On March 24, 2014, in a suit brought by local Works Councils, the Supreme Court of Spain held that IBM Spain’s defined contribution (DC) plan implemented in 1993 was null and void, and held that current employees could reinstate their rights to a defined benefit (DB) plan, although with an offset for DC contributions paid to date.  The Court held that IBM Spain did not consult with the Works Councils in seeking the voluntary participation of employees in changing the pension scheme, and recommended that IBM Spain and the Works Councils engage in discussions over how to carry out the offset. The ruling is declaratory only and there have been no quantifications of, or suits for, individual remedies. IBM Spain is considering its options for appeal.

       In March 2011, the company announced that it had agreed to settle a civil enforcement action with the Securities and Exchange Commission (SEC) relating to alleged violations of the Foreign Corrupt Practices Act of 1977 (FCPA). On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company's global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

       In May 2013, IBM learned that the SEC is conducting an investigation into how IBM reports cloud revenue.  IBM is cooperating with the SEC in this matter. 

       In December 2013, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York related to the company’s third-quarter 2013 financial results disclosure. The company, its Chairman, President and Chief Executive Officer, and a former Senior Vice President and Chief Financial Officer of the company are named as defendants. Plaintiffs allege that defendants violated Section 20(a) and Section10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

       The company is a defendant in numerous actions filed after January 1, 2008 in the Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and different causes of action, including for negligence and recklessness, private nuisance and trespass. Plaintiffs in these cases seek medical monitoring and claim damages in unspecified amounts for a variety of personal injuries and property damages allegedly arising out of the presence of groundwater contamination and vapor intrusion of groundwater contaminants into certain structures in which plaintiffs reside or resided, or conducted business, allegedly resulting from the release of chemicals into the environment by the company at its former manufacturing and development facility in Endicott. These complaints also seek punitive damages in an unspecified amount.  

       The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or

35

Notes to Consolidated Financial Statements – (continued)

laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites. 

       The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters include claims for taxes on the importation of computer software. In November 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this decision. The total potential amount related to the remaining matters for all applicable years is approximately $720 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

13. Commitments:  The company’s extended lines of credit to third-party entities include unused amounts of $6,103 million and $5,028 million at March 31, 2014 and December 31, 2013, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $1,589 million and $1,769 million at March 13, 2014 and December 31, 2013, respectively.

       The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

       The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

       It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

       In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $45 million and $44 million at March 13, 2014 and December 31, 2013, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

       Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty contracts are presented in the following tables:

36

Notes to Consolidated Financial Statements – (continued)

Standard Warranty Liability
(Dollars in millions)	2014		2013
Balance at January 1	$	376	$	394
Current period accruals		54		71
Accrual adjustments to reflect actual experience		(3)		9
Charges incurred		(85)		(93)
Balance at March 31	$	342	$	381
Extended Warranty Liability
(Dollars in millions)	2014		2013
Aggregate deferred revenue at January 1	$	579	$	606
Revenue deferred for new extended warranty contracts		54		47
Amortization of deferred revenue		(73)		(82)
Other*		(11)		(7)
Aggregate deferred revenue at March 31	$	548	$	565
Current portion	$	268	$	286
Noncurrent portion		280		278
Aggregate deferred revenue at March 31	$	548	$	565
* Other primarily consists of foreign currency translation adjustments.

14. Subsequent Events: On April 29, 2014, the company announced that the Board of Directors approved a quarterly dividend of $1.10 per common share. The dividend is payable June 10, 2014 to shareholders of record on May 9, 2014. The dividend declaration represents an increase of $0.15 per common share, which is 16 percent higher than the prior quarterly dividend of $0.95 per common share.

37

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2014

Snapshot

Financial Results Summary:

								Yr. to Yr.
								Percent/
(Dollars in millions except per share amounts)								Margin
For the three months ended March 31:		2014			2013			Change
Revenue		$	22,484		$	23,408			(3.9)	%*
Gross profit margin			46.9	%		45.6	%		1.3	pts.
Total expense and other (income)		$	7,563		$	7,072			6.9	%
Total expense and other (income)-to-revenue ratio			33.6	%		30.2	%		3.4	pts.
Provision for income taxes		$	596		$	574			3.8	%
Net income		$	2,384		$	3,032			(21.4)	%
Net income margin			10.6	%		13.0	%		(2.3)	pts.
Earnings per share:
	Assuming dilution	$	2.29		$	2.70			(15.2)	%
	Basic	$	2.30		$	2.72			(15.4)	%
Weighted-average shares outstanding:
	Assuming dilution		1,041.8			1,124.0			(7.3)	%
	Basic		1,035.2			1,113.7			(7.0)	%
		3/31/14			12/31/13
Assets		$	122,646		$	126,223			(2.8)	%
Liabilities		$	105,906		$	103,294			2.5	%
Equity		$	16,740		$	22,929			(27.0)	%
* 2.4 percent decrease adjusted for currency

Currency:

       The references to "adjusted for currency" or "at constant currency" in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. Certain financial results are adjusted based on a simple mathematical model that translates current period results 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 country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. See “Currency Rate Fluctuations” on pages 57 and 58 for additional information.

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, the company separates business results into operating and non-operating categories. Operating earnings is a non-GAAP measure that excludes the effects of certain acquisition-related charges and retirement-related costs, and their related tax impacts. For acquisitions, operating earnings 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 characterizes certain items as operating and others as non-operating. The company includes defined benefit plan and nonpension postretirement benefit plan service cost, amortization of prior service cost and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includes defined benefit plan and nonpension postretirement benefit plan interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and multi-employer plan costs, pension insolvency costs and other costs. Non-operating costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside the operational performance of the business.

38

Management Discussion – (continued)

       Overall, the company believes that providing investors with a view of operating earnings 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 comparisons to peer companies; and allows the company to provide a long-term strategic view of the business going forward. For its 2015 road map, the company is utilizing an operating view to establish its objectives and track its progress. The company’s reportable segment financial results reflect operating earnings, consistent with the company’s management and measurement system.

The following table provide the company’s (non-GAAP) operating earnings for the first quarter of 2014 and 2013.

						Yr. to Yr.
(Dollars in millions except per share amounts)						Percent
For the three months ended March 31:		2014		2013		Change
Net income as reported		$	2,384	$	3,032		(21.4)	%
Non-operating adjustments (net of tax):
	Acquisition-related charges		161		140		15.2
	Non-operating retirement-related costs/(income)		98		204		(51.9)
Operating (non-GAAP) earnings*		$	2,643	$	3,376		(21.7)	%
Diluted operating (non-GAAP) earnings per share		$	2.54	$	3.00		(15.3)	%
* See page 66 for a more detailed reconciliation of net income to operating earnings.

Financial Performance Summary:

       In the first quarter of 2014, the company reported $22.5 billion in revenue, expanded gross margin and delivered diluted earnings per share of $2.29 as reported and $2.54 on an operating (non-GAAP) basis. The company generated $3.3 billion in cash from operations and $0.6 billion in free cash flow in the first quarter driving shareholder returns of $9.2 billion in gross common stock repurchases and dividends.

     The company’s performance in the first quarter reflects the actions it is taking to transition to key growth areas and to transform parts of the business. In the first quarter the company:

·Announced a $1.2 billion investment to globally expand its SoftLayer cloud hubs.

·Launched BlueMix, a new platform-as-a-service to speed deployment of hybrid clouds.

·Acquired Aspera and Cloudant to extend the company’s big data and cloud capabilities.

·Expanded the ecosystem around OpenPOWER.

·Created an integrated business unit around IBM Watson and announced a $1 billion investment to bring cognitive capabilities to the enterprise.

       The company is also taking portfolio actions to divest businesses that no longer fit its strategic portfolio. In January 2014, the company:

·Completed the initial closing for the divestiture of the customer care business process outsourcing business.

·Announced an agreement to sell its x86 industry standard server business to Lenovo.

       In addition, as expected, the company took a substantial workforce rebalancing charge to align its resources and skills to the demand profile. This charge significantly impacted the financial results in the first quarter, but the company expects the action to pay back within the current year. Many of the actions taken in the first quarter will impact the company’s revenue and profit in the short term, but are expected to have long term benefits.

       The company has continued to shift its investments to address the key trends in information technology (IT) – driven by data and cloud and changes in the way individuals are engaging. Across the business, the company had good performance in the first quarter of 2014 in the offerings that address these shifts. Business analytics revenue increased 5 percent as reported and 6 percent at constant currency on a large base. Cloud revenue increased over 50 percent, with the cloud delivered as a service content doubling year to year. In addition, in the first quarter, the company had strong growth in mobile and security compared to the prior year.

39

Management Discussion – (continued)

     Segment revenue was led by Software which increased 1.6 percent (2 percent adjusted for currency), driven by key branded middleware which increased 4.4 percent (5 percent adjusted for currency). The company is continuing to see strong client demand and strong results in the key areas of mobile, cloud and security where it has been targeting its investments. Total Global Services revenue declined 2.0 percent as reported, but increased 0.3 percent at constant currency; adjusting for the divested customer care business, total Global Services revenue increased 2 percent at constant currency with growth in both Global Technology Services and Global Business Services. The first quarter growth reflects the company’s expanded cloud offerings, contribution from some of the large outsourcing contracts signed in 2013, and good performance in Consulting and Systems Integration. Systems and Technology revenue decreased 23.0 percent (23 percent adjusted for currency) from a combination of secular and cyclical challenges. The company is dealing with challenges in its hardware business models specific to Power, Storage and System x. The business has taken actions to address these business model challenges including; 1) selling the industry standard server business to Lenovo, 2) repositioning Power and building an ecosystem around OpenPOWER, and 3) rightsizing the Power and Storage businesses to the market dynamics. System z mainframe revenue decreased 39.7 percent (40 percent adjusted for currency). The decline in System z revenue reflects that the product is six quarters into this product cycle, though on solid ground secularly.

     From a geographic perspective, revenue in the growth markets declined 10.7 percent as reported and 5 percent adjusted for currency, a one point improvement from the fourth quarter at constant currency. The company views the bulk of the challenges in the growth markets as cyclical, and believes that the opportunity in the growth markets remains attractive over the long term. The company is continuing to invest in these key markets to capture that opportunity.

     In the first quarter, total consolidated revenue decreased 3.9 percent, 2.4 percent at constant currency. Adjusting for the divested customer care business, revenue decreased 1 percent at constant currency. This performance represents a 2 point sequential improvement at constant currency from the fourth quarter of 2013. The constant currency growth in Software, Global Services and Global Financing was offset by the decline in Systems & Technology. The currency impact to revenue was 1.6 points in the first quarter of 2014. Currency was also a headwind to profit performance — reflecting impacts from the Yen and the devaluation of the Venezuelan currency.

     The consolidated gross profit margin increased 1.3 points versus the first quarter of 2013 to 46.9 percent. The operating (non-GAAP) gross margin of 47.6 percent increased 0.9 points year to year. The improvement in gross margin was driven by margin improvements in Global Services and an improved mix toward Software, partially offset by a margin decline in Systems & Technology.

     Total expense and other (income) increased 6.9 percent in the first quarter of 2014 compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 7.9 percent year to year. The year-to-year drivers were approximately:

		Total		Operating
		Consolidated		(non-GAAP)
	Currency*	0	points	0	points
	Acquisitions **	2	points	2	points
	Base expense	5	points	7	points
*	Reflects impacts of translation and hedging programs.
**	Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related
	charges.

       There were several items that had an impact on total expense and other (income) year to year. Workforce rebalancing charges in the first quarter of 2014 were $873 million, an increase of $853 million versus the first quarter of 2013.  In the first quarter of 2014, the company recorded a gain of $98 million related to the divestiture of the customer care business. A gain of a similar amount is expected in the second quarter of 2014 as the remaining country closings are completed. Adjusting for these items, operating (non-GAAP) base expense would have improved by 4 points compared to the 7 point impact as highlighted above. The 4 point improvement is more indicative of the productivity in the base expense. Within base expense, the company is continuing to shift spending to areas where it sees future growth. As an example, the $1.5 billion of research and development spending in the first quarter of 2014 reflects the shift of development priorities to the growth areas. The recent launch of BlueMix is a great example — the company will be investing $1 billion to deliver unique platform-as-a-service capabilities to connect enterprise data and applications to the cloud.   

40

Management Discussion – (continued)

       Pre-tax income decreased 17.3 percent year to year and the pre-tax margin was 13.3 percent, a decrease of 2.1 points versus the first quarter of 2013. Net income decreased 21.4 percent and the net income margin was 10.6 percent, a decrease of 2.3 points year to year. The effective tax rate for the first quarter was 20.0 percent, an increase of 4.1 points year to year. Operating (non-GAAP) pre-tax income decreased 19.1 percent year to year and the operating (non-GAAP) pre-tax margin was 14.7 percent, a decrease of 2.7 points year to year. Operating (non-GAAP) net income decreased 21.7 percent and the operating (non-GAAP) net income margin of 11.8 percent decreased 2.7 points compared to the prior year. The operating (non-GAAP) effective tax rate was 20.0 percent versus 17.3 percent in the first quarter of 2013.

       Diluted earnings per share of $2.29 decreased 15.2 percent versus the prior year. Operating (non-GAAP) diluted earnings per share of $2.54 decreased $0.46 or 15.3 percent versus the first quarter of 2013. In the first quarter, the company repurchased 45.2 million shares of its common stock.

       At March 31, 2014, the company’s balance sheet and liquidity positions remained strong and are well positioned to support the business over the long term. Cash and marketable securities at quarter end were $9,704 million, a decrease of $1,361 million from December 31, 2013. Key drivers in the balance sheet and total cash flows are:

       Total assets decreased $3,577 million ($3,648 million adjusted for currency) from December 31, 2013 driven by:

·Decreases in total receivables ($3,012 million) and cash and cash equivalents ($1,307 million); partially offset by

·Increased prepaid pension assets ($559 million).

       Total liabilities increased $2,612 million ($2,493 million adjusted for currency) from December 31, 2013 driven by:

·Increases in total debt ($4,262 million), deferred income ($1,058 million) and other accrued expenses and liabilities ($717 million); partially offset by

·Decreases in taxes payable ($2,388 million) and accounts payable ($596 million).

       Total equity of $16,740 million decreased $6,189 million from December 31, 2013 as a result of:

·Increased treasury stock ($8,370 million) driven by share repurchases; partially offset by

·Higher retained earnings ($1,390 million), decreased losses in accumulated other comprehensive income/(loss) ($446 million) and higher common stock ($349 million).

     The company generated $3,326 million in cash flow provided by operating activities, a decrease of $697 million compared to the first quarter of 2013, driven primarily by cash tax payments of $2,594 million, an increase in the use of cash of $1,375 million. Investing activities provided $35 million in cash flow in the first quarter of 2014 compared to a use of cash of $1,012 million in the first quarter of 2013. This year-to-year decrease in the use of cash was primarily due to lower cash used for net purchases of marketable securities and other investments ($1,098 million). Net cash used in financing activities of $4,673 million increased $1,957 million compared to the prior year, primarily due to increased cash used for gross common stock repurchases ($5,572 million), partially offset by higher net cash proceeds from total debt ($3,743 million).

       In April 2014, the company stated that it is expecting GAAP earnings per share of at least $17.00 and operating (non-GAAP) earnings of at least $18.00 per diluted share for the full year 2014. The company also stated that its earnings per share expectation does not include the expected gain from the divestiture of its System x server business to Lenovo due to the uncertainty of the timing and the amount. The gain will ultimately be reflected in the company’s results, and the company will provide an update later in the year.  

41

Management Discussion – (continued)

First Quarter in Review

Results of Operations

Segment Details

      The following is an analysis of the first quarter of 2014 versus the first quarter of 2013 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

												Yr. to Yr.
												Percent
									Yr. to Yr.			Change
(Dollars in millions)									Percent/Margin			Adjusted For
For the three months ended March 31:			2014			2013			Change			Currency
Revenue:
	Global Technology Services		$	9,330		$	9,605			(2.9)	%	(0.5)	%
		Gross margin		37.9	%		36.7	%		1.2	pts.
	Global Business Services			4,483			4,484			(0.0)	%	2.0	%
		Gross margin		30.0	%		28.6	%		1.4	pts.
	Software			5,661			5,572			1.6	%	2.1	%
		Gross margin		87.5	%		87.2	%		0.3	pts.
	Systems and Technology			2,391			3,106			(23.0)	%	(22.9	)%
		Gross margin		27.0	%		32.3	%		(5.3)	pts.
	Global Financing			512			499			2.6	%	6.2	%
		Gross margin		46.1	%		45.8	%		0.4	pts.
	Other			107			142			(24.4	)%	(22.8	)%
		Gross margin		(163.7)	%		(158.5)	%		(5.2)	pts.
Total consolidated revenue			$	22,484		$	23,408			(3.9)	%	(2.4)	%
Total consolidated gross profit			$	10,543		$	10,678			(1.3)	%
	Total consolidated gross margin			46.9	%		45.6	%		1.3	pts.
Non-operating adjustments:
	Amortization of acquired intangible assets			102			94			9.0	%
	Acquisition-related charges			2			1			13.7
	Retirement-related costs/(income)			52			164			(68.1	)
Operating (non-GAAP) gross profit			$	10,699		$	10,937			(2.2)	%
	Operating (non-GAAP) gross margin			47.6	%		46.7	%		0.9	pts.

Global Services

In the first quarter of 2014, the Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS), delivered revenue of $13,813 million, a decrease of 2.0 percent as reported, but up 0.3 percent at constant currency compared to the prior year. Normalizing for the divestiture of the company’s customer care business, Global Services revenue decreased 0.5 percent as reported, but increased 2 percent adjusted for currency.  Adjusted for the divestiture, this is the third consecutive quarter of constant currency growth in total Global Services. Pre-tax income in the first quarter declined 13.7 percent and pre-tax margin declined 1.9 points to 13.9 percent; excluding workforce rebalancing charges in both periods, pre-tax income increased 7.1 percent with a pre-tax margin of 17.3 percent, up 1.5 points year to year.

42

Management Discussion – (continued)

										Yr. to Yr.
										Percent
							Yr. to Yr.			Change
(Dollars in millions)							Percent			Adjusted For
For the three months ended March 31:			2014		2013		Change			Currency
Global Services external revenue:			$	13,813	$	14,089		(2.0)	%	0.3	%
	Global Technology Services		$	9,330	$	9,605		(2.9)	%	(0.5)	%
		Outsourcing		5,280		5,558		(5.0)		(2.8)
		Integrated Technology Services		2,329		2,277		2.3		4.7
		Maintenance		1,721		1,770		(2.8)		(0.1)
	Global Business Services		$	4,483	$	4,484		(0.0)	%	2.0	%
		Outsourcing		934		1,041		(10.3)		(7.7)
		Consulting and Systems Integration		3,549		3,443		3.1		4.9

Global Technology Services revenue of $9,330 million decreased 2.9 percent (1 percent adjusted for currency) in the first quarter of 2014. Normalizing for the divestiture of the customer care business, revenue decreased 0.7 percent, but increased 2 percent adjusted for currency. Within GTS, the Softlayer platform, which provides a highly differentiated solution for clients looking to deploy across public, private or hybrid clouds all unified on one platform, continued to perform well and contributed about 1 point of constant currency growth for total GTS in the first quarter. The company announced it will invest $1.2 billion to expand its global cloud footprint and will double the number of its Softlayer centers — with 40 cloud centers in 15 countries, they will be located in every major geography and key financial center. GTS Outsourcing revenue declined 5.0 percent (3 percent adjusted for currency) compared with the prior year. Normalizing for the customer care divestiture, revenue declined 1.3 percent as reported, but returned to growth on a constant currency basis with an increase of 1 percent year to year. This growth was driven by new contracts that were brought on during 2013.

       Global Business Services revenue of $4,483 million was flat year to year, but increased 2 percent at constant currency. Consulting and Systems Integration (C&SI) revenue grew 3.1 percent (5 percent adjusted for currency). This growth was driven by the practices that address the Digital Front Office. The company delivered growth across cloud and business analytics, and in projects for clients on systems of engagement and helping clients connect these front-end capabilities to their back-end systems and processes. A good indication of this success is the company’s number one ranking in both Overall Business Consulting and Cloud Professional Services by IDC, and Mobility Consulting Services by Forrester. The company continues to invest strategically and committed $100 million in March, 2014 to expand its consulting services capability with ten new IBM Interactive Labs and 1,000 experts to address client experience design and engagement. Application Outsourcing revenue decreased 10.3 percent (8 percent adjusted for currency) reflecting increased pricing pressure and client contract renegotiations, as well as a reduction in elective projects.

								Yr. to Yr.
								Percent/
(Dollars in millions)								Margin
For the three months ended March 31:		2014			2013			Change
Global Technology Services:
	External gross profit	$	3,539		$	3,529			0.3	%
	External gross profit margin		37.9	%		36.7	%		1.2	pts.
	Pre-tax income	$	1,345		$	1,585			(15.1)	%
	Pre-tax margin		14.1	%		16.1	%		(2.0)	pts.
Global Business Services:
	External gross profit	$	1,343		$	1,283			4.7	%
	External gross profit margin		30.0	%		28.6	%		1.4	pts.
	Pre-tax income	$	628		$	703			(10.6)	%
	Pre-tax margin		13.6	%		15.1	%		(1.5)	pts.

       GTS first quarter gross profit grew 0.3 percent and its gross profit margin improved 1.2 points to 37.9 percent versus the prior year. Pre-tax income decreased 15.1 percent to $1,345 million and the pre-tax margin declined 2.0 points to 14.1 percent.  Normalizing for workforce rebalancing charges of $325 million and $4 million in the first quarter of 2014 and 2013, respectively, GTS pre-tax income grew 5.2 percent and pre-tax margin expanded 1.3 points. GTS pre-tax income for the quarter included a gain of $98 million related to the customer care divestiture, however the business performance has also been impacted by the divestiture of those operations. The company continues to make investments in key growth areas such as mobile, security and cloud. These initiatives are gaining traction, but they are not yet at scale.

43

Management Discussion – (continued)

       GBS first quarter gross profit grew 4.7 percent and its gross profit margin improved 1.4 points to 30.0 percent versus the prior year. Pre-tax income decreased 10.6 percent to $628 million and the pre-tax margin declined 1.5 points to 13.6 percent.  Normalizing for workforce rebalancing charges of $159 million and $3 million in the first quarter of 2014 and 2013, respectively, GBS pre-tax income grew 11.5 percent and pre-tax margin expanded 1.9 points reflecting improved productivity in the base.

Global Services Backlog

The estimated Global Services backlog at March 31, 2014 was $138 billion, a decrease of 2.3 percent (2 percent adjusted for currency) compared to the March 31, 2013 balance.  This includes a backlog reduction of $3.8 billion associated with the customer care divestiture. Normalizing for this divestiture, backlog was up 0.4 percent (1 percent adjusted for currency) year to year. The estimated transactional backlog at March 31, 2014 increased 5.4 percent (6 percent adjusted for currency) from the March 31, 2013 levels. The estimated outsourcing backlog decreased 5.3 percent (5 percent adjusted for currency) including the backlog reduction from the customer care divestiture. Normalizing for this divestiture, the estimated outsourcing backlog decreased 1.2 percent (1 percent adjusted for currency) compared to the March 31, 2013 balance.

								Yr. to Yr.
								Percent
						Yr. to Yr.		Change
		At March 31,		At March 31,		Percent		Adjusted For
(Dollars in billions)		2014		2013		Change		Currency
Backlog:
	Total backlog	$	137.6	$	140.8	(2.3)	%	(2.1)	%
	excl. customer care					0.4	%	0.6	%
	Outsourcing backlog	$	86.2	$	91.0	(5.3)	%	(5.2)	%
	excl. customer care					(1.2)	%	(1.0)	%

Total Global Services backlog includes GTS Outsourcing, ITS, GBS Outsourcing, Consulting and Systems Integration and Maintenance. Outsourcing backlog includes GTS Outsourcing and GBS Outsourcing. Transactional backlog includes ITS and Consulting and Systems Integration. Total backlog is intended to be a statement of overall work under contract and therefore does include Maintenance. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.

Global Services signings are management’s initial estimate of the value of a client’s commitment under a Global Services contract. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Signings include GTS Outsourcing, ITS, GBS Outsourcing and Consulting and Systems Integration contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Maintenance is not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals.

Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

								Yr. to Yr.
								Percent
					Yr. to Yr.			Change
(Dollars in millions)					Percent			Adjusted For
For the three months ended March 31:	2014		2013		Change			Currency
Total signings:	$	11,153	$	16,930		(34.1)	%	(33.0)	%
Outsourcing signings	$	5,488	$	10,732		(48.9)	%	(47.8)	%
Transactional signings		5,665		6,198		(8.6)	%	(7.5)	%

44

Management Discussion – (continued)

Software
											Yr. to Yr.
											Percent
								Yr. to Yr.			Change
(Dollars in millions)								Percent			Adjusted For
For the three months ended March 31:				2014		2013		Change			Currency
Software external revenue:				$	5,661	$	5,572	1.6		%	2.1	%
	Middleware:			$	4,695	$	4,547		3.3	%	3.7	%
		Key branded middleware:			3,656		3,504		4.4		4.8
			WebSphere Family						12.0		12.4
			Information Management						1.3		1.9
			Workforce Solutions						(4.4)		(4.2)
			Tivoli						6.6		6.9
			Rational						1.0		1.9
		Other middleware			1,039		1,044		(0.5)		(0.1)
	Operating systems				519		578		(10.2)		(9.5)
	Other				447		447		0.0		1.1

       Software revenue of $5,661 million increased 1.6 percent (2 percent adjusted for currency) year to year in the first quarter of 2014. As enterprise clients continue to rely on the company’s middleware solutions to transform their infrastructure and handle their business critical transactions, first quarter growth was led by key branded middleware. The company delivers software solutions through a combination of on-premise and software-as-a-solution (SaaS) offerings. SaaS offerings span across the software brands — and in the first quarter SaaS revenue grew more than 25 percent year to year.

       Key branded middleware revenue, which accounted for 65 percent of the total software revenue this quarter, increased 4.4 percent (5 percent adjusted for currency) year to year. 

       WebSphere had a strong quarter with revenue increasing 12.0 percent (12 percent adjusted for currency). For the thirteenth consecutive year, Gartner designated the company the market share leader in the application infrastructure and middleware segment. The company’s market share of 30 percent is nearly double the size of its closest competitor. The first quarter performance included continued strong growth in MobileFirst, the comprehensive portfolio of mobile software and services that enable clients to manage, integrate and leverage mobile devices. The company has been building capabilities to address this space and now has over 3,000 mobile experts. Across software and services, the company’s mobile business doubled in the first quarter compared to the prior year. The application server business, which is an example of clients utilizing on-premise software to manage the infrastructure workloads driven by mobile, big data and analytics, delivered strong growth for the fourth consecutive quarter.

       Information Management revenue increased 1.3 percent (2 percent adjusted for currency) in the first quarter of 2014. This growth was led by distributed database and master data management which are key elements of the company’s big data and analytics solutions. With the first quarter acquisition of Cloudant, the company has added DataBase-as-a-Service capability. Cloudant extends the company’s mobile and cloud platforms by enabling developers to easily and quickly create next generation mobile and web-based applications.

       Tivoli revenue increased 6.6 percent (7 percent adjusted for currency) compared to the prior year with growth in all three product segments. Performance was led by Tivoli security which increased 27.0 percent (28 percent adjusted for currency) year to year, marking the sixth consecutive quarter of double-digit growth at constant currency. These strong results are being driven, in part, by incremental requirements for security as clients expand into cloud and mobile computing. Across the company, the portfolio of security offerings grew more than 20 percent in the first quarter versus the prior year. Tivoli storage, which enables customers to manage their rapidly growing data, was up 3.7 percent (4 percent adjusted for currency), and Tivoli systems management increased 2.4 percent (2 percent adjusted for currency) year to year.

       Workforce Solutions revenue decreased 4.4 percent (4 percent adjusted for currency) in the first quarter. Although there was strong growth in SaaS offerings, it was more than offset by a decline in the on-premise Notes business. The company is working to transform this business and build recurring revenue streams from the SaaS offerings.

       Rational revenue increased 1.0 percent (2 percent adjusted for currency) year to year in the first quarter.

45

Management Discussion – (continued)

       Operating systems revenue decreased 10.2 percent (9 percent adjusted for currency) and other software revenue was flat (increased 1 percent adjusted for currency) year to year in the first quarter.

       In the first quarter of 2014, the company launched BlueMix which will make the company’s middleware portfolio accessible via the cloud. With BlueMix, developers can efficiently build cloud applications with reusable pieces of code tied to their enterprise systems. This enables businesses to leverage the flexibility that cloud applications provide.

								Yr. to Yr.
								Percent/
(Dollars in millions)								Margin
For the three months ended March 31:		2014			2013			Change
Software:
	External gross profit	$	4,956		$	4,860			2.0	%
	External gross profit margin		87.5	%		87.2	%		0.3	pts.
	Pre-tax income	$	1,918		$	2,014			(4.7)	%
	Pre-tax margin		29.1	%		31.5	%		(2.4)	pts.

The Software gross profit margin improved 0.3 points to 87.5 percent year to year in the first quarter of 2014.  Software pre-tax income of $1,918 million decreased 4.7 percent and the pre-tax margin of 29.1 percent declined 2.4 points. Normalized for workforce rebalancing charges of $165 million and $7 million in the first quarter of 2014 and 2013, respectively, Software pre-tax income was up 3.1 percent and the pre-tax margin was flat year to year.

Systems and Technology
										Yr. to Yr.
										Percent
							Yr. to Yr.			Change
(Dollars in millions)							Percent			Adjusted For
For the three months ended March 31:			2014		2013		Change			Currency
Systems and Technology external revenue:			$	2,391	$	3,106		(23.0)	%	(22.9)	%
	System z							(39.7)	%	(40.2)	%
	Power Systems							(21.7)		(21.3)
	System x							(17.6)		(17.1)
	Storage							(22.9)		(22.9)
		Total Systems						(24.0)		(23.8)
	Microelectronics OEM							(15.9)		(15.9)

       Systems and Technology revenue decreased 23.0 percent (23 percent adjusted for currency) in the first quarter of 2014 versus the same period in 2013. The decline in revenue reflects both the product cycle of System z and the secular challenges in Power, Storage and System x. In January 2014, the company entered into a definitive agreement with Lenovo to divest its System x business. Also, in the first quarter, the company continued to reposition offerings in other parts of its hardware business to make them more relevant, in addition to taking actions to realign its structure to the demand profile the company projects going forward. 

       System z revenue decreased 39.7 percent (40 percent adjusted for currency) in the first quarter of 2014 versus the first quarter of 2013. MIPS (millions of instructions per second) shipments decreased 19 percent in the first quarter of 2014 versus the same period in 2013. The decline in System z revenue was expected as the product is in the sixth quarter of the product cycle since general availability. In the current mainframe cycle, the company has shipped approximately 26 percent more MIPS compared to the same period in the prior cycle. System z is a core franchise which provides mission critical infrastructure for the company’s clients, and the company continues to invest in the platform. In April 2014, the company celebrated the mainframe’s 50^th year.

       Power Systems revenue decreased 21.7 percent (21 percent adjusted for currency) in the first quarter of 2014 versus the first quarter of 2013. The company is aggressively repositioning this platform with a couple of key initiatives. First, the OpenPOWER consortium makes Power technology available to an open development alliance. In the first quarter of 2014, the company expanded its OpenPOWER ecosystem. Second, the company is expanding its Linux capabilities through its POWER8 launch this year. POWER8 is the first processor built for big data, and delivers better cloud economics. 

46

Management Discussion – (continued)

System x revenue decreased 17.6 percent (17 percent adjusted for currency) in the first quarter of 2014 versus the first quarter of 2013.     

       Storage revenue decreased 22.9 percent (23 percent adjusted for currency) in the first quarter versus the comparable period in 2013. The company’s Flash solutions contributed growth again this quarter, but high-end storage experienced substantial weakness versus the first quarter of 2013.  

Microelectronics OEM revenue decreased 15.9 percent (16 percent adjusted for currency) in the first quarter of 2014 versus the comparable period of 2013.   

								Yr. to Yr.
								Percent/
(Dollars in millions)								Margin
For the three months ended March 31:		2014			2013			Change
Systems and Technology:
	External gross profit	$	645		$	1,003			(35.7)	%
	External gross profit margin		27.0	%		32.3	%		(5.3)	pts.
	Pre-tax income	$	(660)		$	(405)			(63.1)	%
	Pre-tax margin		(25.8)	%		(12.5)	%		(13.2)	pts.

       Systems and Technology’s gross profit margin decreased 5.3 points in the first quarter of 2014 versus the prior year. The decrease was driven by a decline due to revenue mix as a result of less mainframe content (2.3 points), lower margins in Power Systems (1.7 points), Microelectronics (1.3 points) and Storage (0.9 points), partially offset by higher margins in System z (0.2 points) and System x (0.1 points).

       Systems and Technology’s pre-tax loss increased $255 million to a loss of $660 million in the first quarter 2014, when compared to the prior year. Pre-tax margin decreased 13.2 points in the first quarter versus the prior year period. Normalized for workforce rebalancing charges of $218 million and $3 million in the first quarter of 2014 and 2013, respectively, Systems and Technology’s first quarter pre-tax income was a loss of $442 million compared to a loss of $402 million in the prior year, and the pre-tax margin declined 4.8 points.

Global Financing

See pages 60 to 65 for a discussion of Global Financing’s segment results.

Geographic Revenue

       In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis. The following geographic, regional and country-specific revenue performance excludes OEM revenue, which is discussed separately. 

										Yr. to Yr.
										Percent
							Yr. to Yr.			Change
(Dollars in millions)							Percent			Adjusted For
For the three months ended March 31:			2014		2013		Change			Currency
Total Revenue			$	22,484	$	23,408		(3.9)	%	(2.4)	%
	Geographies:		$	22,129	$	22,981		(3.7)	%	(2.1)	%
		Americas		9,596		10,042		(4.4)		(2.2)
		Europe/Middle East/Africa (EMEA)		7,578		7,278		4.1		0.7
		Asia Pacific		4,955		5,661		(12.5)		(5.6)
	Major markets							(1.6)	%	(1.2)	%
	Growth markets							(10.7)	%	(5.0)	%
		BRIC countries						(11.2)	%	(6.0)	%

47

Management Discussion – (continued)

       Total geographic revenue of $22,129 million decreased 3.7 percent (2 percent adjusted for currency) in the first quarter of 2014 compared to the prior year. While as reported revenue for the quarter decreased year to year in both the major markets and growth markets, both markets improved their growth rate at constant currency compared to the fourth quarter of 2013.

       Growth markets revenue across all geographies decreased 10.7 percent as reported and 5 percent at constant currency in the first quarter. Revenue grew at a high single-digit rate on a constant currency basis in Latin America, but revenue in the Asia Pacific countries was down driven by continued weakness in China which declined at a double-digit rate. This performance is consistent with the past two quarters and it is expected to take some time for business to improve in China. The company still sees good opportunity in the growth markets over the long term and continues to invest in these key markets to capture this opportunity.

       Americas revenue decreased 4.4 percent (2 percent adjusted for currency) compared to the first quarter of 2013. This is consistent with performance in the fourth quarter of 2013 on a constant currency basis. Within the major markets, the U.S. was down 3.6 percent and Canada was down 9.6 percent (1 percent adjusted for currency). There was strong growth in software, but hardware performance, especially in the U.S., remained a challenge. Revenue in the Latin America growth markets decreased 2.8 percent as reported, but increased 8 percent adjusted for currency. This performance was led by Brazil which was flat year to year as reported, but increased 12 percent on a constant currency basis.

       EMEA revenue increased 4.1 percent (1 percent adjusted for currency) year to year in the first quarter of 2014. This represents a 3 point improvement compared to last quarter’s growth rate.  This improvement was driven by growth in Germany and Italy. Germany grew 13.1 percent (9 percent adjusted for currency) and Italy increased 9.4 percent (5 percent adjusted for currency). The UK increased 0.4 percent as reported, but decreased 6 percent year to year on a constant currency basis. Revenue in the EMEA growth markets decreased 2.0 percent (increased 1 percent adjusted for currency). Russia had strong performance compared to recent quarters with growth of 12.4 percent (17 percent adjusted for currency). 

       Asia Pacific first quarter revenue decreased 12.5 percent (6 percent adjusted for currency) year over year. Japan revenue decreased 7.8 percent as reported, but increased 2 percent on a constant currency basis. Adjusted for currency, this was the sixth consecutive quarter of revenue growth in Japan. The Asia Pacific growth markets decrease of 15.8 percent (11 percent adjusted for currency) was driven by China which declined 19.4 percent (20 percent adjusted for currency). India was down 17.4 percent (6 percent adjusted for currency) on a year-to-year basis.

       OEM revenue decreased 16.8 percent (17 percent adjusted for currency) year to year in the first quarter of 2013, driven by the Microelectronics OEM business.

Expense
Total Expense and Other (Income)
								Yr. to Yr.
(Dollars in millions)								Percent
For the three months ended March 31:		2014			2013			Change
Total consolidated expense and other (income)		$	7,563		$	7,072		6.9	%
Non-operating adjustments:
	Amortization of acquired intangible assets		(92)			(90)		2.1
	Acquisition-related charges		(6)			(9)		(35.4)
	Non-operating retirement-related (costs)/income		(70)			(120)		(41.3)
Operating (non-GAAP) expense and other (income)		$	7,395		$	6,853		7.9	%
Total consolidated expense-to-revenue ratio			33.6	%		30.2	%	3.4	pts.
Operating (non-GAAP) expense-to-revenue ratio			32.9	%		29.3	%	3.6	pts.

48

Management Discussion – (continued)

       Total expense and other (income) increased 6.9 percent in the first quarter compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 7.9 percent versus the first quarter of 2013. The key drivers of the year-to-year change in total expense and other (income) were approximately:

                                                           Total                 Operating

Consolidated (non-GAAP) 

·Currency *                         0   points                0   points                            

·Acquisitions**                   2   points                2   points  

·Base expense                     5   points                7   points              

*     Reflects impacts of translation and hedging programs.

**   Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related  

       charges.

       For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.

Selling, general and administrative expense
						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Selling, general and administrative expense:
	Selling, general and administrative – other	$	4,612	$	4,759	(3.1)	%
	Advertising and promotional expense		338		323	4.6
	Workforce rebalancing charges		873		20	nm
	Retirement-related costs		231		264	(12.4)
	Amortization of acquired intangible assets		92		90	2.1
	Stock-based compensation		88		99	(10.5)
	Bad debt expense		55		23	140.9
	Total consolidated selling, general and administrative expense	$	6,289	$	5,577	12.8	%
	Non-operating adjustments:
	Amortization of acquired intangibles assets		(92)		(90)	2.1
	Acquisition-related charges		(6)		(3)	117.1
	Non-operating retirement-related (costs)/income		(87)		(104)	(15.8)
	Operating (non-GAAP) selling, general and administrative expense	$	6,104	$	5,381	13.4	%
nm –  not meaningful

Total Selling, general and administrative (SG&A) expense increased 12.8 percent (14 percent adjusted for currency) in the first quarter of 2014 versus the first quarter of 2013. The increase was primarily driven by higher base expense (12 points) and acquisition-related spending (2 points), partially offset by the effects of currency (1 point). Operating (non-GAAP) SG&A expense increased 13.4 percent (15 percent adjusted for currency) primarily driven by higher base expense (13 points) and acquisition-related spending (2 points), partially offset by the effects of currency (1 point). Base expense includes workforce rebalancing charges in the first quarter of 2014 of $873 million, an increase of $853 million year to year, which resulted in a 16 point year-to-year impact in the operating (non-GAAP) SG&A base performance.  Normalized for the workforce rebalancing charges in both first-quarter periods, operating (non-GAAP) SG&A base expense decreased 3 points year to year compared to the 13 point impact above. Bad debt expense increased $32 million year to year driven by specific provision additions. The receivables provision coverage was 1.8 percent at March 31, 2014, an increase of 20 basis points from year-end 2013 and 30 basis points from March 31, 2013.  

49

Management Discussion – (continued)

Other (income) and expense
						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Other (income) and expense:
	Foreign currency transaction losses/(gains)	$	43	$	(415)	nm	%
	(Gains)/losses on derivative instruments		5		402	(98.7)
	Interest income		(22)		(23)	(4.9)
	Net (gains)/losses from securities and investment assets		6		(5)	nm
	Other		(158)		(19)	710.2
	Total consolidated other (income) and expense	$	(126)	$	(60)	108.2	%
	Non-operating adjustment:
	Acquisition-related charges		0		(7)	nm
	Operating (non-GAAP) other (income) and expense	$	(126)	$	(67)	87.6	%
nm - not meaningful

Other (income) and expense was income of $126 million and $60 million in the first quarter of 2014 and 2013, respectively. The increase in income of $65 million year over year was primarily driven by the gain associated with the divestiture of the customer care business ($98 million) in the first quarter of 2014 reflected in Other in the table above. In addition, a reduction in losses on derivative instruments ($397 million) year to year was more than offset by lower foreign currency transaction gains ($458 million) year to year due to foreign currency rate volatility. 

Research, Development and Engineering
					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2014		2013		Change
Total consolidated research, development and  engineering expense	$	1,501	$	1,644	(8.7)	%
Non-operating adjustment:
Non-operating retirement-related (costs)/income		17		(16)	nm
Operating (non-GAAP) research, development and engineering expense	$	1,518	$	1,628	(6.7)	%
nm - not meaningful

       Total Research, development and engineering (RD&E) expense decreased 8.7 percent in the first quarter of 2014 versus the first quarter of 2013 primarily driven by: lower base expense (10 points), partially offset by higher expense due to acquisitions (2 points). Operating (non-GAAP) RD&E expense decreased 6.7 percent in the first quarter of 2014 compared to the prior year, primarily driven by: lower base expense (8 points), partially offset by higher expense due to acquisitions (2 points).

Intellectual Property and Custom Development Income
						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Intellectual Property and Custom Development Income:
	Sales and other transfers of intellectual property	$	93	$	45	106.0	%
	Licensing/royalty-based fees		33		49	(32.9)
	Custom development income		82		89	(8.7)
	Total	$	207	$	183	13.1	%

       The timing and amount of Sales and other transfers of IP may vary significantly from period to period depending upon the timing of divestitures, economic conditions, industry consolidation and the timing of new patents and know-how development. There were no significant IP transactions in the first quarter of 2014 and 2013.

50

Management Discussion – (continued)

Interest Expense

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:		2014	2013		Change
Interest expense	$	105	$	94	11.7	%

       The increase in interest expense for the first quarter of 2014 versus the same period of 2013 was primarily driven by higher average debt levels. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings only if the related external borrowings are to support the Global Financing external business. See pages 63 and 64 for additional information regarding Global Financing debt and interest expense. Overall interest expense (excluding capitalized interest) for the first quarter of 2014 was $260 million, an increase of $17 million year to year.

Retirement-Related Plans

       The following table provides the total pre-tax cost for all retirement-related plans. These amounts are included in the Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants.

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Retirement-related plans – cost:
	Service cost	$	124	$	143		(13.0)	%
	Amortization of prior service cost/(credits)		(29)		(30)		(1.2)
	Cost of defined contribution plans		324		357		(9.4)
	Total operating costs	$	419	$	470		(11.0)	%
	Interest cost	$	1,006	$	936		7.5	%
	Expected return on plan assets		(1,599)		(1,552)		3.0
	Recognized actuarial losses		632		869		(27.3)
	Plan amendments/curtailments/settlements		4		0		nm
	Multi-employer plan/other costs		79		30		159.9
	Total non-operating costs/(income)	$	123	$	283		(56.8)	%
	Total retirement-related plans – cost	$	541	$	754		(28.2)	%
nm – not meaningful

       In the first quarter, total retirement-related plans cost decreased by $213 million compared to the first quarter of 2013, primarily driven by a decrease in recognized actuarial losses ($237 million) and higher expected return on plan assets ($47 million), partially offset by higher interest cost ($70 million).

        As discussed in the “Snapshot” on page 38, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the first quarter were $419 million, a decrease of $52 million compared to the first quarter of 2013, driven by lower defined contribution plans cost ($33 million) and lower service cost ($19 million). Non-operating costs of $123 million decreased $161 million in the first quarter compared to the prior year driven primarily by a decrease in recognized actuarial losses ($237 million) and higher expected return on plan assets ($47 million), partially offset by higher interest cost ($70 million).

       See Note 8, "Retirement-Related Benefits," for additional plan cost detail.

Taxes

       The effective tax rate for the first quarter of 2014 was 20.0 percent compared to an effective tax rate of 15.9 percent for the first quarter of 2013. The operating (non-GAAP) tax rate for the first quarter of 2014 was 20.0 percent compared to 17.3 percent for the first quarter of 2013.

51

Management Discussion – (continued)

       The lower rates in the first quarter of 2013 benefitted from discrete period benefits associated with the retroactive impact of the 2012 American Taxpayer Relief Act (approximately $135 million) and newly enacted state legislation (approximately $125 million). In the first quarter of 2014, this year-to-year impact was partially offset by an increased benefit due to a more favorable mix of geographic income and an increase in the expected utilization of foreign tax credits. 

       With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2008. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2011. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at December 31, 2013 increased by $25 million in the first quarter of 2014 to $4,483 million. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $3,971 million at March 31, 2014.

In April 2010, the company appealed the determination of a non-U.S. local taxing authority with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1,164 million, has been included in unrecognized tax benefits. In April 2011, the company received notification that the appeal was denied. In June 2011, the company filed a lawsuit challenging this decision. The company’s latest brief was filed in December  2013. No final determination has been reached on this matter.

       In the fourth quarter of 2013, the company received a draft tax assessment notice for approximately $866 million from the Indian Tax Authorities for 2009. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability. At March 31, 2014, the company has recorded $454 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the Indian Tax Authorities. 

       In the first quarter of 2014, the IRS commenced its audit of the company’s U.S. tax returns for 2011 and 2012. The company anticipates that this audit will be completed by the end of 2015.

Earnings Per Share

       Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

						Yr. to Yr.
						Percent
For the three months ended March 31:		2014		2013		Change
Earnings per share of common stock:
	Assuming dilution	$	2.29	$	2.70		(15.2)	%
	Basic	$	2.30	$	2.72		(15.4)	%
	Diluted operating (non-GAAP)	$	2.54	$	3.00		(15.3)	%
Weighted-average shares outstanding: (in millions)
	Assuming dilution		1,041.8		1,124.0		(7.3)	%
	Basic		1,035.2		1,113.7		(7.0)	%

       Actual shares outstanding at March 31, 2014 were 1,012.2 million. The weighted-average number of common shares outstanding assuming dilution during the first quarter was 82.2 million shares lower than the same period in 2013, primarily as a result of the company’s common stock repurchase program.

52

Management Discussion – (continued)

Financial Position

Dynamics

       At March 31, 2014, the company continues to have a high degree of financial flexibility with a strong balance sheet to support its business objectives. Cash and marketable securities at quarter end were $9,704 million. Total debt of $43,980 million increased $4,262 million from prior year-end levels. The company continues to manage the investment portfolio to meet its capital preservation and liquidity objectives. In the first three months of 2014, the company generated $3,326 million in cash from operations, a decrease of $697 million compared to the first three months of 2013. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its $10 billion global credit facility. The company’s cash flow and cash position permits the company to invest and deploy capital to areas with the most attractive long-term opportunities. 

       The assets and debt associated with the Global Financing business are a significant part of the company’s financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 60, are supplementary data presented to facilitate an understanding of the Global Financing business.

Working Capital
	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Current assets	$	47,959	$	51,350
Current liabilities		41,058		40,154
Working capital	$	6,901	$	11,196
Current ratio		1.17:1		1.28:1

       Working capital decreased $4,295 million from the year-end 2013 position. The key changes are described below:     

       Current assets decreased $3,390 million (a decrease of $3,482 million adjusted for currency), due to:

·A decline of $2,175 million ($2,242 million adjusted for currency) in short-term receivables primarily due to collections of higher year-end balances; and

·A decrease in cash and cash equivalents and marketable securities of $1,361 million.

       Current liabilities increased $904 million ($861 million adjusted for currency), as a result of:

·An increase in short term debt of $2,449 million ($2,440 million adjusted for currency) primarily driven by a reclass from long-term debt to reflect maturities (see debt analysis on page 55) and increases in commercial paper;

·An increase in deferred income of $1,124 million ($1,086 million adjusted for currency) due to annual Software and Global Services customer billings and contract renewals, partially offset by

·A decrease in taxes payable of $2,388 million ($2,392 million adjusted for currency) primarily due to tax payments in the U.S. and Japan.

Cash Flow

       The company’s cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, is summarized in the following table. These amounts include the cash flows associated with the Global Financing business.

53

Management Discussion – (continued)

(Dollars in millions)
For the three months ended March 31:	2014		2013
Net cash provided by/(used in):
Operating activities	$	3,326	$	4,023
Investing activities		35		(1,012)
Financing activities		(4,673)		(2,716)
Effect of exchange rate changes on cash and cash equivalents		5		(121)
Net change in cash and cash equivalents	$	(1,307)	$	173

       Net cash provided by operating activities decreased by $697 million as compared to the first three months of 2013 driven by the following factors:

·      An increase in income taxes paid ($2,594 million in total) of $1,375 million primarily driven by audit settlements;

·      An increase in cash payments for workforce rebalancing of $277 million;

·A decrease in cash provided by deferred income of $441 million due to lower levels of customer prepayments, partially offset by

·      A decrease in cash payments for performance - related bonus plans of $609 million, and

·      An increase in cash provided by receivables of $802 million.

       Investing activities provided $35 million in cash flow in the first quarter compared to a use of cash of $1,012 million in the prior year driven by:

·Lower cash used of $1,098 million for net purchases of marketable securities and other investments; and

·An increase of $381 million in cash from divestitures driven by the sale of the customer care business, partially offset by

·An increase of $206 million in cash used for acquisitions; and

·A net increase in cash used for capital investments of $158 million.

       Net cash used in financing activities increased $1,957 million as compared to the first three months of 2013 driven by the following factors:

·An increase of $5,572 million of  net cash used for gross common stock repurchases; partially offset by

·An increase in net cash from debt transactions (including short-term borrowings) of $3,743 million.

Noncurrent Assets and Liabilities
	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Noncurrent assets	$	74,687	$	74,873
Long-term debt		34,668		32,856
Noncurrent liabilities (excluding debt)		30,179		30,284

       The decrease in noncurrent assets of $186 million (a decrease of $166 million adjusted for currency) was driven by:

·A decrease of $837 million in financing receivables ($934 million adjusted for currency) reflecting seasonal  reductions from higher year-end balances, partially offset by

54

Management Discussion – (continued)

·An increase in prepaid pension assets of $559 million ($554 million adjusted for currency).

       Long-term debt increased by $1,813 million ($1,805 million adjusted for currency) primarily driven by new debt of $4,667 million, partially offset by reclasses to short-term debt of $2,903 million.

       Other noncurrent liabilities, excluding debt, decreased $105 million ($173 million adjusted for currency) primarily driven by a decrease in retirement and nonpension benefit obligations.

Debt

       The company’s funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Total company debt	$	43,980	$	39,718
Total Global Financing segment debt	$	28,252	$	27,504
Debt to support external clients		25,070		24,471
Debt to support internal clients		3,182		3,033

       Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Global Services, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their attributes, these Global Services assets are leveraged with the balance of the Global Financing asset base. The debt analysis above is further detailed in the Global Financing section on pages 63 and 64.

       Given the significant leverage, the company presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the company’s core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions.

       “Core” debt-to-capitalization ratio (excluding Global Financing debt and equity) was 55.3 percent at March 31, 2014 compared to 39.0 percent at December 31, 2013 and 34.3 percent at March 31, 2013. Given the expected skew of the company’s cash from operations and free cash flow, the company expects its “core” debt-to-capitalization ratio to remain in the 50 percent range for the second and third quarters, and be approximately flat year to year at the end of 2014.        

       Consolidated debt-to-capitalization ratio at March 31, 2014 was 72.4 percent versus 63.4 percent at December 31, 2013 and 63.5 percent at March 31, 2013.  

Equity

       Total equity decreased by $6,189 million from December 31, 2013 as a result of an increase in treasury stock of $8,370 million related to gross common stock repurchases in the first three months of 2014, partially offset by an increase in retained earnings of $1,390 million, a decrease in accumulated other comprehensive losses of $446 million and an increase in common stock of $349 million.

Looking Forward 

       The company measures the success of its business model over the long term, not any individual quarter or year. The company’s strategies, investments and actions are all taken with an objective of optimizing long-term performance. A long-term perspective ensures that the company is well-positioned to take advantage of major shifts occurring in technology, business and the global economy.

       In May 2010, the company met with investors to describe how the company manages its business, allocates its capital and serves its shareholders in a detailed discussion of its strategy. The company discussed how it continuously changes its business mix and resource allocation toward higher value, higher growth market opportunities. The company also discussed its transformation to a globally integrated enterprise and how this has allowed the company to capture new growth and productivity. The company highlighted that by aligning its business model with its clients’ needs, the company can achieve

55

Management Discussion – (continued)

its financial goals which will allow the company to invest in future sources of growth and provide strong returns to its shareholders. This delivers long-term value and performance to all key stakeholders. The execution of the company’s strategy results in the 2015 road map — with the expectation of at least $20 of operating (non-GAAP) earnings per share in 2015.

       Within the IT industry, there are major shifts occurring – driven by data, cloud and changes in the way individuals are engaging. In the first quarter, the company had good performance in its offerings that address these shifts, including business analytics, cloud, mobile and security. As important, the company continues to take significant actions to move to these growth areas – examples include the targeted investments in SoftLayer capacity, the BlueMix launch and IBM Watson. The company is focused on allocating its capital efficiently and effectively – which means investing in the right places, as well as moving away from areas that do not support the company’s shift to higher value. This is an important part of the company’s model. Over the last few years, including the pending sale of the industry standard server business, the company has divested over $6 billion of revenue. The result is a stronger, more relevant business.

        Looking forward in 2014, the company expects continued good performance in the key growth areas; however, overall revenue growth will be impacted by the challenges in the hardware business and the customer care divestiture. The customer care divestiture impacted consolidated revenue growth in the first quarter by approximately 1 point, and it is expected that the impact will be approximately 1-1.5 points for the balance of the year. In addition, the divestiture of the System x server business to Lenovo will impact revenue performance, although that impact cannot be determined due to the uncertainty of the timing of the transaction closing. The company’s gross margin will reflect the ongoing productivity initiatives and actions to improve the cost base – as well as the relative strength of software. As always, the company expects to reinvest a portion of the productivity savings to drive the growth areas. The company also expects to continue to return value to its shareholders. In April 2014, the company disclosed that it is expecting GAAP earnings of at least $17.00 and operating (non-GAAP) earnings of at least $18.00 per diluted share for the full year 2014. The operating (non-GAAP) earnings per share expectation exclude acquisition-related charges of $0.72 per share and non-operating retirement-related costs of $0.28 per share. This expectation results in an increase year to year of 13.8 percent in GAAP earnings per share and an increase of 10.5 percent year to year in operating (non-GAAP) earnings per share, keeping the company on track to its 2015 objective. The company’s earnings per share expectation for 2014 does not include any gain from the sale of its System x server business due to the uncertainty of the timing of the transaction and the amount of the gain. The gain will ultimately be reflected in the company’s results, and the company will provide an update later in the year. The company's financial performance in the first quarter was impacted by the current year workforce rebalancing charges which were a primary driver of the year to year earnings per share decline. In the second quarter of 2013, the company recorded significant workforce rebalancing charges; as a result, without a similar impact, the company expects second quarter 2014 earnings per share to improve compared to the prior year. For the first half of 2014, the company expects to deliver approximately 38 percent of its full year operating (non-GAAP) earnings per share expectation. For the second half of 2014, the company expects growth consistent with its full year expectation of a 10.5 percent increase in operating (non-GAAP) earnings per share. Given the transactional nature and momentum in certain parts of the business, the company expects operating (non-GAAP) earnings per share to grow more on a year to year basis in the fourth quarter versus the third quarter.       

       From a segment perspective, the Software business delivered increased revenue in the first quarter, driven by key branded middleware. Normalized for workforce rebalancing charges, the business grew pre-tax income in the first quarter. The company continues to see very good opportunity for its software solutions, and expects the revenue growth rate in Software to improve going forward in 2014. The improving growth rate in revenue will drive profitability. The Global Services business delivered constant currency revenue growth in the first quarter, adjusting for the divested customer care business. Normalized for workforce rebalancing charges, pre-tax income increased and the pre-tax margin expanded compared to the prior year. The company expects Global Services to deliver revenue growth for the rest of 2014 at rates similar to the first quarter, and overall, the company expects Global Services to improve profit growth in 2014 at a mid-single digit rate compared to the prior year. Systems and Technology revenue declined 23 percent in the first quarter of 2014 reflecting both the cyclical and secular challenges that the company expects to continue. The company expects continued hardware revenue declines for the remainder of 2014. The company’s focus for the System and Technology business in 2014 is to stabilize the profit base on a year to year basis. The repositioning of the Power platform, the announcement of POWER8, new product announcements in Storage and the right-sizing of the business will all contribute to this objective. The company expects these actions, together with the divestiture of System x, will result in a smaller and more profitable hardware business going forward. The company will remain a leader in high-performance and high-end systems, in storage and in cognitive computing, and the company will continue to invest in R&D for advanced semiconductor technology.

       Currency movements impacted the company’s year to year revenue and earnings per share growth in the first quarter of 2014. Revenue growth for the quarter was impacted by 1.6 points from currency. Currency also impacted the company’s

56

Management Discussion – (continued)

profit performance. In April 2014, the company indicated that at current spot rates, it expects the impact to revenue to moderate, but it does expect currency to continue to impact profit going-forward.

       The company’s free cash flow performance in the first quarter of 2014 compared to the prior year was significantly impacted by cash tax payments. Historically, the company’s free cash flow generation is skewed to the back end of the year. The company expects free cash flow in 2014 to increase by approximately $1 billion year to year, including the impacts of cash tax payments. Overall, cash tax payments are expected to be a year-to-year headwind in 2014 of about $2 billion, with the majority of that impact having occurred in the first quarter.

        In the first quarter of 2014, as part of its common stock repurchase program, the company repurchased 45.2 million shares of its common stock expending approximately $8.2 billion in the period. For the full year 2014, the company expects total share repurchase to be slightly less than the 2013 amount of $13.9 billion. The company will continue to return capital to its shareholders for the rest of 2014, however, it will be at a reduced rate relative to the first quarter.

         The company expects, in the normal course of business, that its effective tax rate and operating (non-GAAP) tax rate will be approximately 20 percent in 2014. The rate will change year to year based on nonrecurring events, such as the settlement of income tax audits, changes in tax laws and divestitures, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.

       The company expects 2014 pre-tax retirement-related plan cost to be approximately $2.1 billion, a decrease of approximately $800 million compared to 2013. This estimate reflects current pension plan assumptions at December 31, 2013. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.7 billion, a decrease of approximately $100 million versus 2013. Non-operating retirement-related plan cost is expected to be approximately $350 million, a decrease of approximately $700 million compared to 2013, driven by less recognized actuarial losses. Cash disbursements for all retirement-related plans are expected to be approximately $2.9 billion in 2014, an increase of approximately $200 million compared to 2013.

Currency Rate Fluctuations

       Changes in the relative values of non-U.S. currencies to the U.S. dollar affect the company’s financial results and financial position. At March 31, 2014, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end 2013. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions. Further discussion of currency and hedging appears in the company’s 2013 Annual Report in Note D, “Financial Instruments – Derivative Financial Instruments,” on pages 102 to 106.

Foreign currency fluctuations often drive operational responses that mitigate the simple mechanical translation of earnings. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, the company may use some of the advantage from a weakening U.S. dollar to improve its position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to its customers. Competition will frequently take the same action. Consequently, the company believes that some of the currency-based changes in cost impact the prices charged to clients. The company also maintains currency hedging programs for cash management purposes which mitigate, but do not eliminate, the volatility of currency impacts on the company’s financial results.

       The company translates revenue, cost and expense in its non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple constant currency mathematical translation of local currency results using the comparable prior period’s currency conversion rate. However, this constant currency methodology that the company utilizes to disclose this information does not incorporate any operational actions that management may take in reaction to fluctuating currency rates.  Currency movements impacted the company’s year-to-year revenue and earnings per share growth in the first quarter of 2014. Based on the currency rate movements in the first three months of 2014, total revenue decreased 3.9 percent as reported and decreased 2.4 percent at constant currency versus the first three months of 2013. On a pre-tax income basis, these translation impacts offset by the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $60 million in the first three months of 2014. The same mathematical exercise resulted in a decrease of approximately $70 million in the first three months of 2013. The company views these amounts as a theoretical maximum impact to its as-reported financial results. Considering the operational responses mentioned above, movements of exchange

57

Management Discussion – (continued)

rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but the company believes it could be substantially less than thetheoretical maximum given the competitive pressure in the marketplace.

       For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars.

       The company continues to monitor the economic conditions in Venezuela. On December 30, 2010, the official rate for essential goods was eliminated, with no change to the SITME rate. In February 2013, the SITME rate was eliminated, and the official rate was set at 6.3 bolivars fuerte (BsF) to the U.S. dollar. In March 2013, the Venezuelan government created a new foreign exchange mechanism called the “Complimentary System of Foreign Currency Acquirement” (or the “SICAD 1”). This system operates similar to an auction system and allows entities in specific sectors to bid for U.S. dollars to be used for specific import transactions. In December 2013, the Venezuelan government published the SICAD 1 rate implied by the transactions settled in these auctions, and issued Exchange Agreement No. 24 which clarified the use of the SICAD 1 mechanism.  In January 2014, the government issued Exchange Agreement No. 25, and significantly expanded the transactions that qualify for use of SICAD 1 and stated that a new agency called the National Center of Foreign Commerce (CENCOEX) would assume the role of CADIVI, which historically controlled the sale and purchase of foreign currency in Venezuela. In February 2014, the Venezuelan government signed into law a plan to open a new exchange control mechanism (“SICAD 2”), and indicated that the official rate of 6.3 BsF per USD would increasingly be reserved for the settlement of USD denominated obligations related to purchases of “essential goods and services.” In March 2014, the Venezuelan government published operating rules for SICAD 2 in Exchange Agreement No. 27. SICAD 2 began operating on March 24, 2014. In March 2014, the company adopted the SICAD 1 rate of 10.7 BsF per USD. The SICAD 1 rate is more representative of the exchange rate that will be used for the periodic auctions in SICAD 1 for many of the goods and services sold by the company’s Venezuelan operations.  In the quarter ended March 31, 2014, the company recorded a pre-tax loss of $31 million as a result of the devaluation in Other (income) and expense in the Consolidated Statement of Earnings. At March 31, 2014, the company’s net asset position in Venezuela was $43 million. The company’s operations in Venezuela comprised less than 1 percent of total 2013 and 2012 revenue, respectively.

       In January 2014, the Argentinian government devalued its currency from 6 pesos to the U.S. dollar to 8 pesos to the U.S. dollar. This devaluation did not have a material impact given the size of the company’s operations in Argentina (less than 1 percent of total 2013 revenue).

Liquidity and Capital Resources

      In the company’s 2013 Annual Report, on pages 65 to 67, there is a discussion of the company’s liquidity including two tables that present five years of data. The table presented on page 65 includes net cash from operating activities, cash and marketable securities and the size of the company’s global credit facilities for each of the past five years. For the three months ended, or as of, as applicable, March 31, 2014, those amounts are $3.3 billion for net cash from operating activities, $9.7 billion of cash and marketable securities and $10 billion in global credit facilities, respectively. In 2013, the term of the five-year global credit facility was extended by one year, and now expires on November 10, 2018. See the 2013 Annual Report on page 114 for additional information.   

      The major rating agencies’ ratings on the company’s debt securities at March 31, 2014 appear in the table on page 59. The agency ratings remain unchanged from December 31, 2013. The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants and provides periodic certification to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

    The company does not have “ratings trigger” provisions in its debt covenants or documentation, which would allow the

58

Management Discussion – (continued)

holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. The company’s contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the company’s credit rating were to fall below investment grade. At March 31, 2014, the fair value of those instruments that were in a liability position was $441 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the company’s outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.

	STANDARD	MOODY'S
	AND	INVESTORS	FITCH
	POOR'S	SERVICE	RATINGS
Senior long-term debt	AA-	Aa3	A+
Commercial paper	A-1+	Prime-1	F1

      The table appearing on page 66 of the company’s 2013 Annual Report presents the format in which management reviews cash flows for each of the past five years and is accompanied by a description of the way cash flow is managed, measured and reviewed. The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlights causes and events underlying sources and uses of cash in that format on pages 53 and 54. The following is management’s view of cash flows for the first three months of 2014 and 2013 prepared in a manner consistent with the table and description on pages 65 and 66 of the company’s 2013 Annual Report:

(Dollars in millions)
For the three months ended March 31:	2014		2013
Net cash from operating activities per GAAP:	$	3,326	$	4,023
Less: the change in Global Financing receivables		1,807		1,597
Net cash from operating activities, excluding Global Financing receivables		1,518		2,425
Capital expenditures, net		(887)		(729)
Free cash flow		631		1,696
Acquisitions		(264)		(58)
Divestitures		391		10
Share repurchase		(8,166)		(2,593)
Dividends		(990)		(948)
Non-Global Financing debt		3,634		(717)
Other (includes Global Financing receivables and Global Financing debt)		3,402		3,473
Change in cash, cash equivalents and short-term marketable securities	$	(1,361)	$	863

Free cash flow of $631 million for the first three months of 2014 decreased $1,065 million year to year. The decrease was driven primarily by higher cash tax payments of $2.6 billion, which were higher year to year $1.4 billion, resulting from audit settlement payments and other prior period discrete tax impacts that settled in the first quarter of 2014. Free cash flow was also impacted year to year by higher workforce rebalancing payments and capital spending increases, partially offset by lower compensation-related payments and lower pension contributions. In the first three months of 2014, the company continued to focus its cash utilization on returning value to shareholders including $1.0 billion in dividends and $8.2 billion in gross common stock repurchases.   

       Events that could temporarily change the historical cash flow dynamics discussed above and in the company’s 2013 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in Note 12, “Contingencies,” in this Form 10-Q. With respect to pension funding, the company expects to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $600 million in 2014. Cash disbursements related to all retirement-related plans is expected to be approximately $2.9 billion in 2014. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations. 

59

Management Discussion – (continued)

       The company’s U.S. cash flows continue to be sufficient to fund its current domestic operations and obligations, including investing and financing activities such as dividends and debt service. The company’s U.S. operations generate substantial cash flows, and, in those circumstances where the company has additional cash requirements in the U.S., the company has several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates, utilizing its committed global credit facility, repatriating certain foreign earnings and utilizing intercompany loans with certain foreign subsidiaries. 

The company does earn a significant amount of its pre-tax income outside the U.S. The company’s policy is to indefinitely reinvest the undistributed earnings of its foreign subsidiaries, and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. The company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable. While the company currently does not have a need to repatriate funds held by its foreign subsidiaries, if these funds are needed for operations and obligations in the U.S., the company could elect to repatriate these funds which could result in a reassessment of the company’s policy and increased tax expense.

Global Financing

       Global Financing is a reportable segment that is measured as a stand-alone entity. Global Financing facilitates clients’ acquisition of IBM systems, software and services with the objective of generating consistently strong returns on equity.

Results of Operations

	Three Months Ended
	March 31,
(Dollars in millions)	2014			2013
External revenue	$	512		$	499
Internal revenue		617			541
Total revenue		1,129			1,040
Cost		321			325
Gross profit	$	808		$	715
Gross profit margin		71.6	%		68.7	%
Pre-tax income	$	596		$	538
After-tax income*	$	404		$	364
Return on equity*		41.2	%		41.5	%
* See page 64 for the details of the after-tax income and the return on equity calculation.

       The increase in revenue in the first quarter, as compared to the same period in 2013, was due to:

·Growth in external revenue of 2.6 percent (6 percent adjusted for currency), due to an increase in financing revenue (up 3.4 percent to $391 million); and

·Growth in internal revenue of 14.1 percent, due to increases in used equipment sales revenue (up 17.2 percent to $507 million) and in financing revenue (up 1.6 percent to $110 million).

       The increase in external financing revenue in the first quarter of 2014, compared to the same period in 2013, was due to an increase in the average asset balance, partially offset by lower asset yields. The increase in internal financing revenue in the first quarter, compared to the same period in 2013, was due to higher asset yields.

       Global Financing gross profit increased 13.1 percent in the first quarter of 2014 compared to the same period in 2013, primarily due to an increase in used equipment sales gross profit. The gross profit margin increased 2.8 points in the first quarter, compared to the same period in 2013, due to a margin increase in used equipment sales, partially offset by a margin decrease in financing and a shift in mix away from higher margin financing activities.

60

Management Discussion – (continued)

       Global Financing pre-tax income increased 10.7 percent to $596 million in the first quarter of 2014, compared to the same period in 2013, due to higher gross profit ($93 million), partially offset by increases in financing receivables provisions ($26 million) and selling, general and administrative expenses ($10 million). The increase in financing receivables provisions was due to higher specific reserve requirements in the current year.

      The decrease in return on equity in the first quarter of 2014, compared to the same period of 2013, was due to a higher average equity balance, partially offset by the increase in after-tax income.

Financial Position
Balance Sheet
	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Cash and cash equivalents	$	1,446	$	1,446
Net investment in sales-type and direct financing leases		9,283		9,739
Equipment under operating leases:
External clients (a)		898		947
Client loans		13,975		14,297
Total client financing assets		24,156		24,982
Commercial financing receivables		7,024		8,541
Intercompany financing receivables (b) (c)		4,044		4,216
Other receivables		341		352
Other assets		668		601
Total assets	$	37,679	$	40,138
Intercompany payables (b)	$	2,727	$	5,766
Debt (d)		28,252		27,504
Other liabilities		2,694		3,043
Total liabilities		33,673		36,314
Total equity		4,006		3,825
Total liabilities and equity	$	37,679	$	40,138

(a) Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company's product divisions   

     which is eliminated in IBM's consolidated results.

(b) Entire amount eliminated for purposes of IBM's consolidated results and therefore does not appear on pages 5 and 6.

(c) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing    

     debt.

(d) Global Financing debt is comprised of intercompany loans and external debt. A portion of Global Financing debt is in support 

      of the company's internal business, or related to intercompany mark-up embedded in the Global Financing assets. See table on

      page 64.

Sources and Uses of Funds

       The primary use of funds in Global Financing is to originate client and commercial financing assets. Client financing assets for end users consist primarily of IBM systems, software and services, but also include OEM equipment, software and services to meet IBM clients’ total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans for systems, software and services with terms generally from one to seven years. Global Financing’s client loans are primarily for software and services and are unsecured. These loans are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation. Client financing also includes internal activity as described on pages 33 and 34 of the 2013 IBM Annual Report.

       Commercial financing receivables arise primarily from inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory financing and accounts receivable financing generally range from 30 to 90 days. These short-term receivables are primarily unsecured and are also subjected to additional credit analysis in order to evaluate the associated risk.

61

Management Discussion – (continued)

        In addition to the actions previously described, in certain circumstances, the company may take mitigation actions to transfer credit risk to third parties.

       At March 31, 2014, substantially all financing assets are IT related assets, and approximately 58 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers.

Originations
The following are total financing originations:
	Three Months Ended
	March 31,
(Dollars in millions)	2014		2013
Client financing	$	3,019	$	3,257
Commercial financing		10,360		9,053
Total	$	13,380	$	12,310

       Cash collections of both commercial financing and client financing assets exceeded new financing originations in both the first quarter of 2014 and 2013, which resulted in a net decrease in financing assets in these periods. The increase in originations was due to improving volumes in commercial financing. Internal loan financing with Global Services is executed under a loan facility and is not considered originations.

Cash generated by Global Financing was deployed to pay intercompany payables and dividends to IBM as well as business partners and OEM suppliers.

Global Financing Receivables and Allowances

       The following table presents external financing receivables excluding residual values and the allowance for credit losses:

	At March 31,			At December 31,
(Dollars in millions)	2014			2013
Gross financing receivables	$	30,079		$	32,319
Specific allowance for credit losses		311			279
Unallocated allowance for credit losses		103			113
Total allowance for credit losses		413			392
Net financing receivables	$	29,666		$	31,928
Allowance for credit losses coverage		1.4	%		1.2	%

Roll Forward of  Global Financing Receivables Allowance for Credit Losses
(Dollars in millions)		Allowance		Additions/
January 1, 2014		Used*		(Reductions)		Other**		March 31, 2014
$	392	$	(10)	$	33	$	(1)	$	413
*   Represents reserved receivables, net of recoveries, that were disposed of during the period.
** Primarily represents translation adjustments.

       The percentage of Global Financing receivables reserved increased from 1.2 percent at December 31, 2013, to 1.4 percent at March 31, 2014, primarily due to an increase in specific reserve requirements. Specific reserves increased 11 percent from $279 million at December 31, 2013, to $311 million at March 31, 2014. Unallocated reserves decreased 9 percent from $113 million at December 31, 2013, to $103 million at March 31, 2014, due to the decline in gross financing receivables. 

       Global Financing’s bad debt expense was an increase of $33 million for the three months ended March 31, 2014, compared to an increase of $7 million for the same period in 2013. The year-to-year increase in bad debt expense was due to higher specific reserve requirements, primarily in China, in the current year. 

62

Management Discussion – (continued)

Residual Value    

       Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Global Financing has insight into product plans and cycles for the IBM products under lease. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

Global Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment, which are primarily sourced from equipment returned at the end of a lease, represented 55.6 percent and 53.2 percent of Global Financing's revenue in the first quarter of 2014 and 2013, respectively.  The increase was due to a higher volume of used equipment sales for internal transactions. The gross profit margins on these sales were 67.9 percent and 58.9 percent in the first quarter of 2014 and 2013, respectively. The increase in the gross profit margin was driven by a margin increase in internal sales and a shift in mix toward higher margin internal equipment sales.

       The table below presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at January 1, 2014 and March 31, 2014. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2014 is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. While primarily focused on IBM products, guarantees are also obtained for certain OEM products. These third-party guarantees are included in minimum lease payments as provided for by accounting standards in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets. 

The residual value guarantee increases the minimum lease payments that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease. The aggregate asset values associated with the guarantees of sales-type leases were $86 million and $130 million for the financing transactions originated during the quarters ended March 31, 2014 and March 31, 2013, respectively. The aggregate asset values associated with the guarantees of direct financing leases were $46 million and $55 million for the financing transactions originated during the quarters ended March 31, 2014 and March 31, 2013, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $5 million and $8 million for the financing transactions originated during the quarters ended March 31, 2014 and March 31, 2013, respectively. The cost of guarantees was $0.5 million and $0.8 million for the quarters ended March 31, 2014 and March 31, 2013, respectively.

Unguaranteed Residual Value
							Estimated Run Out of
		At			At		March 31, 2014 Balance
	January 1,			March 31,									2017 and
(Dollars in millions)	2014			2014			2014		2015		2016		Beyond
Sales-type and direct financing
leases	$	736		$	698		$	126	$	206	$	224	$	143
Operating leases		200			193			87		54		40		12
Total unguaranteed residual
value	$	936		$	891		$	213	$	260	$	264	$	155
Related original amount
financed	$	17,642		$	17,021
Percentage		5.3	%		5.2	%

63

Management Discussion – (continued)

Debt
	At March 31,			At December 31,
	2014			2013
Debt-to-equity ratio		7.1	x		7.2	x

The company funds Global Financing through borrowings using a debt-to-equity ratio target of approximately 7 to 1. The debt used to fund Global Financing assets is composed of intercompany loans and external debt. The terms of the intercompany loans are set by the company to substantially match the term and currency underlying the financing receivable and are based on arm's-length pricing. Both assets and debt are presented in the Global Financing balance sheet on page 61.

       Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. As previously stated, the company measures Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s external client and internal business is included in the “Global Financing Results of Operations” on page 60 and in Segment Information on pages 25 and 26.

       In the company’s Consolidated Statement of Earnings on page 3, the external debt-related interest expense supporting Global Financing’s internal financing to the company is reclassified from cost of financing to interest expense.

       The following table provides additional information on total company debt. In this table, intercompany activity includes internal loans and leases at arm’s-length pricing in support of Global Services’ long-term contracts and other internal activity. The company believes these assets should be appropriately leveraged in line with the overall Global Financing business model.

(Dollars in millions)	At March 31, 2014					At December 31, 2013
Global Financing Segment				$	28,252				$	27,504
Debt to support external clients		$	25,070				$	24,471
Debt to support internal clients			3,182					3,033
Non-Global Financing Segments					15,727					12,214
Debt supporting operations			18,910					15,247
Intercompany activity			(3,182)					(3,033)
Total company debt				$	43,980				$	39,718

Liquidity and Capital Resources

       Global Financing is a segment of the company, and therefore is supported by the company’s overall liquidity position and access to capital markets. Cash generated by Global Financing was deployed to pay dividends to the company in order to maintain an appropriate debt-to-equity ratio.

Return on Equity

	Three Months Ended
	March 31,
(Dollars in millions)	2014			2013
Numerator:
Global Financing after-tax income*	$	404		$	364
Annualized after-tax income (A)	$	1,614		$	1,455
Denominator:
Average Global Financing equity (B)**	$	3,915		$	3,507
Global Financing return on equity(A)/(B)		41.2	%		41.5	%

*   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 last 2 quarters.

64

Management Discussion – (continued)

Looking Forward

Global Financing's financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. Global Financing’s assets and new financing volumes are IBM and OEM products and services financed to the company’s clients and business partners, and substantially all financing assets are IT related assets which provide a stable base of business for future growth. Global Financing’s offerings are competitive and available to clients as a result of the company’s borrowing cost and access to the capital markets. Overall, Global Financing’s originations will be dependent upon the demand for IT products and services as well as client participation rates.

       IBM continues to access both the short-term commercial paper market and the medium- and long-term debt markets. A protracted period where IBM could not access the capital markets would likely lead to a slowdown in originations. 

       Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and gross profit. The company’s interest rate risk management policy, however, combined with the Global Financing pricing strategy should mitigate gross margin erosion due to changes in interest rates.   

       The economy could impact the credit quality of the Global Financing receivables portfolio and therefore the level of provision for credit losses. Global Financing will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio.

       As discussed on page 63, Global Financing has historically been able to manage residual value risk both through insight into the company’s product cycles, as well as through its remarketing business.

       Global Financing has policies in place to manage each of the key risks involved in financing. These policies, combined with product and client knowledge, should allow for the prudent management of the business going forward, even during periods of uncertainty with respect to the global economy.

65

Management Discussion – (continued)

GAAP Reconciliation

       The tables below provide a reconciliation of the company’s income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company’s calculation of operating earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Snapshot” section beginning on page 38 for the company’s rationale for presenting operating earnings information.

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the three months ended March 31, 2014	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	10,543		$	104		$	52		$	10,699
Gross profit margin		46.9	%		0.5	pts.		0.2	pts.		47.6	%
S,G&A	$	6,289		$	(97)		$	(87)		$	6,104
R,D&E		1,501			0			17			1,518
Other (income) and expense		(126)			(0)			0			(126)
Total expense and other (income)		7,563			(98)			(70)			7,395
Pre-tax income		2,980			201			123			3,304
Pre-tax income margin		13.3	%		0.9	pts.		0.5	pts.		14.7	%
Provision for income taxes*	$	596		$	40		$	25		$	661
Effective tax rate		20.0	%		0.0	pts.		(0.0)	pts.		20.0	%
Net income	$	2,384		$	161		$	98		$	2,643
Net income margin		10.6	%		0.7	pts.		0.4	pts.		11.8	%
Diluted earnings per share	$	2.29		$	0.16		$	0.09		$	2.54

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the three months ended March 31, 2013	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	10,678		$	95		$	164		$	10,937
Gross profit margin		45.6	%		0.4	pts.		0.7	pts.		46.7	%
S,G&A	$	5,577		$	(92)		$	(104)		$	5,381
R,D&E		1,644			0			(16)			1,628
Other (income) and expense		(60)			(7)			0			(67)
Total expense and other (income)		7,072			(99)			(120)			6,853
Pre-tax income		3,606			194			283			4,084
Pre-tax income margin		15.4	%		0.8	pts.		1.2	pts.		17.4	%
Provision for income taxes*	$	574		$	54		$	79		$	708
Effective tax rate		15.9	%		0.6	pts.		0.9	pts.		17.3	%
Net income	$	3,032		$	140		$	204		$	3,376
Net income margin		13.0	%		0.6	pts.		0.9	pts.		14.4	%
Diluted earnings per share	$	2.70		$	0.12		$	0.18		$	3.00
*  The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP
pre-tax income which employs an annual effective tax rate method to the results.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q 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 the 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 and 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; the company’s ability to successfully

66

Management Discussion – (continued)

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 or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.

Item 4. Controls and Procedures

       The company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

Part II – Other Information

Item 1.  Legal Proceedings

       Refer to Note 12, “Contingencies,” on pages 33 to 36 of this Form 10-Q.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

       The following table provides information relating to the company’s repurchase of common stock for the first quarter of 2014.

					Total Number		Approximate
					of Shares		Dollar Value
					Purchased as		of Shares that
	Total Number		Average		Part of Publicly		May Yet Be
	of Shares		Price Paid		Announced		Purchased Under
Period	Purchased		per Share		Program		The Program*
January 1, 2014 - January 31, 2014		12,635,458	$	184.10		12,635,458	$	12,333,106,699
February 1, 2014 - February 28, 2014		16,204,309	$	181.08		16,204,309	$	9,398,820,327
March 1, 2014 - March 31, 2014		16,313,435	$	187.78		16,313,435	$	6,335,441,141
Total		45,153,202	$	184.35		45,153,202

* On October 29, 2013, the Board of Directors authorized $15.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

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Item 6. Exhibits

Exhibit Number

10.1	Amendment No. 4 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2014.
10.2	Forms of LTTP equity award agreements for (i) stock options, restricted stock,  restricted stock units,
	cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit awards. Terms and conditions document, effective June 9, 2014, in connection with foregoing award agreements.
11	Statement re: computation of per share earnings.
12	Statement re: computation of ratios.
31.1	Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statement of Earnings for the three months ended March 31, 2014 and 2013, (ii) the Consolidated Statement of Comprehensive Income for the three months ended March 31, 2014 and 2013, (iii) the Consolidated Statement of Financial Position at March 31, 2014 and December 31, 2013, (iii) the Consolidated Statement of Cash Flows for the three months ended March 31, 2014 and 2013, (iv) the Consolidated Statement of Changes in Equity for the three months ended March 31, 2014 and 2013 and (v) the notes to the Consolidated Financial Statements.

SIGNATURE

       Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	International Business Machines Corporation
	(Registrant)
Date: April 29, 2014
	By:	/s/  James J. Kavanaugh
		James J. Kavanaugh
		Vice President and Controller
		(Principal Accounting Officer)

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EX-10.1

 

EXHIBIT 10.1

IBM EXCESS 401(k) PLUS PLAN

(As Amended and Restated effective as of January 1, 2010)

AMENDMENT No. 4

Instrument of Amendment

Recitals:

International Business Machines Corporation (“IBM”) has established and maintains the IBM Excess 401(k) Plus Plan (the “Plan”), an unfunded deferred compensation plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).  

In accordance with Section 10.01 of the Plan, IBM has reserved the right to amend the Plan at any time and from time to time.

IBM amended and restated the Plan effective as of January 1, 2010.

IBM has determined to amend the Plan, as heretofore restated, in the manner set forth in this Instrument of Amendment, to be effective for Deferral Periods that begin on or after January 1, 2014, except as otherwise specified herein.

Amendment:

1.             Article II (“Definitions”) is amended by modifying the definition of “Company Contribution-Eligible Individual” to read, in its entirety, as follows:

“Company Contribution-Eligible Individual” generally means, with respect to a Plan Year, any individual who satisfies (a), (b), (c) or (d) below:

(a) On December 15 of the Plan Year, the individual is employed by the Company, is on a U.S. payroll, and is not a Supplemental Employee; for this purpose, an individual (other than a Supplemental Employee) shall be treated as “employed” if the individual is on a leave of absence that is classified in the employer’s payroll records as a bridge leave, a pre-retirement planning leave, a paid or unpaid leave of absence, or a military leave.

(b) The individual terminates employment with the Company during the Plan Year due to Retirement.

(c) The individual terminates U.S. employment during the Plan Year due to participation in the Global IBMer program, or any successor thereto.

(d)           The individual is described in (i), (ii) or (iii) below:

(i)            The individual terminates employment with the Company on January 31, 2014 as a result of the consummation of the transaction described in the Master Asset Purchase Agreement, dated as of September 10, 2013 and amended December 31, 2013, by and between SYNNEX Corporation and International Business Machines Corporation, and becomes an employee of SYNNEX Corporation or one of its affiliates immediately thereafter. This subsection (d)(i) shall apply solely for purposes of determining whether an individual is an Company Contribution-Eligible Individual for the 2014 Plan Year, and solely with respect to Company Contributions for periods of service prior to the transaction described in this subsection.

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(ii)           The individual terminates employment with the Company on February 28, 2014 as a result of the consummation of the transaction described in the Master Asset Purchase Agreement, dated as of April 17, 2012, by and between Toshiba Tec Corporation and International Business Machines Corporation, and becomes an employee of Toshiba Tec Corporation or one of its affiliates immediately thereafter. This subsection (d)(ii) shall apply solely for purposes of determining whether an individual is an Company Contribution-Eligible Individual for the 2014 Plan Year, and solely with respect to Company Contributions for periods of service prior to the transaction described in this subsection.

(iii)     The individual terminates employment with the Company in 2014 as a result of the consummation of the transaction described in the Master Asset Purchase Agreement, dated as of January 23, 2014, by and between International Business Machines Corporation and Lenovo Group Limited, and becomes an employee of Lenovo Group Limited or one of its affiliates immediately thereafter. This subsection (d)(iii) shall apply solely for purposes of determining whether an individual is a Company Contribution-Eligible Individual for the 2014 Plan Year, and solely with respect to Company Contributions for periods of service prior to the transaction described in this subsection.

An individual shall not be a Company Contribution-Eligible Individual for a Plan Year if the individual terminates employment with the Company prior to December 15 of the Plan Year for any reason not described in (b), (c) or (d) above, including death, or if the individual is receiving LTD Benefits on December 15 of the Plan Year and did not satisfy the age and/or service requirements for Retirement on the date the LTD benefits commenced. Notwithstanding the general rules set forth in (a) through (d) above, if an individual terminates employment with the Company during the Plan Year for a reason not described in (b), (c) or (d) above and is rehired by the Company later in the Plan Year, the individual shall be a Company Contribution-Eligible Individual for the Plan Year only for Company Contributions to which the individual is entitled for periods of service following the date of rehire, and only to the extent the individual satisfies (a), (b), (c) or (d) above. For the avoidance of doubt, the individual would not be entitled to Company Contributions for the remainder of the Plan Year following the date of rehire if the individual’s termination was a 409A Separation from Service.

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	EXHIBIT 10.2 International Business Machines Corporation ("IBM") Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the "Plan")]
Award Type	[Stock Options, Restricted Stock, Restricted Stock Units, Cash-Settled Restricted Stock Units, SARs]
Purpose	The purpose of this Award  is to retain selected employees and executives.  You recognize that this Award represents  a potentially significant benefit to you and is  awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 9, 2014” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award.  This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant: [Month Date, Year]  [Exercise Price:$XX]  Number of [Options/Units/Shares/SARs]  Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document. Options/Units/Shares/SARs                 Date          [number of shares]                         [month date year] [number of shares]                         [month date year] [            “               ][          “                 ] Options expire, subject to the Terms and Conditions document, on:    [month date year]
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditionsdocument  http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances.

1

	It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM  may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award  in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award  if you render services for a competitor prior to, or during the Rescission Period.  You understand that the Rescission Period that has been established is 12 months.  Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM's  long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary.  The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments.  The Plan is discretionary in nature.  This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future.  Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions.  This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it.  This Award will be cancelled unless you accept it by11:59 p.m. Eastern time two business days prior to the first vesting date in the “Vesting”  section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to the "Cancellation and Rescission" section of this Agreement (unless your previous award agreement(s) specified a longer Rescission Period, in which case such longer period will apply) and the “Cancellation and Rescission” section of the Terms and Conditions document.

2

	International Business Machines Corporation ("IBM") Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the "Plan")]
Award Type	Performance Share Units (PSUs)
Purpose	The purpose of this Award  is to retain selected executives.  You recognize that this Award represents  a potentially significant benefit to you and is  awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 9, 2014” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant        # PSUs Awarded                   Performance Period              Date of Payout [month day year]           [amount]                                         [dates]                               [date] [month day year]           [amount]                                         [dates]                               [date] [          “             ]           [     “     ]                                         [   “   ]                                [  “   ]
Vesting	You can earn the PSUs awarded above based on IBM’s performance in achieving cumulative business targets of earnings-per-share and cash flow, weighted 70/30 respectively, over the 3-year Performance Period applicable to the award (provided that for any Performance Period(s) beginning prior to January 1, 2014, the weightings above will be 80/20, respectively). Performance against each of the targets will be subject to separate payout calculations according to the following table (which will be applied separately for each award of PSUs listed above):  % of Target                  <70%     70%     80%     90%     100%     110%     >120%  % of PSUs earned           0%     25%     50%     75%     100%     125%       150%
Payout of Awards	Following the Date of Payout, the Company shall either (a) deliver to you a number of shares of Capital Stock equal to the number of your earned PSUs, or (b) make a cash payment to you equal to the Fair Market Value on the Date of Payout of the number of your earned PSUs at the end of the Performance Period, in either case, net of any applicable tax withholding, and the respective PSUs shall thereafter be canceled.  All payouts under this Award are subject to the provisions of the Plan, this Agreement and the Terms and Conditions document, including those relating to the cancellation and rescission of awards.
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to:  ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances

1

	It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM  may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award  in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award  if you render services for a competitor prior to, or during the Rescission Period.  You understand that the Rescission Period that has been established is 12 months.  Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM's  long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary.  The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments.  The Plan is discretionary in nature.  This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future.  Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions.  This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it.  This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time two business days prior to the end of the Performance Period in the “Grant”  section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on  IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to (A) the "Cancellation and Rescission" section of this Agreement (unless your previous award agreement(s) specified a longer Rescission Period, in which case such longer period will apply) and the “Cancellation and Rescission” section of the Terms and Conditions document and (B) any other cancellation, rescission or recovery required by applicable laws, rules, regulations or standards, including without limitation any requirements or standards of the U.S. Securities and Exchange Commission or the New York Stock Exchange.

2

	International Business Machines Corporation ("IBM") Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the "Plan")]
Award Type	Retention Restricted Stock Units  (RRSUs)
Purpose	The purpose of this Award  is to retain selected executives.  You recognize that this Award represents  a potentially significant benefit to you and is  awarded for the purpose stated here.
Awarded to Home Country [Global ID]	Sample United States (USA)  [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 9, 2014” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award.  This  Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant:  [Month Date, Year]  Number of Units Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document. Units                            Date  [amount] [month date, year]  [amount] [month date, year]
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml  for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment,  including retirement or for cause It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM  may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award  in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award  if you render services for a competitor prior to, or during the Rescission Period.  You understand that the Rescission Period that has been established is three years.  Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to

1

	administer this Award, subject to the Terms and Conditions document;you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM's  long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary.  The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments.  The Plan is discretionary in nature.  This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future.  Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions.  This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it.  This Award will be cancelled unless you accept it by11:59 p.m. Eastern time two business days prior to the first vesting date in the “Vesting”  section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), and (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law.

2

IBM

TERMS AND CONDITIONS OF YOUR EQUITY AWARD: EFFECTIVE JUNE 9, 2014

			Terms and Conditions of Your Equity Award
			Table of Contents
			Page
1.	Introduction			2
2.	How to Use This Document			2
3.	Definition of Terms			3
4.	Provisions that apply to all Award types and all countries			4
5.	Provisions that apply to all Award types but not all countries			5
6.	Provisions that apply to specific Award types for all countries
	a. Restricted Stock Units (“RSUs”) including Cash-Settled RSUs
		and Retention RSUs (“RRSUs”)		6
			i. All RSUs
			ii. RSUs Other Than Cash-Settled RSUs and Cash-Settled RRSUs
			iii. Cash-Settled RSUs including Cash-Settled RRSUs
	b. Restricted Stock			7
	Stock Options (“Options”) and Stock Appreciation Rights “SARs”)			9
			i.    All Option and SAR Awards
			ii.All SAR Awards
	d. Performance Share Units (“PSUs”)			11
7.	Provisions that apply to specific countries			12
	a. Denmark

1

Terms and Conditions of Your Equity Award

Introduction

This document provides you with the terms and conditions of your Award that are in addition to the terms and conditions contained in your Equity Award Agreement for your specific Award. Also, your Award is subject to the terms and conditions in the governing plan document; the applicable document is indicated in your Equity Award Agreement and can be found at http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml.

As an Award recipient, you can see a personalized summary of all your outstanding equity grants in the “Personal statement” section of the IBM executive compensation web site (http://w3.ibm.com/hr/exec/comp). This site also contains other information about long-term incentive awards, including copies of the prospectus (the governing plan document).  If you have additional questions and you are based in the U.S., you can call the Employee Service Center at 800-796-9876 (or 919-784-8646) weekdays, from 8:00 a.m. to 8:00 p.m. Eastern time (TTY available at 800-426-6537).  If you are based in another country you can call your local IBM Employee Service Center.

How to Use This Document

Terms and conditions that apply to all awards in all countries can be found on page 4.  Review these in addition to any award- or country-specific terms and conditions that may be listed.  Once you have reviewed these general terms, check in your Equity Award Agreement for any award-specific and/or country-specific terms that apply to your Award. 

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Terms and Conditions of Your Equity Award:

Definition of Terms

The following are defined terms in the Long-Term Performance Plan and/or your Equity Award Agreement. These are provided for your information. See the Plan prospectus and your Equity Award Agreement for more details.

“Awards” -- The grant of any form of stock option, stock appreciation right, stock or cash award, whether granted singly, in combination or in tandem, to a Participant pursuant to such terms, conditions, performance requirements, limitations and restrictions as the Committee may establish in order to fulfill the objectives of the Plan.

"Board" -- The Board of Directors of International Business Machines Corporation ("IBM").

"Capital Stock" -- Authorized and issued or unissued Capital Stock of IBM, at such par value as may be established from time to time.

“Committee” -- The committee designated by the Board to administer the Plan.

"Company" -- IBM and its affiliates and subsidiaries including subsidiaries of subsidiaries and partnerships and other business ventures in which IBM has an equity interest.

“Equity Award Agreement” – The document provided to the Participant which provides the grant details.

"Fair Market Value" -- The average of the high and low prices of Capital Stock on the New York Stock Exchange for the date in question, provided that, if no sales of Capital Stock were made on said exchange on that date, the average of the high and low prices of Capital Stock as reported for the most recent preceding day on which sales of Capital Stock were made on said exchange.

"Participant" -- An individual to whom an Award has been made under the Plan. Awards may be made to any employee of, or any other individual providing services to, the Company. However, incentive stock options may be granted only to individuals who are employed by IBM or by a subsidiary corporation (within the meaning of section 424(f) of the Code) of IBM, including a subsidiary that becomes such after the adoption of the Plan.

“Plan” -- Any IBM Long-Term Performance Plan.

3

Terms and Conditions of Your Equity Award:

Provisions that apply to all Award types and all countries

The following terms apply to all countries and for all Award types (Restricted Stock Units, Cash-Settled Restricted Stock Units, Restricted Stock, Stock Options, Stock Appreciation Rights and Performance Share Units).

Cancellation and Rescission

All determinations regarding enforcement, waiver or modification of the cancellation and rescission and other provisions of the Plan and your Equity Award Agreement (including the provisions relating to termination of employment, death and disability) shall be made in IBM’s sole discretion.  Determinations made under your Equity Award Agreement and the Plan need not be uniform and may be made selectively among individuals, whether or not such individuals are similarly situated.

You agree that the cancellation and rescission provisions of the Plan and your Equity Award Agreement are reasonable and agree not to challenge the reasonableness of such provisions, even where forfeiture of your Award is the penalty for violation.

Jurisdiction, Governing Law, Expenses and Taxes

Your Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.  You submit to the exclusive jurisdiction and venue of the federal or state courts of New York, County of Westchester, to resolve all issues that may arise out of or relate to your Equity Award Agreement. 

If any court of competent jurisdiction finds any provision of your Equity Award Agreement, or portion thereof, to be unenforceable, that provision shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of your Equity Award Agreement shall continue in full force and effect.

If you or the Company brings an action to enforce your Equity Award Agreement and the Company prevails, you will pay all costs and expenses incurred by the Company in connection with that action and in connection with collection, including reasonable attorneys’ fees.

If the Company, in its sole discretion, determines that it has incurred or will incur any obligation to withhold taxes as a result of your Award, without limiting the Company’s rights under Section 9 of the Plan, the Company may withhold the number of shares that it determines is required to satisfy such liability and/or the Company may withhold amounts from other compensation to the extent required to satisfy such liability under federal, state, provincial, local, foreign or other tax laws.  To the extent that such amounts are not withheld, the Company may require you to pay to the Company any amount demanded by the Company for the purpose of satisfying such liability.

4

Terms and Conditions of Your Equity Award:

Provisions that apply to all Award types but not all countries

The following provision applies to all Award types (Restricted Stock Units, Cash-Settled Restricted Stock Units, Restricted Stock, Stock Options, Stock Appreciation Rights and Performance Share Units) granted to all individuals in all countries except those with a home country of Latin America, specifically: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

Non-Solicitation

In consideration of your Award, you agree that during your employment with the Company and for two years following the termination of your employment for any reason, you will not directly or indirectly hire, solicit or make an offer to any employee of the Company to be employed or perform services outside of the Company.  Also, you agree that during your employment with the Company and for one year following the termination of your employment for any reason, you will not directly or indirectly, solicit, for competitive business purposes, any customer of the Company with which you were involved as part of your job responsibilities during the last year of your employment with the Company.  By accepting your Award, you acknowledge that the Company would suffer irreparable harm if you fail to comply with the foregoing, and that the Company would be entitled to any appropriate relief, including money damages, equitable relief and attorneys’ fees.

5

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

a.Restricted Stock Units (“RSUs”) including Cash-Settled RSUs and Retention RSUs (“RRSUs”)

All references in this document to RSUs include RRSUs, unless explicitly stated otherwise

i.All RSUs

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan) prior to the Vesting Date(s) set in your Equity Award Agreement, all then unvested RSUs, including  RRSUs, under your Award shall be canceled.  

However, your unvested and/or outstanding RSUs, but not RRSUs, will continue to vest upon the termination of employment if all of the following criteria are met:

•You are on the performance team, or any successor team thereto, at the time of termination of employment;

•You have completed at least one year of active service since the award date of grant;

•You have reached age 55 with 15 years of service at the time of termination of employment (age 60 with 15 years of service for the Chairman and CEO); and

•Appropriate senior management, the Committee or the Board, as appropriate, do not exercise their discretion to cancel or otherwise limit the vesting of the RSUs.

Death or Disability

Upon your death all RSUs covered by this Agreement shall vest immediately and your Vesting Date shall be your date of death.  If you are disabled as described in Section 12 of the Plan, your RSUs shall continue to vest according to the terms of your Award. 

Leave of Absence

In the event of a management approved leave of absence, any unvested RSUs shall continue to vest as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement. If you return to

6

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

active status, your unvested RSUs will continue to vest in accordance with the terms in this document and your Equity Award Agreement. 

Dividend Equivalents

IBM shall not pay dividend equivalents on cash-settled or stock-settled unvested RSU awards.

ii.RSUs Other Than Cash-Settled RSUs and Cash-Settled RRSUs

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the section "Termination of Employment including Death, Disability and Leave of Absence" above, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, IBM shall make a payment to Participant in shares of Capital Stock equal to the number of vested RSUs, subject to any applicable tax withholding requirements as described in Section 9 of the Plan, and the respective RSUs shall thereupon be canceled.  RSUs are not shares of Capital Stock and do not convey any stockholder rights.

iii.  Cash-Settled RSUs including Cash-Settled RRSUs

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the section entitled "Termination of Employment including Death, Disability and Leave of Absence" above, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, the Company shall make a payment to Participant in cash equal to the Fair Market Value of the vested RSUs, subject to any applicable tax withholding requirements as described in Section 9 of the Plan, and the respective RSUs shall thereupon be canceled.  Fair Market Value will be calculated in your home country currency at the exchange rate on the applicable Vesting Date using a commercially reasonable measure of exchange rate.  RSUs are not shares of Capital Stock and do not convey any stockholder rights.

b.Restricted Stock

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the paragraph entitled "Termination of Employment including Death, Disability or Leave of Absence" below, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, the shares of Restricted Stock awarded under your Equity Award Agreement will be deliverable

to you, subject to any applicable tax withholding requirements as described in Section 9 of the Plan.

7

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan) prior to the Vesting Date(s) in your Equity Award Agreement, all then unvested shares of Restricted Stock under your Award shall be canceled (unless your Equity Award Agreement provides otherwise). 

Death or Disability

Upon your death all unvested shares of Restricted Stock covered by your Equity Award Agreement shall vest immediately and your Vesting Date shall be your date of death.  If you are disabled as described in Section 12 of the Plan, your unvested shares of Restricted Stock shall continue to vest according to the terms of your Equity Award Agreement. 

Leave of Absence

In the event of a management approved leave of absence, any unvested shares of Restricted Stock shall continue to vest as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement. If you return to active status, your unvested shares of Restricted Stock will continue to vest in accordance with the terms in this document and your Equity Award Agreement.

Dividends and Other Rights

During the period that the Restricted Stock is held by IBM hereunder, such stock will remain on the books of IBM in your name, may be voted by you, and any applicable dividends shall be paid to you.  Shares issued in stock splits or similar events which relate to Restricted Stock then held by IBM in your name shall be issued in your name but shall be held by IBM under the terms hereof.

Transferability

Shares of Restricted Stock awarded under your Equity Award Agreement cannot be sold, assigned, transferred, pledged or otherwise encumbered prior to the vesting of your Award as set forth in your Equity Award Agreement and any such sale, assignment, transfer, pledge or encumbrance, or any attempt thereof, shall be void.

8

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

c.Stock Options (“Options”) and Stock Appreciation Rights (“SARs”)

i.All Option and SAR Awards

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

In the event you cease to be an employee (other than on account of death or are disabled as described in Section 12 of the Plan):

§Any Options or SARs that are not exercisable as of the date your employment terminates shall be canceled immediately (unless your Equity Award Agreement provides otherwise), and

§Any Options or SARs that are exercisable as of the date your employment terminates (other than for cause) will remain exercisable for 90 days (not three months) after the date of termination, after which any unexercised Options or SARs are canceled; provided, however, if you are a banded executive when your employment with the Company terminates (other than for cause) after you have attained age 55 and completed at least 15 years of service with the Company at the time of termination, any Options or SARs that are exercisable as of the date your employment terminates shall remain exercisable for the full term as in your Equity Award Agreement (unless your Equity Award Agreement provides otherwise).

Death or Disability

In the event of your death, all Options or SARs shall become fully exercisable and remain exercisable for their full term.

In the event you are disabled (as described in Section 12 of the Plan), any unvested Options or SARs shall continue to vest and be exercisable.

9

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

Leave of Absence

In the event of a management approved leave of absence, any unvested Options or SARs shall continue to vest and be exercisable as if you were an active employee of the Company, subject to the terms in this document and your Equity Award Agreement.  If you return to active status, your Options or SARs will continue to vest and be exercisable in accordance with their terms.  If you do not return to active status,

§Your unvested Options or SARs will be canceled immediately; and

§Your vested Options or SARs will be canceled on the later of the 91^st day following your last day of active employment or the date of the termination of your leave of absence; provided, however, if you are a banded executive when your employment terminates (other than for cause) after you have attained age 55 and completed at least 15 years of service with the Company at the time of termination, any Options or SARs that are exercisable as of the date your employment terminates shall remain exercisable for the full term as in your Equity Award Agreement.

Termination of Employment for Cause

If your employment terminates for cause, all exercisable and not exercisable Options or SARs are canceled immediately.

ii.All SAR Awards

Settlement of Award

Upon exercise, the Company shall deliver an aggregate amount, in cash, equal to the excess of the Fair Market Value of a share of Capital Stock on the date of exercise over the Exercise Price set forth in your Equity Award Agreement multiplied by the number of SARs exercised, subject to any applicable tax withholding requirements as described in Section 9 of the Plan.  The value of the Award will be calculated in your home country currency at the exchange rate on the date the Award becomes fully vested using a commercially reasonable measure of exchange rate.

10

Terms and Conditions of Your Equity Award:

Provisions that apply to specific Award types for all countries

d.Performance Share Units (“PSUs”)

Termination of Employment, including Death and Disability, and Leave of Absence

Termination of Employment and Leave of Absence

If you cease to be an active, full-time employee for any reason (other than on account of death or are disabled as described in Section 12 of the Plan) before the Date of Payout (in the case of a recipient in the United States, at year end of the applicable PSU Performance Period), all PSUs are canceled immediately provided, however, if you are a banded executive when your employment terminates (other than for cause) after you have attained age 55, completed at least 15 years of service with the Company at the time of termination, and completed at least one year of active service during the PSU Performance Period (as set forth in your Equity Award Agreement), the PSUs granted hereunder shall be paid out on the Date of Payout (as set forth in your Equity Award Agreement) based on IBM performance over the entire applicable Performance Period(s), in an amount that will be prorated for the number of months completed as an active executive during the PSU Performance Period, adjusted for the performance score.

However, your unvested PSUs will continue to vest upon termination of employment or the time you cease to be an active, full-time employee if all of the following criteria are met:

•You are on the performance team, or any successor team thereto, at the time of termination of employment or the time you cease to be an active, full-time employee;

•You have completed at least one year of active service during the PSU Performance Period (as set forth in your Equity Award Agreement);

•You have reached age 55 with 15 years of service at the time of termination of employment or the time you cease to be an active, full-time employee (age 60 with 15 years of service for the Chairman and CEO);

•The Committee has certified that all performance conditions have been met; and

•Appropriate senior management, the Committee or the Board, as appropriate, do not exercise their discretion to cancel or otherwise limit the payout.

Death or Disability

Prior to the Date of Payout, (i) in the event of your death or (ii) if you are disabled (as described in Section 12 of the Plan), all PSUs shall continue to vest according to the terms of your Equity Award Agreement and the PSUs will be paid out at the end of the Performance Period based on IBM performance over the entire applicable Performance Period(s).

11

Terms and Conditions of Your Equity Award:

Provisions that apply to specific countries

a.Denmark 

i.All Awards

Non-Solicitation

The following part of the above non-solicitation provision does not apply to those individuals with the home country of Denmark: “In consideration of your Award, you agree that during your employment with the Company and for two years following the termination of your employment for any reason, you will not directly or indirectly hire, solicit or make an offer to any employee of the Company to be employed or perform services outside of the Company.”

12

EX-11

 

EXHIBIT 11

COMPUTATION OF BASIC AND DILUTED

EARNINGS PER SHARE

(UNAUDITED)

	For the Three Months Ended
	March 31, 2014		March 31, 2013
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		1,035,213,567		1,113,674,384
Add – Incremental shares under stock-based compensation plans		5,433,316		8,872,513
Add – Incremental shares associated with contingently issuable shares		1,123,266		1,448,276
Number of shares on which diluted earnings per share is calculated		1,041,770,149		1,123,995,173
Net income on which basic earnings per share is calculated (millions)	$	2,384	$	3,032
Net income applicable to contingently issuable shares (millions)		─		─
Net income on which diluted earnings per share is calculated (millions)	$	2,384	$	3,032
Earnings per share of common stock:
Assuming dilution	$	2.29	$	2.70
Basic	$	2.30	$	2.72
Stock options to purchase 19,129 shares were outstanding as of March 31, 2014, but were not included in the
computation of diluted earnings per share because the options' exercise price during the period was greater than the average
market price of the common shares, and, therefore, the effect would have been antidilutive. There were no stock options
outstanding as of March 31, 2013 that were considered antidilutive.

69

EX-12

 

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

FOR THREE MONTHS ENDED MARCH 31,

(UNAUDITED)

(Dollars in millions)	2014		2013
Income before income taxes (1)	$	2,983	$	3,611
Add: fixed charges, excluding capitalized interest		384		366
Income as adjusted before income taxes	$	3,367	$	3,977
Fixed charges:
Interest expense	$	260	$	244
Capitalized interest		21		15
Portion of rental expense representative of interest		124		122
Total fixed charges	$	405	$	381
Ratio of earnings to fixed charges		8.31		10.44
(1) Income before income taxes excludes (a) amortization of capitalized interest, and (b) the company's share in the income
and losses of less-than-fifty percent-owned affiliates.

70

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Virginia M. Rometty, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 29, 2014

/s/ Virginia M. Rometty

Virginia M. Rometty

Chairman, President and Chief Executive Officer

71

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Martin J. Schroeter, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 29, 2014

/s/		Martin J. Schroeter
	Martin J. Schroeter
	Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

72

EX-32.1

Exhibit 32.1

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Virginia M. Rometty, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Virginia M. Rometty

Virginia M. Rometty

Chairman, President and Chief Executive Officer

April 29, 2014

       A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

73

EX-32.2

Exhibit 32.2

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin J. Schroeter, Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Martin J. Schroeter

Martin J. Schroeter

Senior Vice President and Chief Financial Officer,

Finance and Enterprise Transformation

April 29, 2014

       A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

74

XML

Financing Receivables: (Details) (USD $) In Millions, unless otherwise specified						3 Months Ended				3 Months Ended				3 Months Ended				3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Mar. 31, 2014 Net investment in sales-type and direct financing leases	Dec. 31, 2013 Net investment in sales-type and direct financing leases	Mar. 31, 2014 Net investment in sales-type and direct financing leases Financing receivable, lower range of payment terms	Mar. 31, 2014 Net investment in sales-type and direct financing leases Financing receivable, upper range of payment terms	Mar. 31, 2014 Commercial financing receivables	Dec. 31, 2013 Commercial financing receivables	Mar. 31, 2014 Commercial financing receivables Financing receivable, lower range of payment terms	Mar. 31, 2014 Commercial financing receivables Financing receivable, upper range of payment terms	Mar. 31, 2014 Client loan receivables	Dec. 31, 2013 Client loan receivables	Mar. 31, 2014 Client loan receivables Financing receivable, lower range of payment terms	Mar. 31, 2014 Client loan receivables Financing receivable, upper range of payment terms	Mar. 31, 2014 Installment payment receivables	Dec. 31, 2013 Installment payment receivables	Mar. 31, 2014 Installment payment receivables Financing receivable, lower range of payment terms	Mar. 31, 2014 Installment payment receivables Financing receivable, upper range of payment terms
Financing receivables:
Financing receivables used as collateral for non-recourse borrowings	$ 756	$ 769
Financing receivables held for sale	0	0
Financing receivables, current
Financing receivables, net, current	18,329	19,787		4,096	4,004			7,024	8,541			5,797	5,854			1,412	1,389
Financing receivables, noncurrent
Financing receivables, net, noncurrent	11,918	12,755		5,152	5,700							6,147	6,360			619	695
Financing receivables
Financing receivable, payment terms						2 years	6 years			30 days	90 days			1 year	7 years			1 year	3 years
Sales-type and direct financing leases, unguaranteed residual value				698	737
Sales-type and direct financing leases, unearned income				634	672
Allowance for credit losses	$ 394	$ 365	$ 318	$ 131	$ 123			$ 16	$ 23			$ 222	$ 201			$ 41	$ 41

XML

Acquisitions/Divestitures (Purchase Price allocation) (Details) (USD $) In Millions, unless otherwise specified				3 Months Ended				3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Mar. 31, 2014 Acquisitions	Mar. 31, 2014 Acquisitions Completed technology	Mar. 31, 2014 Acquisitions Client relationships	Mar. 31, 2014 Acquisitions Patents/trademarks	Mar. 31, 2014 Acquisitions Patents/trademarks Minimum	Mar. 31, 2014 Acquisitions Patents/trademarks Maximum
Acquisitions:
Current assets				$ 21
Fixed assets/noncurrent assets				18
Goodwill	31,214	31,184	29,247	239
Intangible assets					33	1	8
Total assets acquired				319
Current liabilities				(11)
Noncurrent liabilities				(22)
Total liabilities assumed				(33)
Total purchase price				$ 286
Acquired intangible asset, weighted average useful life				6 years 10 months	7 years	7 years		5 years	7 years

XML

Segments: (Revenue by segments) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenue
Revenue	$ 22,484	$ 23,408
Total reportable segments
Revenue
Revenue	24,476	25,185
Internal transactions
Revenue
Revenue	(2,099)	(1,919)
Other revenue adjustments
Revenue
Revenue	$ 107	$ 142

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Acquisitions/Divestitures (Divestitures) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended			0 Months Ended	12 Months Ended	3 Months Ended	0 Months Ended		3 Months Ended	12 Months Ended	3 Months Ended	0 Months Ended	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013	Jan. 23, 2014 x86 Server Portfolio	Dec. 31, 2013 x86 Server Portfolio	Mar. 31, 2014 x86 Server Portfolio Estimated	Jan. 23, 2014 x86 Server Portfolio Maximum	Sep. 10, 2013 Customer Care Business Process Outsourcing Services	Mar. 31, 2014 Customer Care Business Process Outsourcing Services	Dec. 31, 2013 Customer Care Business Process Outsourcing Services	Mar. 31, 2014 Customer Care Business Process Outsourcing Services Minimum Estimated	Sep. 10, 2013 Customer Care Business Process Outsourcing Services Maximum	Mar. 31, 2014 Customer Care Business Process Outsourcing Services Maximum Estimated	Mar. 31, 2014 Retail Stores Solutions business	Mar. 31, 2014 Retail Stores Solutions business Estimated
Divestitures
Transaction price for sale of business				$ 2,300				$ 501
Approximate amount of transaction price received in cash				2,000				430
Noncash consideration received on sale of business								71
Equity Ownership percent acquired							5.00%					5.00%
Pre-tax gain on sale of business						1,000			98		200		225	34	508
Revenues	22,484	23,408			4,600					1,300
Services	13,982	14,274
Pre-tax income	2,980	3,606								100
Tangible assets	$ 13,683		$ 13,821		$ 100					$ 50

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Stock-Based Compensation: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ 124		$ 144
Income tax benefits	(41)		(50)
Total Stock-based compensation cost	83		94
Stock-based compensation cost, increase (decrease) due to performance share units	(7)
Stock-based compensation cost, increase (decrease) due to restricted stock units	(9)
Stock-based compensation cost, increase (decrease) related to the company's assumption of stock-based awards previously issued by acquired entities	(4)
Stock-based compensation cost, unrecognized, related to non-vested awards	853
Stock-based compensation cost, unrecognized, related to non-vested awards, weighted average period of recognition	2 years 5 months
Capitalized stock-based compensation cost	0		0
Cost
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	31		31
Selling, general and administrative expense
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	88		99
Research, development and engineering
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	14		14
Other (income) and expense
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ (9)	[1]

[1] Reflects the one-time effects related to the divestiture of the customer care business.

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Basis of Presentation: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basis of Presentation:
Noncontrolling interest amounts in income, net of tax	$ (0.5)	$ 1.4

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Intangible Assets Including Goodwill: (Details 2) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014
Future amortization expense, by year
2014 (for Q2-Q4)	$ 997
2015	936
2016	697
2017	487
2018	328
Capitalized software
Future amortization expense, by year
2014 (for Q2-Q4)	377
2015	294
2016	96
2017	8
2018
Acquired intangibles
Future amortization expense, by year
2014 (for Q2-Q4)	619
2015	642
2016	601
2017	479
2018	$ 328

XML

Stock-Based Compensation: (Tables)

3 Months Ended

Mar. 31, 2014

Stock-Based Compensation:

Stock-based compensation cost included in Consolidated Statement of Earnings

(Dollars in millions)
For the three months ended March 31:		2014		2013
Cost	$	31	$	31
Selling, general and administrative		88		99
Research, development and engineering		14		14
Other (income) and expense*		(9)		—
Pre-tax stock-based compensation cost		124		144
Income tax benefits		(41)		(50)
Total stock-based compensation cost	$	83	$	94
* Reflects the one-time effects related to the divestiture of the customer care business.

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Equity Activity: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments, before tax	$ (61)		$ (405)
Net changes related to available-for-sale securities, before tax
Unrealized gains/(losses) arising during the period, before tax	0		(3)
Reclassification of (gains)/losses to other (income) and expense, before tax	4		1
Subsequent changes in previously impaired securities arising during the period, before tax			1
Total net changes related to available-for-sale securities	4		(1)
Unrealized gains/(losses) on cash flow hedges, before tax
Unrealized gains/(losses) arising during the period, before tax	88		360
Reclassification of (gains)/losses to net income, before tax	(1)		(56)
Total unrealized gains/(losses) on cash flow hedges	87		305
Retirement-related benefit plans, before tax
Prior service costs/(credits), before tax	1		33
Net (losses)/gains arising during the period, before tax	32		(15)
Curtailments and settlements	4
Amortization of prior service (credits)/costs, before tax	(29)		(30)
Amortization of net (gains)/losses, before tax	649		886
Total retirement-related benefit plans	656		875
Other comprehensive income/(loss), before tax	687		773
Other comprehensive income/(loss), tax
Foreign currency translation adjustments, tax	10		(84)
Net changes related to available-for-sale securities, tax
Unrealized gains/(losses) arising during the period, tax	0		1
Reclassification of (gains)/losses to other (income) and expense, tax	(2)		0
Subsequent changes in previously impaired securities arising during the period, tax			0
Total net changes related to available-for-sale securities, tax	(2)		0
Unrealized gains/(losses) on cash flow hedges, tax
Unrealized gains/(losses) arising during the period, tax	(33)		(128)
Total unrealized gains/(losses) on cash flow hedges, tax	(32)		(108)
Retirement-related benefit plans, tax
Prior service costs/(credits), tax	0	[1]	(11)	[1]
Net (losses)/gains arising during the period, tax	(11)	[1]	5	[1]
Curtailments and settlements, tax	(1)	[1]
Amortization of prior service (credits)/costs, tax	10	[1]	10	[1]
Amortization of net (gains)/losses, tax	(214)	[1]	(293)	[1]
Total retirement-related benefit plans, tax	(217)	[1]	(289)	[1]
Other comprehensive income/(loss), tax	(241)		(480)
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments, net of tax	(51)		(489)
Net changes related to available-for-sale securities, net of tax
Unrealized gains/(losses) arising during the period, net of tax	0		(2)
Reclassification of (gains)/losses to other (income) and expense, net of tax	3	[2]	0	[2]
Subsequent changes in previously impaired securities arising during the period, net of tax			1
Total net changes related to available-for-sale securities, net of tax	3		0
Unrealized gains/(losses) on cash flow hedges, net of tax
Unrealized gains/(losses) arising during the period, net of tax	54		232
Total unrealized gains/(losses) on cash flow hedges, net of tax	55		197
Retirement-related benefit plans, net of tax
Prior service costs/(credits), net of tax	0	[1]	22	[1]
Net (losses)/gains arising during the period, net of tax	21	[1]	(10)	[1]
Curtailments and settlements, net of tax	3	[1]
Amortization of prior service (credits)/costs, net of tax	(20)	[1]	(20)	[1]
Amortization of net (gains)/losses, net of tax	434	[1]	594	[1]
Total retirement-related benefit plans, net of tax	439	[1]	586	[1]
Other comprehensive income/(loss)	446		293
Cost of sales
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	26		(9)
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to other (income) and expense, tax	(10)		3
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	16		(6)
SG&A expense
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	2		(10)
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to other (income) and expense, tax	0		3
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	2		(7)
Other (income) and expense
Net changes related to available-for-sale securities, before tax
Reclassification of (gains)/losses to other (income) and expense, before tax	4		1
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	(29)		(37)
Net changes related to available-for-sale securities, tax
Reclassification of (gains)/losses to other (income) and expense, tax	(2)		0
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to other (income) and expense, tax	11		14
Net changes related to available-for-sale securities, net of tax
Reclassification of (gains)/losses to other (income) and expense, net of tax	3		0
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	(18)		(23)
Interest expense
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	0		0
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to other (income) and expense, tax	0
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	$ 0		$ 0

[1] (1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits," for additional information.)

[2] * There were no writedowns for the three months ended March 31, 2014 and 2013.

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Financing Receivables: (Details 4) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Impaired client loan receivables
Recorded Investment	$ 222		$ 201
Related Allowance	199		183
Average Recorded Investment	211	158
Interest Income Recognized	0	0
Interest Income Recognized on Cash Basis	0	0
Major Markets
Impaired client loan receivables
Recorded Investment	75		79
Related Allowance	63		67
Average Recorded Investment	77	79
Interest Income Recognized	0	0
Interest Income Recognized on Cash Basis	0	0
Growth Markets
Impaired client loan receivables
Recorded Investment	147		122
Related Allowance	136		116
Average Recorded Investment	134	79
Interest Income Recognized	0	0
Interest Income Recognized on Cash Basis	$ 0	$ 0

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Financial Instruments: (Details 4) (USD $) In Millions, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Derivative instruments in fair value hedging relationships | Interest rate swaps
Derivative Instruments, Gain (Loss)
Notional amount	$ 5,900	$ 3,100
Average remaining maturity	9 years 6 months	10 years 7 months
Derivative instruments in cash flow hedging relationships | Foreign exchange forward contracts
Derivative Instruments, Gain (Loss)
Notional amount	10,200	10,200
Average remaining maturity	8 months	8 months
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges of borrowings	(169)	(252)
Gains (losses) expected to be reclassified to net income within the next 12 months	(155)	(166)
Maximum length of time hedged	4 years
Derivative instruments in cash flow hedging relationships | Interest rate swaps
Derivative Instruments, Gain (Loss)
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges of borrowings	1	1
Gains (losses) expected to be reclassified to net income within the next 12 months	1	1
Derivative instruments in cash flow hedging relationships | Currency swaps
Derivative Instruments, Gain (Loss)
Notional amount	1,200	1,200
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges of borrowings	(6)	(9)
Gains (losses) expected to be reclassified to net income within the next 12 months	(3)	(3)
Maximum length of time hedged	7 years
Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Notional amount	3,400	3,000
Average remaining maturity	4 months 24 days	4 months 24 days
Derivative instruments not designated as hedging instruments | Foreign exchange forward and swap contracts
Derivative Instruments, Gain (Loss)
Notional amount	16,300	14,700
Maximum length of time hedged	1 year
Derivative instruments not designated as hedging instruments | Equity contracts
Derivative Instruments, Gain (Loss)
Notional amount	$ 1,200	$ 1,300

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Retirement-Related Benefits (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended										12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Mar. 31, 2014 Defined Contribution U.S. Plans	Mar. 31, 2013 Defined Contribution U.S. Plans	Mar. 31, 2014 Defined Contribution Non-U.S. Plans	Mar. 31, 2013 Defined Contribution Non-U.S. Plans	Mar. 31, 2014 Multi-employer Plans - Non U.S. Plans Spain Pending Litigation SG&A expense	Mar. 31, 2014 U.S. Defined Benefit Pension Plans	Mar. 31, 2013 U.S. Defined Benefit Pension Plans	Mar. 31, 2014 U.S. Defined Benefit Pension Plans Equity securities	Dec. 31, 2013 U.S. Defined Benefit Pension Plans Equity securities	Mar. 31, 2014 U.S. Defined Benefit Pension Plans Debt securities	Dec. 31, 2013 U.S. Defined Benefit Pension Plans Debt securities	Mar. 31, 2014 Non-US Defined Benefit Pension Plans	Mar. 31, 2013 Non-US Defined Benefit Pension Plans	Mar. 31, 2014 Non-U.S. Defined Benefit and Multi-employer Plan	Mar. 31, 2014 U.S. Defined Benefit Non Pension Postretirement Plans	Mar. 31, 2013 U.S. Defined Benefit Non Pension Postretirement Plans	Mar. 31, 2014 Non-U.S. Defined Benefit Non Pension Postretirement Plans	Mar. 31, 2013 Non-U.S. Defined Benefit Non Pension Postretirement Plans
Retirement-related plans cost
Service cost														$ 116	$ 131		$ 7	$ 9	$ 2	$ 3
Interest cost								555	496					390	382		45	42	16	16
Expected return on plan assets								(1,024)	(995)					(572)	(554)		0	0	(2)	(2)
Amortization of prior service costs/(credits)								2	2					(29)	(31)		(2)		(1)	(1)
Recognized actuarial losses								269	451					360	404		0	8	3	6
Curtailments and settlements														4	0
Multi-employer plans/other costs							55							79	30
Total net periodic pension (income)/cost of defined benefit plans								(198)	(46)					348	363		50	58	17	22
Cost of defined contribution plans			191	206	133	151
Defined benefit and contribution pension plan - cost	474	674
Nonpension postretirement plans - cost	67	80
Total	541	754
Year-to-year percent change, defined benefit and contribution pension plans cost	(29.60%)
Year-to-year percent change, Nonpension postretirement plans cost	(16.00%)
Year-to-year percent change, total	(28.20%)
Expected current year contributions to non-U.S. defined benefit plans																600
Year-to-date contributions to non-U.S. defined benefit plans																126
Defined benefit and contribution pension plan - cost U.S. Plans	(7)	160
Defined benefit and contribution pension plan - cost Non U.S. Plans	481	514
Proceeds from Medicare Prescription Drug Improvement and Modernization Act of 2003	$ 5.4	$ 6.1
Target allocation (as a percent)										32.00%	42.00%	57.00%	47.00%
Expected long-term returns on plan assets (as a percent)								7.75%

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Commitments: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Mar. 31, 2014 Extended lines of credit	Dec. 31, 2013 Extended lines of credit	Mar. 31, 2014 Financing for client purchase agreements	Dec. 31, 2013 Financing for client purchase agreements	Mar. 31, 2014 Financial guarantees	Dec. 31, 2013 Financial guarantees
Commitments, guarantees:
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients			$ 6,103	$ 5,028	$ 1,589	$ 1,769
Guarantor obligations, maximum exposure							45	44
Movement in standard warranty liability
Beginning Balance	376	394
Current period accruals	54	71
Accrual adjustments to reflect actual experience	(3)	9
Charges incurred	(85)	(93)
Ending Balance	$ 342	$ 381

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Segments: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Segment Information
Revenue	$ 22,484	$ 23,408
Pre-tax income	2,980	3,606
Global Technology Services
Segment Information
Revenue	9,330	9,605
Global Business Services
Segment Information
Revenue	4,483	4,484
Software
Segment Information
Revenue	5,661	5,572
Systems and Technology
Segment Information
Revenue	2,391	3,106
Global Financing
Segment Information
Revenue	512	499
Total Segments
Segment Information
Revenue	22,376	23,266
Business Segments
Segment Information
Revenue	24,476	25,185
Pre-tax income	3,828	4,435
Business Segments | Global Technology Services
Segment Information
Revenue	9,570	9,852
Pre-tax income	1,345	1,585
Revenue year-to-year change (as a percent)	(2.90%)
Pre-tax income year-to-year change (as a percent)	(15.10%)
Pre-tax income margin (as a percent)	14.10%	16.10%
Business Segments | Global Business Services
Segment Information
Revenue	4,624	4,664
Pre-tax income	628	703
Revenue year-to-year change (as a percent)	(0.90%)
Pre-tax income year-to-year change (as a percent)	(10.60%)
Pre-tax income margin (as a percent)	13.60%	15.10%
Business Segments | Software
Segment Information
Revenue	6,593	6,403
Pre-tax income	1,918	2,014
Revenue year-to-year change (as a percent)	3.00%
Pre-tax income year-to-year change (as a percent)	(4.70%)
Pre-tax income margin (as a percent)	29.10%	31.50%
Business Segments | Systems and Technology
Segment Information
Revenue	2,559	3,226
Pre-tax income	(660)	(405)
Revenue year-to-year change (as a percent)	(20.70%)
Pre-tax income year-to-year change (as a percent)	(63.10%)
Pre-tax income margin (as a percent)	(25.80%)	(12.50%)
Business Segments | Global Financing
Segment Information
Revenue	1,129	1,040
Pre-tax income	596	538
Revenue year-to-year change (as a percent)	8.60%
Pre-tax income year-to-year change (as a percent)	10.70%
Pre-tax income margin (as a percent)	52.80%	51.80%
Business Segments | Total Segments
Segment Information
Revenue	24,476	25,185
Pre-tax income	3,828	4,435
Revenue year-to-year change (as a percent)	(2.80%)
Pre-tax income year-to-year change (as a percent)	(13.70%)
Pre-tax income margin (as a percent)	15.60%	17.60%
Internal transactions
Segment Information
Revenue	(2,099)	(1,919)
Pre-tax income	(524)	(339)
Internal transactions | Global Technology Services
Segment Information
Revenue	(241)	(248)
Internal transactions | Global Business Services
Segment Information
Revenue	(141)	(180)
Internal transactions | Software
Segment Information
Revenue	(932)	(831)
Internal transactions | Systems and Technology
Segment Information
Revenue	(168)	(120)
Internal transactions | Global Financing
Segment Information
Revenue	(617)	(541)
Internal transactions | Total Segments
Segment Information
Revenue	$ (2,099)	$ (1,919)

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Basis of Presentation:

3 Months Ended

Mar. 31, 2014

Basis of Presentation:

Basis of Presentation:

1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).The financial statements and footnotes are unaudited. In the opinion of the company's management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company's results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See the company's 2013 Annual Report on pages 67 to 70 for a discussion of the company's critical accounting estimates.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company's 2013 Annual Report.

Noncontrolling interest amounts in income of $(0.5)million and $1.4million, net of tax, for the three months ended March 31, 2014 and 2013, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.

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Commitments: (Details 2) (USD $) In Millions, unless otherwise specified			3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2014 Extended warranty		Mar. 31, 2013 Extended warranty
Movement in extended warranty liability
Beginning balance, aggregate deferred revenue			$ 579		$ 606
Revenue deferred for new extended warranty contracts			54		47
Amortization of deferred revenue			(73)		(82)
Other			(11)	[1]	(7)	[1]
Ending balance, aggregate deferred revenue			548		565
Deferred revenue:
Deferred income, current portion	13,681	12,557	268		286
Deferred income, noncurrent portion	4,042	4,108	280		278
Aggregate deferred revenue			$ 548		$ 565

[1] * Other primarily consists of foreign currency translation adjustments.

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Financing Receivables: (Details 5) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Gross recorded investment for each class of receivables, by credit quality indicator
Total	$ 22,831	$ 23,537
Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	16,336	17,325
Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	6,494	6,212
Lease receivables
Gross recorded investment for each class of receivables, by credit quality indicator
Total	8,591	8,996
Lease receivables | Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	6,356	6,796
Lease receivables | Major Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	648	743
Lease receivables | Major Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,243	1,513
Lease receivables | Major Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,172	2,111
Lease receivables | Major Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,349	1,393
Lease receivables | Major Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	519	595
Lease receivables | Major Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	354	365
Lease receivables | Major Markets | CCC+ - D
Gross recorded investment for each class of receivables, by credit quality indicator
Total	71	76
Lease receivables | Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,235	2,200
Lease receivables | Growth Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	63	68
Lease receivables | Growth Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	168	168
Lease receivables | Growth Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,025	957
Lease receivables | Growth Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	333	350
Lease receivables | Growth Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	350	368
Lease receivables | Growth Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	218	214
Lease receivables | Growth Markets | CCC+ - D
Gross recorded investment for each class of receivables, by credit quality indicator
Total	80	74
Loan receivables
Gross recorded investment for each class of receivables, by credit quality indicator
Total	14,239	14,542
Loan receivables | Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	9,980	10,529
Loan receivables | Major Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,017	1,151
Loan receivables | Major Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,952	2,344
Loan receivables | Major Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	3,411	3,271
Loan receivables | Major Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,119	2,158
Loan receivables | Major Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	814	922
Loan receivables | Major Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	555	565
Loan receivables | Major Markets | CCC+ - D
Gross recorded investment for each class of receivables, by credit quality indicator
Total	111	118
Loan receivables | Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	4,259	4,012
Loan receivables | Growth Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	119	125
Loan receivables | Growth Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	320	307
Loan receivables | Growth Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,953	1,745
Loan receivables | Growth Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	634	638
Loan receivables | Growth Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	666	672
Loan receivables | Growth Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	414	391
Loan receivables | Growth Markets | CCC+ - D
Gross recorded investment for each class of receivables, by credit quality indicator
Total	$ 152	$ 134

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Acquisitions/Divestitures: (Tables)

3 Months Ended

Mar. 31, 2014

Acquisitions/Divestitures:

Business acquisition, purchase price allocation

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	21
Fixed assets/noncurrent assets					18
Intangible assets:
	Goodwill		N/A		239
	Completed technology		7		33
	Client relationships		7		1
	Patents/trademarks		5-7		8
Total assets acquired					319
Current liabilities					(11)
Noncurrent liabilities					(22)
Total liabilities assumed					(33)
Total purchase price				$	286
N/A - not applicable

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Retirement-Related Benefits: (Tables)

3 Months Ended

Mar. 31, 2014

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

Retirement-related benefits net periodic (income)/cost in the Consolidated Statement of Earnings

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Retirement-related plans – cost
	Defined benefit and contribution pension plans – cost	$	474	$	674		(29.6)	%
	Nonpension postretirement plans – cost		67		80		(16.0)
	Total	$	541	$	754		(28.2)	%

Defined Benefit Pension Plans

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

Retirement-related benefits net periodic (income)/cost in the Consolidated Statement of Earnings

Cost/(Income) of Pension Plans
(Dollars in millions)		U.S. Plans				Non-U.S. Plans
For the three months ended March 31:		2014		2013		2014		2013
Service cost		$	—	$	—	$	116	$	131
Interest cost			555		496		390		382
Expected return on plan assets			(1,024)		(995)		(572)		(554)
Amortization of prior service costs/(credits)			2		2		(29)		(31)
Recognized actuarial losses			269		451		360		404
Curtailments and settlements			—		—		4		0
Multi-employer plans/other costs			—		—		79		30
Total net periodic pension (income)/cost of defined
	benefit plans		(198)		(46)		348		363
Cost of defined contribution plans			191		206		133		151
Total defined benefit and contribution plans cost recognized
	in the Consolidated Statement of Earnings	$	(7)	$	160	$	481	$	514

Nonpension Postretirement Plans

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

Retirement-related benefits net periodic (income)/cost in the Consolidated Statement of Earnings

The following table provides the components of the cost/(income) for the company's nonpension postretirement plans:
Cost of Nonpension Postretirement Plans
		U.S. Plan				Non-U.S. Plans
(Dollars in millions)		2014		2013		2014		2013
For the three months ended March 31:
Service cost		$	7	$	9	$	2	$	3
Interest cost			45		42		16		16
Expected return on plan assets			0		(0)		(2)		(2)
Amortization of prior service costs/(credits)			(2)		—		(1)		(1)
Recognized actuarial losses			0		8		3		6
Total nonpension postretirement plan cost recognized in
	Consolidated Statement of Earnings	$	50	$	58	$	17	$	22

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Intangible Assets Including Goodwill: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013	Dec. 31, 2013
Intangible asset balances by major asset class:
Gross Carrying Amount	$ 6,929			$ 6,930
Accumulated Amortization	(3,231)			(3,059)
Net Carrying Amount	3,698			3,871
Net carrying amount increase/(decrease)	(173)
Intangible asset amortization expense	339		331
Intangible assets retired and fully amortized	164
Capitalized software
Intangible asset balances by major asset class:
Gross Carrying Amount	1,471			1,494
Accumulated Amortization	(696)			(699)
Net Carrying Amount	775			794
Client relationships
Intangible asset balances by major asset class:
Gross Carrying Amount	2,149			2,148
Accumulated Amortization	(1,050)			(977)
Net Carrying Amount	1,099			1,171
Completed technology
Intangible asset balances by major asset class:
Gross Carrying Amount	2,935			2,910
Accumulated Amortization	(1,312)			(1,224)
Net Carrying Amount	1,623			1,687
In-process R&D
Intangible asset balances by major asset class:
Gross Carrying Amount	2			13
Net Carrying Amount	2			13
Patents/trademarks
Intangible asset balances by major asset class:
Gross Carrying Amount	366			358
Accumulated Amortization	(169)			(154)
Net Carrying Amount	198			204
Other intangible assets
Intangible asset balances by major asset class:
Gross Carrying Amount	7	[1]		7	[1]
Accumulated Amortization	(5)	[1]		(5)	[1]
Net Carrying Amount	$ 2	[1]		$ 2	[1]

[1] *Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.

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Financing Receivables: (Details 6) (Global Financing, Financing Receivable Portfolio)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Financial Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	39.00%	39.00%
Government Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	15.00%	14.00%
Manufacturing Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	13.00%	14.00%
Retail Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	9.00%	8.00%
Services Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	8.00%	8.00%
Healthcare Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	5.00%	6.00%
Communications Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	6.00%	6.00%
Other industries
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	4.00%	4.00%

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Intangible Assets Including Goodwill: (Tables)

3 Months Ended

Mar. 31, 2014

Intangible Assets Including Goodwill:

Intangible asset balances by major asset class

	At March 31, 2014
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,471	$	(696)	$	775
Client relationships		2,149		(1,050)		1,099
Completed technology		2,935		(1,312)		1,623
In-process R&D		2		—		2
Patents/trademarks		366		(169)		198
Other*		7		(5)		2
Total	$	6,929	$	(3,231)	$	3,698
	At December 31, 2013
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,494	$	(699)	$	794
Client relationships		2,148		(977)		1,171
Completed technology		2,910		(1,224)		1,687
In-process R&D		13		—		13
Patents/trademarks		358		(154)		204
Other*		7		(5)		2
Total	$	6,930	$	(3,059)	$	3,871

*Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.

Intangible assets, future amortization expense

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2014 (for Q2-Q4)	$	377	$	619	$	997
2015		294		642		936
2016		96		601		697
2017		8		479		487
2018		—		328		328

Changes in goodwill balances by reportable segment

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other			Balance
Segment	01/01/14		Additions		Adjustments		Divestitures		Adjustments			3/31/14
Global Business Services	$	4,334	$	—	$	—	$	—		$	4	$	4,337
Global Technology Services		4,129		—		—		(52)			16		4,094
Software		21,121		239		0		—			(170)		21,190
Systems and Technology		1,601		—		—		—			(8)		1,593
Total	$	31,184	$	239	$	0	$	(52)		$	(158)	$	31,214

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other		Balance
Segment	01/01/13		Additions		Adjustments		Divestitures		Adjustments		12/31/13
Global Business Services	$	4,357	$	—	$	(0)	$	(3)	$	(21)	$	4,334
Global Technology Services		2,916		1,246		17		—		(50)		4,129
Software		20,405		987		11		(4)		(279)		21,121
Systems and Technology		1,568		13		33		—		(14)		1,601
Total	$	29,247	$	2,246	$	61	$	(7)	$	(363)	$	31,184

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Restructuring-Related Liabilities: (Tables)

3 Months Ended

Mar. 31, 2014

Restructuring-Related Liabilities:

Schedule of restructuring related liabilities

11.Restructuring-Related Liabilities: The following table provides a roll forward of the current and noncurrent liabilities for special restructuring-related actions taken prior to 2006.

		Liability						Liability
		as of				Other		as of
(Dollars in millions)		01/01/14		Payments		Adjustments*		3/31/2014
Current:
	Workforce	$	27	$	(7)	$	8	$	28
Total current		$	27	$	(7)	$	8	$	28
Noncurrent:
	Workforce	$	440	$	—	$	(3)	$	437
Total noncurrent		$	440	$	—	$	(3)	$	437
* Other Adjustments principally include the reclassification of noncurrent to current, remeasurement of actuarial assumptions,
foreign currency translation adjustments and interest accretion.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Parenthetical)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Common stock issued under employee plans (in shares)	3,105,227	3,726,163
Purchases of treasury stock under employee plans (in shares)	488,203	629,550
Sales of treasury stock under employee plans (in shares)	328,673	648,990
Other treasury shares purchased, not retired (in shares)	45,153,202	12,318,883

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Commitments: (Tables)

3 Months Ended

Mar. 31, 2014

Commitments:

Changes in warranty liabilities

Standard Warranty Liability
(Dollars in millions)	2014		2013
Balance at January 1	$	376	$	394
Current period accruals		54		71
Accrual adjustments to reflect actual experience		(3)		9
Charges incurred		(85)		(93)
Balance at March 31	$	342	$	381

Extended Warranty Liability
(Dollars in millions)	2014		2013
Aggregate deferred revenue at January 1	$	579	$	606
Revenue deferred for new extended warranty contracts		54		47
Amortization of deferred revenue		(73)		(82)
Other*		(11)		(7)
Aggregate deferred revenue at March 31	$	548	$	565
Current portion	$	268	$	286
Noncurrent portion		280		278
Aggregate deferred revenue at March 31	$	548	$	565
* Other primarily consists of foreign currency translation adjustments.

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Financing Receivables: (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2014 Major Markets	Dec. 31, 2013 Major Markets	Mar. 31, 2014 Growth Markets	Dec. 31, 2013 Growth Markets	Mar. 31, 2014 Lease receivables	Dec. 31, 2013 Lease receivables	Dec. 31, 2012 Lease receivables	Mar. 31, 2014 Lease receivables Major Markets	Dec. 31, 2013 Lease receivables Major Markets	Dec. 31, 2012 Lease receivables Major Markets	Mar. 31, 2014 Lease receivables Growth Markets	Dec. 31, 2013 Lease receivables Growth Markets	Dec. 31, 2012 Lease receivables Growth Markets	Mar. 31, 2014 Loan receivables	Dec. 31, 2013 Loan receivables	Dec. 31, 2012 Loan receivables	Mar. 31, 2014 Loan receivables Major Markets	Dec. 31, 2013 Loan receivables Major Markets	Dec. 31, 2012 Loan receivables Major Markets	Mar. 31, 2014 Loan receivables Growth Markets	Dec. 31, 2013 Loan receivables Growth Markets	Dec. 31, 2012 Loan receivables Growth Markets
Financing Receivables
Ending Balance	$ 22,831	$ 23,537	$ 16,336	$ 17,325	$ 6,494	$ 6,212	$ 8,591	$ 8,996		$ 6,356	$ 6,796		$ 2,235	$ 2,200		$ 14,239	$ 14,542		$ 9,980	$ 10,529		$ 4,259	$ 4,012
Collectively evaluated for impairment	22,494	23,219	16,223	17,206	6,270	6,013
Individually evaluated for impairment	337	318	113	119	224	199
Allowance for Credit Losses
Allowance for credit losses, beginning balance	365	318	137	180	228	138	131	123	114	41	42	59	90	80	55	263	242	204	93	95	121	171	147	84
Write-offs	(8)	(33)	(5)	(23)	(3)	(10)
Provision	39	84	3	(21)	36	105
Other	(1)	(5)	0	1	(1)	(6)
Allowance for credit losses, ending balance	394	365	134	137	260	228	131	123	114	41	42	59	90	80	55	263	242	204	93	95	121	171	147	84
Collectively evaluated for impairment	89	93	41	45	47	48
Individually evaluated for impairment	$ 306	$ 272	$ 93	$ 93	$ 213	$ 179

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Acquisitions/Divestitures (Narratives) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 acquisitions	Dec. 31, 2013	Dec. 31, 2012
Acquisitions:
Businesses acquired, number (in entities)	2
Businesses acquired, aggregate cost	$ 286
Goodwill	31,214	31,184	29,247
Software
Acquisitions:
Businesses acquired, number (in entities)	2
Goodwill	21,190	21,121	20,405
Percentage of business acquired	100.00%
Acquisitions
Acquisitions:
Acquired intangible asset, weighted average useful life	6 years 10 months
Expected percent of goodwill deductible for tax purposes	0.00%
Total purchase price	286
Goodwill	239
Acquisitions | Software
Acquisitions:
Goodwill	$ 239

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CONSOLIDATED STATEMENT OF EARNINGS (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenue:
Services	$ 13,982	$ 14,274
Sales	7,984	8,629
Financing	517	505
Total revenue	22,484	23,408
Cost:
Services	9,101	9,526
Sales	2,561	2,931
Financing	278	273
Total cost	11,941	12,730
Gross profit	10,543	10,678
Expense and other (income):
Selling, general and administrative	6,289	5,577
Research, development and engineering	1,501	1,644
Intellectual property and custom development income	(207)	(183)
Other (income) and expense	(126)	(60)
Interest expense	105	94
Total expense and other (income)	7,563	7,072
Income before income taxes	2,980	3,606
Provision for income taxes	596	574
Net income	$ 2,384	$ 3,032
Earnings per share of common stock:
Assuming dilution (in dollars per share)	$ 2.29	$ 2.7
Basic (in dollars per share)	$ 2.3	$ 2.72
Weighted-average number of common shares outstanding: (millions)
Assuming dilution (in shares)	1,041.8	1,124.0
Basic (in shares)	1,035.2	1,113.7
Cash dividend per common share (in dollars per share)	$ 0.95	$ 0.85

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Financing Receivables: (Details 7) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014		Dec. 31, 2013
Past Due Financing Receivable
Total Past Due (> 90 days)	$ 68	[1]	$ 68	[1]
Current	22,763		23,469
Total Financing Receivables	22,831		23,537
Recorded Investment > 90 Days and Accruing	35		41
Troubled debt restructurings of financing receivables	0		0
Major Markets
Past Due Financing Receivable
Total Financing Receivables	16,336		17,325
Growth Markets
Past Due Financing Receivable
Total Financing Receivables	6,494		6,212
Lease receivables
Past Due Financing Receivable
Total Past Due (> 90 days)	25	[1]	25	[1]
Current	8,566		8,970
Total Financing Receivables	8,591		8,996
Recorded Investment > 90 Days and Accruing	18		16
Lease receivables | Major Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	8	[1]	6	[1]
Current	6,348		6,789
Total Financing Receivables	6,356		6,796
Recorded Investment > 90 Days and Accruing	8		5
Lease receivables | Growth Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	17	[1]	19	[1]
Current	2,218		2,181
Total Financing Receivables	2,235		2,200
Recorded Investment > 90 Days and Accruing	10		11
Loan receivables
Past Due Financing Receivable
Total Past Due (> 90 days)	43	[1]	43	[1]
Current	14,197		14,499
Total Financing Receivables	14,239		14,542
Recorded Investment > 90 Days and Accruing	18		25
Loan receivables | Major Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	11	[1]	9	[1]
Current	9,969		10,520
Total Financing Receivables	9,980		10,529
Recorded Investment > 90 Days and Accruing	11		6
Loan receivables | Growth Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	31	[1]	34	[1]
Current	4,228		3,979
Total Financing Receivables	4,259		4,012
Recorded Investment > 90 Days and Accruing	$ 6		$ 18

[1] * Does not include accounts that are fully reserved.

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CONSOLIDATED STATEMENT OF CASH FLOWS (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net income	$ 2,384	$ 3,032
Adjustments to reconcile net income to cash provided by operating activities
Depreciation	802	822
Amortization of intangibles	339	331
Stock-based compensation	124	144
Net (gain)/loss on asset sales and other	(161)	(62)
Changes in operating assets and liabilities, net of acquisitions/divestitures	(162)	(244)
Net cash provided by operating activities	3,326	4,023
Cash flows from investing activities:
Payments for property, plant and equipment	(849)	(714)
Proceeds from disposition of property, plant and equipment	74	123
Investment in software	(112)	(139)
Acquisition of businesses, net of cash acquired	(264)	(58)
Divestitures of businesses, net of cash transferred	391	10
Non-operating finance receivables - net	665	732
Purchases of marketable securities and other investments	(477)	(2,136)
Proceeds from disposition of marketable securities and other investments	608	1,169
Net cash provided by/(used in) investing activities	35	(1,012)
Cash flows from financing activities:
Proceeds from new debt	4,875	2,685
Payments to settle debt	(1,507)	(857)
Short-term borrowings/(repayments) less than 90 days - net	845	(1,359)
Common stock repurchases	(8,166)	(2,593)
Common stock transactions - other	270	356
Cash dividends paid	(990)	(948)
Net cash used in financing activities	(4,673)	(2,716)
Effect of exchange rate changes on cash and cash equivalents	5	(121)
Net change in cash and cash equivalents	(1,307)	173
Cash and cash equivalents at January 1	10,716	10,412
Cash and cash equivalents at March 31	$ 9,409	$ 10,585

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Restructuring-Related Liabilities: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014
Current Liability
Restructuring Reserve
Liability at the beginning of the period	$ 27
Payments	(7)
Other Adjustments	8	[1]
Liability at the end of the period	28
Noncurrent Liability
Restructuring Reserve
Liability at the beginning of the period	440
Other Adjustments	(3)	[1]
Liability at the end of the period	437
Workforce | Current Liability
Restructuring Reserve
Liability at the beginning of the period	27
Payments	(7)
Other Adjustments	8	[1]
Liability at the end of the period	28
Workforce | Noncurrent Liability
Restructuring Reserve
Liability at the beginning of the period	440
Other Adjustments	(3)	[1]
Liability at the end of the period	$ 437

[1] Other Adjustments principally include the reclassification of noncurrent to current, remeasurement of actuarial assumptions, foreign currency translation adjustments and interest accretion.

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Financial Instruments (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013		Dec. 31, 2013
Fair value of financial instruments, details:
Carrying amount of long-term debt	$ 34,668				$ 32,856
Fair value of long-term debt	36,808				34,555
Debt and Marketable Equity Securities.
Debt securities - noncurrent, Adjusted Cost	8	[1]			7	[1]
Debt securities - noncurrent, gross unrealized gains	2	[1]			1	[1]
Available-for-sale equity investments, Adjusted Cost	2	[1]			20	[1]
Available-for-sale equity investments, gross unrealized gains	2	[1]			2	[1]
Available-for-sale equity investments, gross unrealized losses	0	[1]			4	[1]
Debt securities - noncurrent	9	[1]			9	[1]
Available-for-sale equity investments	4	[1]			18	[1]
Sales of debt and available-for-sale equity investments
Proceeds	14		18
Gross realized gains (before taxes)			3
Gross realized losses (before taxes)	4		4
Unrealized holding gains/(losses) on available-for-sale debt and equity securities
Net unrealized gains/(losses) arising during the period	0		(1)
Net unrealized (gains)/losses reclassified to net income	3	[2]	0	[2]
Writedowns included in net income for the period	0		0
Maximum contractual maturities of substantially all available-for-sale debt securities	1 year
Other operating (income) and expense
Debt and Marketable Equity Securities.
Trading securitites, unrealized gains	$ 6

[1] Included within investments and sundry assets in the Consolidated Statement of Financial Position.

[2] * There were no writedowns for the three months ended March 31, 2014 and 2013.

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Subsequent Events:

3 Months Ended

Mar. 31, 2014

Subsequent Events:

Subsequent Events:

14. Subsequent Events: On April 29, 2014, the company announced that the Board of Directors approved a quarterly dividend of $1.10 per common share. The dividend is payable June 10, 2014 to shareholders of record on May 9, 2014. The dividend declaration represents an increase of $0.15 per common share, which is 16 percent higher than the prior quarterly dividend of $0.95 per common share.

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Financial Instruments (Details 3) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Financial Instruments:
Derivative instruments with credit-risk related contingent features	$ 201	$ 216
Collateral posted on derivative instruments	0	0
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	678	719
Fair value of total derivative liabilities and debt	6,557	6,802
Maximum spread on credit default swap agreements before full overnight collateralization is required	2.50%
Liabilities included in master netting arrangements	221	251
Cash collateral received, derivatives	23	29
Net exposure related to derivative assets recorded in the Statement of Financial Position	434	439
Net amount related to derivative liabilities recorded in the Statement of Financial Position	220	250
Non-cash collateral received	0	0
Cash collateral rehypothecated	0	0
Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	528	522
Fair value of total derivative instruments, Liabilities	337	456
Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	151	197
Fair value of total derivative instruments, Liabilities	104	45
Other receivables
Fair Values of Derivative Instruments
Cash collateral issued, derivatives	0	0
Accounts payable
Fair Values of Derivative Instruments
Cash collateral received, derivatives	23	29
Prepaid expenses and other current assets | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	110	187
Prepaid expenses and other current assets | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	74	94
Prepaid expenses and other current assets | Equity contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	17	36
Investments and sundry assets | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	363	308
Investments and sundry assets | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	54	26
Investments and sundry assets | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	59	67
Other accrued expenses and liabilities | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities		0
Other accrued expenses and liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	270	331
Other accrued expenses and liabilities | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	98	40
Other accrued expenses and liabilities | Equity contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	2	4
Other liabilities | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	12	13
Other liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	55	112
Other liabilities | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	4	1
Long term debt | Designated as hedging instruments | Net investment hedge
Fair Values of Derivative Instruments
Debt designated as hedging instrument	6,116	6,111
Short term debt | Designated as hedging instruments | Net investment hedge
Fair Values of Derivative Instruments
Debt designated as hedging instrument		$ 190

XML

Financing Receivables: (Tables)

3 Months Ended

Mar. 31, 2014

Financing Receivables:

Financing receivables, net of allowances for credit losses, including residual values

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Current:
Net investment in sales-type and direct financing leases	$	4,096	$	4,004
Commercial financing receivables		7,024		8,541
Client loan receivables		5,797		5,854
Installment payment receivables		1,412		1,389
Total	$	18,329	$	19,787
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,152	$	5,700
Commercial financing receivables		—		—
Client loan receivables		6,147		6,360
Installment payment receivables		619		695
Total	$	11,918	$	12,755

Schedule of financing receivables and allowance for credit losses by portfolio segment

(Dollars in millions)		Major		Growth
At March 31, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,356	$	2,235	$	8,591
	Loan receivables		9,980		4,259		14,239
Ending balance		$	16,336	$	6,494	$	22,831
Collectively evaluated for impairment		$	16,223	$	6,270	$	22,494
Individually evaluated for impairment		$	113	$	224	$	337
Allowance for credit losses:
Beginning balance at January 1, 2014
	Lease receivables	$	42	$	80	$	123
	Loan receivables		95		147		242
Total		$	137	$	228	$	365
	Write-offs		(5)		(3)		(8)
	Provision		3		36		39
	Other		(0)		(1)		(1)
Ending balance at March 31, 2014		$	134	$	260	$	394
	Lease receivables	$	41	$	90	$	131
	Loan receivables	$	93	$	171	$	263
Collectively evaluated for impairment		$	41	$	47	$	89
Individually evaluated for impairment		$	93	$	213	$	306

(Dollars in millions)		Major		Growth
At December 31, 2013		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,796	$	2,200	$	8,996
	Loan receivables		10,529		4,012		14,542
Ending balance		$	17,325	$	6,212	$	23,537
Collectively evaluated for impairment		$	17,206	$	6,013	$	23,219
Individually evaluated for impairment		$	119	$	199	$	318
Allowance for credit losses:
Beginning balance at January 1, 2013
	Lease receivables	$	59	$	55	$	114
	Loan receivables		121		84		204
Total		$	180	$	138	$	318
	Write-offs		(23)		(10)		(33)
	Provision		(21)		105		84
	Other		1		(6)		(5)
Ending balance at December 31, 2013		$	137	$	228	$	365
	Lease receivables	$	42	$	80	$	123
	Loan receivables	$	95	$	147	$	242
Collectively evaluated for impairment		$	45	$	48	$	93
Individually evaluated for impairment		$	93	$	179	$	272

Schedule of recorded investment in financing receivables which are on Non-Accrual Status

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Major markets	$	24	$	25
Growth markets		62		34
Total lease receivables	$	85	$	59
Major markets	$	41	$	40
Growth markets		116		92
Total loan receivables	$	157	$	132
Total receivables	$	242	$	191

Schedule of impaired client loan receivables

	At March 31, 2014				At December 31, 2013
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	75	$	63	$	79	$	67
Growth markets		147		136		122		116
Total	$	222	$	199	$	201	$	183

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2014:	Investment		Recognized		Cash Basis
Major markets	$	77	$	0	$	0
Growth markets		134		0		0
Total	$	211	$	0	$	0
					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2013:	Investment		Recognized		Cash Basis
Major markets	$	79	$	0	$	0
Growth markets		79		0		0
Total	$	158	$	0	$	0

Schedule of gross recorded investment by credit quality indicator

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At March 31, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	648	$	63	$	1,017	$	119
	A+ – A-		1,243		168		1,952		320
	BBB+ – BBB-		2,172		1,025		3,411		1,953
	BB+ – BB		1,349		333		2,119		634
	BB- – B+		519		350		814		666
	B – B-		354		218		555		414
	CCC+ – D		71		80		111		152
Total		$	6,356	$	2,235	$	9,980	$	4,259

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2013:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	743	$	68	$	1,151	$	125
	A+ – A-		1,513		168		2,344		307
	BBB+ – BBB-		2,111		957		3,271		1,745
	BB+ – BB		1,393		350		2,158		638
	BB- – B+		595		368		922		672
	B – B-		365		214		565		391
	CCC+ – D		76		74		118		134
Total		$	6,796	$	2,200	$	10,529	$	4,012

Schedule of past due financing receivables

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At March 31, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	6,348	$	6,356	$	8
Growth markets		17		2,218		2,235		10
Total lease receivables	$	25	$	8,566	$	8,591	$	18
Major markets	$	11	$	9,969	$	9,980	$	11
Growth markets		31		4,228		4,259		6
Total loan receivables	$	43	$	14,197	$	14,239	$	18
Total	$	68	$	22,763	$	22,831	$	35
* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	6,789	$	6,796	$	5
Growth markets		19		2,181		2,200		11
Total lease receivables	$	25	$	8,970	$	8,996	$	16
Major markets	$	9	$	10,520	$	10,529	$	6
Growth markets		34		3,979		4,012		18
Total loan receivables	$	43	$	14,499	$	14,542	$	25
Total	$	68	$	23,469	$	23,537	$	41
* Does not include accounts that are fully reserved.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $) In Millions, unless otherwise specified	Total	Total IBM Stockholders' Equity	Common Stock and Additional Paid-in Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income/(Loss)	Non-Controlling Interests
Equity - at Dec. 31, 2012	$ 18,984	$ 18,860	$ 50,110	$ 117,641	$ (123,131)	$ (25,759)	$ 124
Net income plus other comprehensive income/(loss)
Net income	3,032	3,032		3,032
Other comprehensive income/(loss)	293	293				293
Total comprehensive income/(loss)	3,325	3,325
Cash dividends paid - common stock	(948)	(948)		(948)
Common stock issued under employee plan (Shares - 3,105,227 and 3,726,163 for the three months ended March 31,2014 and 2013, respectively)	361	361	361
Purchases ( (Shares - 488,203 and 629,550) and sales ( Shares - 328,673 and 648,990) of the treasury stock under employee plans - net, for the three months ended March 31, 2014 and 2013, respectively)	(65)	(65)		(12)	(53)
Other treasury shares purchased, not retire (Shares - 45,153,202 and 12,318,883 for the three months ended March 31, 2014 and 2013, respectively)	(2,493)	(2,493)			(2,493)
Changes in other equity	52	52	52
Changes in noncontrolling interests	(1)						(1)
Equity - at Mar. 31, 2013	19,214	19,092	50,522	119,713	(125,677)	(25,466)	122
Equity - at Dec. 31, 2013	22,929	22,792	51,594	130,042	(137,242)	(21,602)	137
Net income plus other comprehensive income/(loss)
Net income	2,384	2,384		2,384
Other comprehensive income/(loss)	446	446				446
Total comprehensive income/(loss)	2,830	2,830
Cash dividends paid - common stock	(990)	(990)		(990)
Common stock issued under employee plan (Shares - 3,105,227 and 3,726,163 for the three months ended March 31,2014 and 2013, respectively)	333	333	333
Purchases ( (Shares - 488,203 and 629,550) and sales ( Shares - 328,673 and 648,990) of the treasury stock under employee plans - net, for the three months ended March 31, 2014 and 2013, respectively)	(51)	(51)		(5)	(46)
Other treasury shares purchased, not retire (Shares - 45,153,202 and 12,318,883 for the three months ended March 31, 2014 and 2013, respectively)	(8,324)	(8,324)			(8,324)
Changes in other equity	16	16	16
Changes in noncontrolling interests	(4)						(4)
Equity - at Mar. 31, 2014	$ 16,740	$ 16,607	$ 51,943	$ 131,431	$ (145,612)	$ (21,156)	$ 133

XML

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income	$ 2,384	$ 3,032
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments	(61)	(405)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0	(3)
Reclassification of (gains)/losses to net income	4	1
Subsequent changes in previously impaired securities arising during the period		1
Total net changes related to available-for-sale securities	4	(1)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	88	360
Reclassification of (gains)/losses to net income	(1)	(56)
Total unrealized gains/(losses) on cash flow hedges	87	305
Retirement-related benefit plans:
Prior service costs/(credits)	1	33
Net (losses)/gains arising during the period	32	(15)
Curtailments and settlements	4
Amortization of prior service (credits)/costs	(29)	(30)
Amortization of net (gains)/losses	649	886
Total retirement-related benefit plans	656	875
Other comprehensive income/(loss), before tax	687	773
Income tax (expense)/benefit related to items of other comprehensive income	(241)	(480)
Other comprehensive income/(loss)	446	293
Total comprehensive income/(loss)	$ 2,830	$ 3,325

XML

Acquisitions/Divestitures:

3 Months Ended

Mar. 31, 2014

Acquisitions/Divestitures:

Acquisitions/Divestitures:

9.Acquisitions/Divestitures:

Acquisitions: During the three months ended March 31, 2014, the company completed two acquisitions at an aggregate cost of $286 million.

The Software segment completed acquisitions of two privately held companiesin the first quarter:Aspera, Inc. (Aspera) and Cloudant, Inc. (Cloudant).Bothacquisitions were for 100 percent of the acquired companies.

The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of March 31, 2014:

		Amortization			Total
(Dollars in millions)		Life (in yrs.)			Acquisitions
Current assets				$	21
Fixed assets/noncurrent assets					18
Intangible assets:
	Goodwill		N/A		239
	Completed technology		7		33
	Client relationships		7		1
	Patents/trademarks		5-7		8
Total assets acquired					319
Current liabilities					(11)
Noncurrent liabilities					(22)
Total liabilities assumed					(33)
Total purchase price				$	286
N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. Aspera’s technology makes cloud computing faster, more predictable and more cost effective for big data transfers such as enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity. The acquisition of Cloudant willextend the company’s mobile and cloud platforms by enabling developers to easily and quickly create next generation mobile and web-based applications.Purchase price consideration for these acquisitions as reflected in the table above, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled work-force, neither of which qualify as an amortizable intangible asset. The overall weighted-average life of the identified amortizable intangible assets acquired is 6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $239 million has been assigned to the Software segment. It is expected that none of the goodwill will be deductible for tax purposes.

On April 10, 2014, the company announced that it had entered into a definitive agreement to acquire Silverpop, a privately held company based in Atlanta, GA. Silverpop is a provider of cloud-based capabilities that deliver personalized customer engagements in highly scalable environments. The acquisition is expected to close in the second quarter of 2014.

Divestitures:

On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo will acquire the company’s x86 server portfolio for $2.3 billion, consisting of approximately $2 billion in cash, with the balance in Lenovo stock. The stock will represent less than 5 percent equity ownership in Lenovo. The company will sell to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.

IBM and Lenovo plan to enter into a strategic relationship which will include a global OEM and reseller agreement for sales of IBM’s industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions. Following the closing of the transaction, Lenovo will assume related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time.

The transaction will be completed as soon as is practical, subject to the satisfaction of regulatory requirements, customary closing conditions and any other required approvals. At March 31, 2014, the company is engaged in the regulatory review process and in the activities necessary to separate the tangible assets in order to close the transaction. The transaction is expected to be completed in phases, with the initial closing expected in the second half of 2014. Subsequent local closings will occur subject to similar conditions, agreements and the information and consultation process in applicable countries.

The company expects to recognize a total pre-tax gain on the sale of approximately $1 billion. This gain will be recognized consistent with the closing schedule for the transaction. The exact amount of the gain and the breakdown by closing date is not yet determinable. The variables that can impact the final gain include the valuation of the final balance sheet transferred, the valuation of other related agreements and transaction-related expenses.

The company’s worldwide x86 business is reported in the Systems and Technology segment, and the associated maintenance operations are part of the Global Technology Services segment. In 2013, this combined business delivered approximately $4.6 billion of revenue, was essentially breakeven on a pre-tax income basis and had approximately $100 million in tangible assets.

On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX will acquire the company’s worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX stock, which represents less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and Concentrix, SYNNEX’s outsourcing business, has become an IBM strategic business partner for global customer care business process outsourcing services.

The transaction is being completed in phases – the initial closing was completed on January 31, 2014, with subsequent closings expected to be completed in the second quarter of 2014, subject to customary closing conditions, local agreements and the information and consultation process in applicable countries. The company expects to recognize a total pre-tax gain on the sale of between $200 million and $225 million. The gain recognized in the first quarter of 2014 was $98 million. The company’s worldwide customer care business process outsourcing services and industry process services was reported in the Global Technology Services segment. In 2013, the divested business delivered approximately $1.3 billion of revenue, approximately $0.1 billion of pre-tax income and had approximately $50 million in tangible assets.

On April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba TEC for the sale of its Retail Store Solutions business. As part of the transaction, the company agreed to transfer the maintenance business to Toshiba TEC within three years of the original closing of the transaction.

In first quarter 2014, the company completed the first phase of the transfer of the maintenance workforce to Toshiba. Subsequent wave closings are scheduled to be completed through the first quarter of 2015 along with associated parts and inventory transfer. The first phase transfer and an assessment of the ongoing contractual terms of the overall transaction resulted in the recognition of an additional pre-tax gain of $34 million in the first quarter of 2014.

The company expects to close the final phase of the divestiture in the first quarter of 2015. Overall, the company expects to recognize a cumulative total pre-tax gain on the sale of approximately $508 million.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2014
Document and Entity Information
Entity Registrant Name	INTERNATIONAL BUSINESS MACHINES CORP
Entity Central Index Key	0000051143
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding	1,012,183,432
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

Intangible Assets Including Goodwill:

3 Months Ended

Mar. 31, 2014

Intangible Assets Including Goodwill:

Intangible Assets Including Goodwill:

10.Intangible Assets Including Goodwill: The following table details the company’s intangible asset balances by major asset class:

	At March 31, 2014
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,471	$	(696)	$	775
Client relationships		2,149		(1,050)		1,099
Completed technology		2,935		(1,312)		1,623
In-process R&D		2		—		2
Patents/trademarks		366		(169)		198
Other*		7		(5)		2
Total	$	6,929	$	(3,231)	$	3,698
	At December 31, 2013
(Dollars in millions)	Gross Carrying		Accumulated		Net Carrying
Intangible asset class	Amount		Amortization		Amount
Capitalized software	$	1,494	$	(699)	$	794
Client relationships		2,148		(977)		1,171
Completed technology		2,910		(1,224)		1,687
In-process R&D		13		—		13
Patents/trademarks		358		(154)		204
Other*		7		(5)		2
Total	$	6,930	$	(3,059)	$	3,871

*Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased $173 million during the first quarter of 2014, primarily due to amortization, partially offset by intangible asset additions resulting from acquisitions. The aggregate intangible amortization expense for acquired intangibles (excluding capitalized software) was $339 million and $331 million for the quarters ended March 31, 2014 and 2013, respectively. In addition, in the first three months of 2014, the company retired $164 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at March 31, 2014:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2014 (for Q2-Q4)	$	377	$	619	$	997
2015		294		642		936
2016		96		601		697
2017		8		479		487
2018		—		328		328

The change in the goodwill balances by reportable segment, for the three months ended March 31, 2014 and for the year ended December 31, 2013are as follows:

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other			Balance
Segment	01/01/14		Additions		Adjustments		Divestitures		Adjustments			3/31/14
Global Business Services	$	4,334	$	—	$	—	$	—		$	4	$	4,337
Global Technology Services		4,129		—		—		(52)			16		4,094
Software		21,121		239		0		—			(170)		21,190
Systems and Technology		1,601		—		—		—			(8)		1,593
Total	$	31,184	$	239	$	0	$	(52)		$	(158)	$	31,214

									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other		Balance
Segment	01/01/13		Additions		Adjustments		Divestitures		Adjustments		12/31/13
Global Business Services	$	4,357	$	—	$	(0)	$	(3)	$	(21)	$	4,334
Global Technology Services		2,916		1,246		17		—		(50)		4,129
Software		20,405		987		11		(4)		(279)		21,121
Systems and Technology		1,568		13		33		—		(14)		1,601
Total	$	29,247	$	2,246	$	61	$	(7)	$	(363)	$	31,184

Purchase price adjustments recorded in the first three months of 2014 and full year 2013 were related to acquisitions that were completed on or prior to December 31, 2013 or December 31, 2012, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded during the first three months of 2014 or the full year of 2013 and the company has no accumulated impairment losses.

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 9,409	$ 10,716
Marketable securities	295	350
Notes and accounts receivable - trade (net of allowances of $305 in 2014 and $291 in 2013)	9,682	10,465
Short-term financing receivables (net of allowances of $317 in 2014 and $308 in 2013)	18,329	19,787
Other accounts receivable (net of allowances of $36 in 2014 and $36 in 2013)	1,650	1,584
Inventories, at lower of average cost or market:
Finished goods	472	444
Work in process and raw materials	1,984	1,866
Total inventories	2,456	2,310
Deferred taxes	1,708	1,651
Prepaid expenses and other current assets	4,430	4,488
Total current assets	47,959	51,350
Property, plant and equipment	40,478	40,475
Less: Accumulated depreciation	26,795	26,654
Property, plant and equipment - net	13,683	13,821
Long-term financing receivables (net of allowances of $93 in 2014 and $80 in 2013)	11,918	12,755
Prepaid pension assets	6,110	5,551
Deferred taxes	3,034	3,051
Goodwill	31,214	31,184
Intangible assets - net	3,698	3,871
Investments and sundry assets	5,030	4,639
Total assets	122,646	126,223
Current liabilities:
Taxes	2,245	4,633
Short-term debt	9,312	6,862
Accounts payable	6,865	7,461
Compensation and benefits	3,664	3,893
Deferred income	13,681	12,557
Other accrued expenses and liabilities	5,292	4,748
Total current liabilities	41,058	40,154
Long-term debt	34,668	32,856
Retirement and nonpension postretirement benefit obligations	16,031	16,242
Deferred income	4,042	4,108
Other liabilities	10,106	9,934
Total liabilities	105,906	103,294
IBM stockholders' equity:
Common stock, par value $0.20 per share, and additional paid-in capital, Shares authorized: 4,687,500,000; Shares issued: (2014 - 2,210,627,775 2013 - 2,207,522,548)	51,943	51,594
Retained earnings	131,431	130,042
Treasury stock - at cost; (Shares: 2014 - 1,198,444,343 , 2013 - 1,153,131,611 )	(145,612)	(137,242)
Accumulated other comprehensive income/(loss)	(21,156)	(21,602)
Total IBM stockholders' equity	16,607	22,792
Noncontrolling interests	133	137
Total equity	16,740	22,929
Total liabilities and equity	$ 122,646	$ 126,223

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Financing Receivables:

3 Months Ended

Mar. 31, 2014

Financing Receivables:

Financing Receivables:

4. Financing Receivables:The following table presents financing receivables, net of allowances for credit losses, including residual values.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Current:
Net investment in sales-type and direct financing leases	$	4,096	$	4,004
Commercial financing receivables		7,024		8,541
Client loan receivables		5,797		5,854
Installment payment receivables		1,412		1,389
Total	$	18,329	$	19,787
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,152	$	5,700
Commercial financing receivables		—		—
Client loan receivables		6,147		6,360
Installment payment receivables		619		695
Total	$	11,918	$	12,755

Net investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $698 million and $737 million at March 31, 2014 and December 31, 2013, respectively, and is reflected net of unearned income of $634 million and $672 million, and net of the allowance for credit losses of $131 million and $123 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $16 million and $23 million at March 31, 2014 and December 31, 2013, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan receivables, net of allowance for credit losses of $222 million and $201 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.

Installment payment receivables, net of allowance for credit losses of $41 million and $41 million at March 31, 2014 and December 31, 2013, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

Client loan receivables and installment payment receivables financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $756 million and $769 million at March 31, 2014 and December 31, 2013, respectively.

The company did not have any financing receivables held for sale as of March 31, 2014 and December 31, 2013.

Financing Receivables by Portfolio Segment

The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial financing receivables and other miscellaneous current financing receivables at March 31, 2014 and December 31, 2013. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. For additional information on the company’s accounting policies for the allowance for credit losses, see the company’s 2013 Annual Report on pages 92 and 93.

(Dollars in millions)		Major		Growth
At March 31, 2014		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,356	$	2,235	$	8,591
	Loan receivables		9,980		4,259		14,239
Ending balance		$	16,336	$	6,494	$	22,831
Collectively evaluated for impairment		$	16,223	$	6,270	$	22,494
Individually evaluated for impairment		$	113	$	224	$	337
Allowance for credit losses:
Beginning balance at January 1, 2014
	Lease receivables	$	42	$	80	$	123
	Loan receivables		95		147		242
Total		$	137	$	228	$	365
	Write-offs		(5)		(3)		(8)
	Provision		3		36		39
	Other		(0)		(1)		(1)
Ending balance at March 31, 2014		$	134	$	260	$	394
	Lease receivables	$	41	$	90	$	131
	Loan receivables	$	93	$	171	$	263
Collectively evaluated for impairment		$	41	$	47	$	89
Individually evaluated for impairment		$	93	$	213	$	306

(Dollars in millions)		Major		Growth
At December 31, 2013		Markets		Markets		Total
Financing receivables:
	Lease receivables	$	6,796	$	2,200	$	8,996
	Loan receivables		10,529		4,012		14,542
Ending balance		$	17,325	$	6,212	$	23,537
Collectively evaluated for impairment		$	17,206	$	6,013	$	23,219
Individually evaluated for impairment		$	119	$	199	$	318
Allowance for credit losses:
Beginning balance at January 1, 2013
	Lease receivables	$	59	$	55	$	114
	Loan receivables		121		84		204
Total		$	180	$	138	$	318
	Write-offs		(23)		(10)		(33)
	Provision		(21)		105		84
	Other		1		(6)		(5)
Ending balance at December 31, 2013		$	137	$	228	$	365
	Lease receivables	$	42	$	80	$	123
	Loan receivables	$	95	$	147	$	242
Collectively evaluated for impairment		$	45	$	48	$	93
Individually evaluated for impairment		$	93	$	179	$	272

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon creditrating, probability of default, term, characteristics (lease/loan) and loss history.

Financing Receivables on Non-Accrual Status

Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts forwhich it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables.

The following table presents the recorded investment in financing receivables which were on non-accrual status at March 31, 2014 and December 31, 2013.

	At March 31,		At December 31,
(Dollars in millions)	2014		2013
Major markets	$	24	$	25
Growth markets		62		34
Total lease receivables	$	85	$	59
Major markets	$	41	$	40
Growth markets		116		92
Total loan receivables	$	157	$	132
Total receivables	$	242	$	191

Impaired Loans

The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status.

The following tables present impaired client loan receivables.

	At March 31, 2014				At December 31, 2013
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	75	$	63	$	79	$	67
Growth markets		147		136		122		116
Total	$	222	$	199	$	201	$	183

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2014:	Investment		Recognized		Cash Basis
Major markets	$	77	$	0	$	0
Growth markets		134		0		0
Total	$	211	$	0	$	0
					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended March 31, 2013:	Investment		Recognized		Cash Basis
Major markets	$	79	$	0	$	0
Growth markets		79		0		0
Total	$	158	$	0	$	0

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Standard & Poor’s Ratings Services credit ratings as shown below. Standard & Poor’s does not provide credit ratings to the company on its customers.

The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at March 31, 2014 and December 31, 2013. Receivables with a credit quality indicator ranging from AAA to BBB- are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At March 31, 2014:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	648	$	63	$	1,017	$	119
	A+ – A-		1,243		168		1,952		320
	BBB+ – BBB-		2,172		1,025		3,411		1,953
	BB+ – BB		1,349		333		2,119		634
	BB- – B+		519		350		814		666
	B – B-		354		218		555		414
	CCC+ – D		71		80		111		152
Total		$	6,356	$	2,235	$	9,980	$	4,259

At March 31, 2014, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (15 percent), Manufacturing (13 percent), Retail (9 percent), Services (8 percent), Communications (6 percent), Healthcare (5 percent) and Other (4 percent).

		Lease Receivables				Loan Receivables
(Dollars in millions)		Major		Growth		Major		Growth
At December 31, 2013:		Markets		Markets		Markets		Markets
Credit Rating:
	AAA – AA-	$	743	$	68	$	1,151	$	125
	A+ – A-		1,513		168		2,344		307
	BBB+ – BBB-		2,111		957		3,271		1,745
	BB+ – BB		1,393		350		2,158		638
	BB- – B+		595		368		922		672
	B – B-		365		214		565		391
	CCC+ – D		76		74		118		134
Total		$	6,796	$	2,200	$	10,529	$	4,012

At December 31, 2013, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (39 percent), Government (14 percent), Manufacturing (14 percent), Retail (8 percent), Services (8 percent), Healthcare (6 percent), Communications (6 percent) and Other (4 percent).

Past Due Financing Receivables

The company views receivables as past due when payment has not been received after 90 days, measured from the billing date.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At March 31, 2014:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	6,348	$	6,356	$	8
Growth markets		17		2,218		2,235		10
Total lease receivables	$	25	$	8,566	$	8,591	$	18
Major markets	$	11	$	9,969	$	9,980	$	11
Growth markets		31		4,228		4,259		6
Total loan receivables	$	43	$	14,197	$	14,239	$	18
Total	$	68	$	22,763	$	22,831	$	35
* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	6	$	6,789	$	6,796	$	5
Growth markets		19		2,181		2,200		11
Total lease receivables	$	25	$	8,970	$	8,996	$	16
Major markets	$	9	$	10,520	$	10,529	$	6
Growth markets		34		3,979		4,012		18
Total loan receivables	$	43	$	14,499	$	14,542	$	25
Total	$	68	$	23,469	$	23,537	$	41
* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

The company did not have any troubled debt restructurings during the three months ended March 31, 2014 and for the year ended December 31, 2013.

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Financial Instruments:

3 Months Ended

Mar. 31, 2014

Financial Instruments:

Financial Instruments:

3. Financial Instruments:

Fair Value Measurements

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

• Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;
• Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
• Level 3—Unobservable inputs for the asset or liability.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

• Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.
• Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

  As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.

Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. See Note A, “Significant Accounting Policies - Impairment,” on page 88 in the company’s 2013 Annual Report for additional information. There were no material impairments of non-financial assets for the three months ended March 31, 2014and 2013, respectively.

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013.

(Dollars in millions)
At March 31, 2014				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,619	$	—	$	4,619
		Commercial paper		—		559		—		559
		Money market funds		988		—		—		988
		U.S. government securities		—		599		—		599
		Canadian government securities		—		226		—		226
		Other securities		—		40		—		40
	Total			988		6,044		—		7,032	(6)
	Debt securities - current (2)			—		295		—		295	(6)
	Debt securities - noncurrent (3)			1		8		—		9
	Trading securities investments (3)			—		77		—		77
	Available-for-sale equity investments (3)			4		—		—		4
	Derivative assets (4)
		Interest rate contracts		—		363		—		363
		Foreign exchange contracts		—		297		—		297
		Equity contracts		—		17		—		17
	Total			—		678		—		678	(7)
Total assets			$	993	$	7,102	$	—	$	8,095	(7)
Liabilities:
	Derivative liabilities (5)
		Foreign exchange contracts	$	—	$	427	$	—	$	427
		Equity contracts		—		2		—		2
		Interest rate contracts		—		12		—		12
Total liabilities			$	—	$	441	$	—	$	441	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of

Financial Position.

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments

and sundry assets in the Consolidated Statement of Financial Position at March 31, 2014 were $202 million and

$476 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other

liabilities in the Consolidated Statement of Financial Position at March 31, 2014 were $370 million and $71

million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $221

million each.

(Dollars in millions)
At December 31, 2013				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,754	$	—	$	4,754
		Commercial paper		—		1,507		—		1,507
		Money market funds		1,728		—		—		1,728
		Other securities		—		8		—		8
	Total			1,728		6,269		—		7,997	(6)
	Debt securities - current (2)			—		350		—		350	(6)
	Debt securities - noncurrent (3)			1		7		—		9
	Available-for-sale equity investments (3)			18		—		—		18
	Derivative assets (4)
		Interest rate contracts		—		308		—		308
		Foreign exchange contracts		—		375		—		375
		Equity contracts		—		36		—		36
	Total			—		719		—		719	(7)
Total assets			$	1,747	$	7,345	$	—	$	9,092	(7)
Liabilities:
	Derivative liabilities (5)
		Interest rate contracts	$	—	$	13	$	—	$	13
		Foreign exchange contracts		—		484		—		484
		Equity contracts		—		4		—		4
Total liabilities			$	—	$	501	$	—	$	501	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of

Financial Position.

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments

and sundry assets in the Consolidated Statement of Financial Position at December 31, 2013 were $318 million and

$401 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other

liabilities in the Consolidated Statement of Financial Position at December 31, 2013 were $375 million and $126

million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $251

million each.

There were no transfers between Levels 1 and 2 for the three months ended March 31, 2014 and the year ended December 31, 2013.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Loans and Long-term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At March 31, 2014 and December 31, 2013, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $34,668 million and $32,856 million, and the estimated fair value was $36,808 million and $34,555 million at March 31, 2014 and December 31, 2013, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Debt and Marketable Equity Securities

The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position.

During the quarter, the company acquired equity investments in conjunction with the sale of the customer care business which are classified as trading securities. At March 31, 2014, unrealized gains related to trading securities of $6 million were recorded in other (income) and expense in the Consolidated Statement of Earnings.

The following tables summarize the company’s noncurrent debt and marketable equity securities which are also considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At March 31, 2014:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	8	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	2	$	2	$	0	$	4
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2013:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	7	$	1	$	—	$	9
Available-for-sale equity investments(1)	$	20	$	2	$	4	$	18
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

Based on an evaluation of available evidence as of March 31, 2014 and December 31, 2013, the company believes that unrealized losses on debt and available-for-sale equity investments were temporary and did not represent a need for an other-than-temporary impairment.

Sales of debt and available-for-sale equity investments during the period were as follows:

(Dollars in millions)
For the three months ended March 31:		2014		2013
Proceeds	$	14	$	18
Gross realized gains (before taxes)		—		3
Gross realized losses (before taxes)		4		4

(Dollars in millions)
For the three months ended March 31:		2014		2013
Net unrealized gains/(losses) arising during the period	$	0	$	$ (1)
Net unrealized (gains)/losses reclassified to net income*		3		0
* There were no writedowns for the three months ended March 31, 2014 and 2013.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at March 31, 2014.

Derivative Financial Instruments

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at March 31, 2014 and December 31, 2013 was $201 million and $216 million, respectively, for which no collateral was posted at March 31, 2014 and December 31, 2013. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of March 31, 2014 and December 31, 2013 was $678 million and $719 million, respectively. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure was reduced by $221 million and $251 million at March 31, 2014 and December 31, 2013, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at March 31, 2014 and December 31, 2013, this exposure was reduced by $23 million and $29 million of cash collateral, respectively, received by the company. At March 31, 2014 and December 31, 2013, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $434 million and $439 million, respectively. At March 31, 2014 and December 31, 2013, the net amount related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $220 million and $250 million, respectively.

In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at March 31, 2014 or December 31, 2013 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral totaled $23 million and $29 million at March 31, 2014 and December 31, 2013, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. No amount was rehypothecated at March 31, 2014 or at December 31, 2013. At March 31, 2014 and December 31, 2013, no amounts of non-cash collateral were held.  

The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps and cross-currency swaps, depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolios. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2014 and December 31, 2013, the total notional amount of the company’s interest rate swaps was $5.9 billion and $3.1 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2014 and December 31, 2013 was approximately 9.5 years and 10.6 years, respectively.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at March 31, 2014 and December 31, 2013.

At March 31, 2014 and December 31, 2013, net gains of approximately $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, gains of less than $1 million, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments designated as net investment hedges was $3.4 billion and $3.0 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2014 and December 31, 2013 was approximately 0.4 years for both periods.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is four years. At March 31, 2014 and December 31, 2013, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.2 billion with a weighted-average remaining maturity of 0.7 years for both periods.

At March 31, 2014 and December 31, 2013, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $169 million and $252 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $155 million and $166 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. Currently, the maximum length of time over which the company has hedged its exposure to variability in future cash flows is approximately seven years. At March 31, 2014 and December 31, 2013, the total notional amount of cross currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.2 billion for both periods.

At March 31, 2014 and December 31, 2013, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses of $6 million (before taxes) and $9 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $3 million of losses in both periods is expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $16.3 billion and $14.7 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At March 31, 2014 and December 31, 2013, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion and $1.3 billion, respectively.

Other Risks

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at March 31, 2014 and December 31, 2013.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at March 31, 2014 and December 31, 2013.

The following tables provide a quantitative summary of the derivative and non-derivative instrument- related risk management activity as of March 31, 2014 and December 31, 2013 as well as for the three months ended March 31, 2014 and 2013, respectively:

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of March 31, 2014 and December 31, 2013
(Dollars in millions)	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
	Classification	3/31/2014		12/31/2013		Classification	3/31/2014		12/31/2013
Designated as hedging
instruments:
Interest rate contracts:	Prepaid expenses and					Other accrued
	other current assets	$	—	$	—	expenses and liabilities	$	—	$	0
	Investments and sundry
	assets		363		308	Other liabilities		12		13
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets		110		187	expenses and liabilities		270		331
	Investments and sundry
	assets		54		26	Other liabilities		55		112
Fair value of derivative						Fair value of derivative
assets		$	528	$	522	liabilities	$	337	$	456
Not designated as
hedging instruments:
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets	$	74	$	94	expenses and liabilities	$	98	$	40
	Investments and sundry
	assets		59		67	Other liabilities		4		1
Equity contracts:	Prepaid expenses and					Other accrued
	other current assets		17		36	expenses and liabilities		2		4
Fair value of derivative						Fair value of derivative
assets		$	151	$	197	liabilities	$	104	$	45
Total debt designated as
hedging instruments:
	Short-term debt		N/A		N/A		$	—	$	190
	Long-term debt		N/A		N/A			6,116		6,111
Total		$	678	$	719		$	6,557	$	6,802
N/A-not applicable

The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the three months ended March 31, 2014 and 2013
(Dollars in millions)		Gain (Loss) Recognized in Earnings
		Consolidated
		Statement of	Recognized on				Attributable to Risk
		Earnings Line Item	Derivatives(1)				Being Hedged(2)
For the three months ended March 31:				2014		2013		2014		2013
Derivative instruments in fair value hedges:
Interest rate contracts		Cost of financing	$	48	$	(20)	$	(23)	$	46
		Interest expense		33		(13)		(15)		30
Derivative instruments not designated as
	hedging instruments(1):
Foreign exchange contracts		Other (income)
		and expense		(34)		(439)		N/A		N/A
Equity contracts		SG&A expense		21		85		N/A		N/A
Total			$	68	$	(387)	$	(38)	$	76

		Gain (Loss) Recognized in Earnings and Other Comprehensive Income
						Consolidated					(Ineffectiveness) and
		Effective Portion				Statement of	Effective Portion Reclassified				Amounts Excluded from
		Recognized in OCI				Earnings Line Item	from AOCI				Effectiveness Testing(3)
For the three months
	ended March 31:	2014		2013			2014		2013		2014		2013
Derivative instruments
	in cash flow hedges:
Interest rate contracts		$	—	$	—	Interest expense	$	—	$	—	$	—	$	—
						Other (income)
Foreign exchange			88		360	and expense		29		37		(0)		1
	contracts					Cost of sales		(26)		9		—		—
						SG&A expense		(2)		10		—		—
Instruments in net
	investment hedges(4):
Foreign exchange
	contracts		(26)		219	Interest expense		—		—		0		(1)
Total		$	62	$	579		$	1	$	56	$	(0)	$	0

N/A-not applicable

Note: OCI represents Other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.

• The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
• The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
• The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
• Instruments in net investment hedges include derivative and non-derivative instruments

For the three months ending March 31, 2014 and 2013, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Refer to the company’s 2013 Annual Report, Note A, “Significant Accounting Policies – Derivative Financial Instruments,” on pages90 to 91 for additional information.

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Financial Instruments: (Tables)

3 Months Ended

Mar. 31, 2014

Financial Instruments:

Financial assets and financial liabilities measured at fair value on a recurring basis

(Dollars in millions)
At March 31, 2014				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,619	$	—	$	4,619
		Commercial paper		—		559		—		559
		Money market funds		988		—		—		988
		U.S. government securities		—		599		—		599
		Canadian government securities		—		226		—		226
		Other securities		—		40		—		40
	Total			988		6,044		—		7,032	(6)
	Debt securities - current (2)			—		295		—		295	(6)
	Debt securities - noncurrent (3)			1		8		—		9
	Trading securities investments (3)			—		77		—		77
	Available-for-sale equity investments (3)			4		—		—		4
	Derivative assets (4)
		Interest rate contracts		—		363		—		363
		Foreign exchange contracts		—		297		—		297
		Equity contracts		—		17		—		17
	Total			—		678		—		678	(7)
Total assets			$	993	$	7,102	$	—	$	8,095	(7)
Liabilities:
	Derivative liabilities (5)
		Foreign exchange contracts	$	—	$	427	$	—	$	427
		Equity contracts		—		2		—		2
		Interest rate contracts		—		12		—		12
Total liabilities			$	—	$	441	$	—	$	441	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of

Financial Position.

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments

and sundry assets in the Consolidated Statement of Financial Position at March 31, 2014 were $202 million and

$476 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other

liabilities in the Consolidated Statement of Financial Position at March 31, 2014 were $370 million and $71

million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $221

million each.

(Dollars in millions)
At December 31, 2013				Level 1		Level 2		Level 3		Total
Assets:
	Cash equivalents (1)
		Time deposits and certificates of deposit	$	—	$	4,754	$	—	$	4,754
		Commercial paper		—		1,507		—		1,507
		Money market funds		1,728		—		—		1,728
		Other securities		—		8		—		8
	Total			1,728		6,269		—		7,997	(6)
	Debt securities - current (2)			—		350		—		350	(6)
	Debt securities - noncurrent (3)			1		7		—		9
	Available-for-sale equity investments (3)			18		—		—		18
	Derivative assets (4)
		Interest rate contracts		—		308		—		308
		Foreign exchange contracts		—		375		—		375
		Equity contracts		—		36		—		36
	Total			—		719		—		719	(7)
Total assets			$	1,747	$	7,345	$	—	$	9,092	(7)
Liabilities:
	Derivative liabilities (5)
		Interest rate contracts	$	—	$	13	$	—	$	13
		Foreign exchange contracts		—		484		—		484
		Equity contracts		—		4		—		4
Total liabilities			$	—	$	501	$	—	$	501	(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of

Financial Position.

(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments

and sundry assets in the Consolidated Statement of Financial Position at December 31, 2013 were $318 million and

$401 million, respectively.

(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other

liabilities in the Consolidated Statement of Financial Position at December 31, 2013 were $375 million and $126

million, respectively.

(6) Available-for-sale securities with carrying values that approximate fair value.

(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated

Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $251

million each.

There were no transfers between Levels 1 and 2 for the three months ended March 31, 2014 and the year ended December 31, 2013.

Noncurrent debt and marketable equity securities available-for-sale and recorded at fair value

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At March 31, 2014:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	8	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	2	$	2	$	0	$	4
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2013:	Cost		Gains		Losses		Value
Debt securities – noncurrent(1)	$	7	$	1	$	—	$	9
Available-for-sale equity investments(1)	$	20	$	2	$	4	$	18
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.

Sales of debt and available-for-sale equity investments

Sales of debt and available-for-sale equity investments during the period were as follows:

(Dollars in millions)
For the three months ended March 31:		2014		2013
Proceeds	$	14	$	18
Gross realized gains (before taxes)		—		3
Gross realized losses (before taxes)		4		4

Unrealized gains/(losses) on available-for-sale debt and equity securities

(Dollars in millions)
For the three months ended March 31:		2014		2013
Net unrealized gains/(losses) arising during the period	$	0	$	$ (1)
Net unrealized (gains)/losses reclassified to net income*		3		0
* There were no writedowns for the three months ended March 31, 2014 and 2013.

Fair Value of Derivative Instruments in the Consolidated Statement of Financial Position

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of March 31, 2014 and December 31, 2013
(Dollars in millions)	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
	Classification	3/31/2014		12/31/2013		Classification	3/31/2014		12/31/2013
Designated as hedging
instruments:
Interest rate contracts:	Prepaid expenses and					Other accrued
	other current assets	$	—	$	—	expenses and liabilities	$	—	$	0
	Investments and sundry
	assets		363		308	Other liabilities		12		13
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets		110		187	expenses and liabilities		270		331
	Investments and sundry
	assets		54		26	Other liabilities		55		112
Fair value of derivative						Fair value of derivative
assets		$	528	$	522	liabilities	$	337	$	456
Not designated as
hedging instruments:
Foreign exchange	Prepaid expenses and					Other accrued
contracts:	other current assets	$	74	$	94	expenses and liabilities	$	98	$	40
	Investments and sundry
	assets		59		67	Other liabilities		4		1
Equity contracts:	Prepaid expenses and					Other accrued
	other current assets		17		36	expenses and liabilities		2		4
Fair value of derivative						Fair value of derivative
assets		$	151	$	197	liabilities	$	104	$	45
Total debt designated as
hedging instruments:
	Short-term debt		N/A		N/A		$	—	$	190
	Long-term debt		N/A		N/A			6,116		6,111
Total		$	678	$	719		$	6,557	$	6,802
N/A-not applicable

Effect of Derivative Instruments in the Consolidated Statement of Earnings

The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the three months ended March 31, 2014 and 2013
(Dollars in millions)		Gain (Loss) Recognized in Earnings
		Consolidated
		Statement of	Recognized on				Attributable to Risk
		Earnings Line Item	Derivatives(1)				Being Hedged(2)
For the three months ended March 31:				2014		2013		2014		2013
Derivative instruments in fair value hedges:
Interest rate contracts		Cost of financing	$	48	$	(20)	$	(23)	$	46
		Interest expense		33		(13)		(15)		30
Derivative instruments not designated as
	hedging instruments(1):
Foreign exchange contracts		Other (income)
		and expense		(34)		(439)		N/A		N/A
Equity contracts		SG&A expense		21		85		N/A		N/A
Total			$	68	$	(387)	$	(38)	$	76

		Gain (Loss) Recognized in Earnings and Other Comprehensive Income
						Consolidated					(Ineffectiveness) and
		Effective Portion				Statement of	Effective Portion Reclassified				Amounts Excluded from
		Recognized in OCI				Earnings Line Item	from AOCI				Effectiveness Testing(3)
For the three months
	ended March 31:	2014		2013			2014		2013		2014		2013
Derivative instruments
	in cash flow hedges:
Interest rate contracts		$	—	$	—	Interest expense	$	—	$	—	$	—	$	—
						Other (income)
Foreign exchange			88		360	and expense		29		37		(0)		1
	contracts					Cost of sales		(26)		9		—		—
						SG&A expense		(2)		10		—		—
Instruments in net
	investment hedges(4):
Foreign exchange
	contracts		(26)		219	Interest expense		—		—		0		(1)
Total		$	62	$	579		$	1	$	56	$	(0)	$	0

N/A-not applicable

Note: OCI represents Other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.

• The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
• The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
• The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
• Instruments in net investment hedges include derivative and non-derivative instruments.

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Restructuring-Related Liabilities:

3 Months Ended

Mar. 31, 2014

Restructuring-Related Liabilities:

Restructuring-Related Liabilities:

11.Restructuring-Related Liabilities: The following table provides a roll forward of the current and noncurrent liabilities for special restructuring-related actions taken prior to 2006.

		Liability						Liability
		as of				Other		as of
(Dollars in millions)		01/01/14		Payments		Adjustments*		3/31/2014
Current:
	Workforce	$	27	$	(7)	$	8	$	28
Total current		$	27	$	(7)	$	8	$	28
Noncurrent:
	Workforce	$	440	$	—	$	(3)	$	437
Total noncurrent		$	440	$	—	$	(3)	$	437
* Other Adjustments principally include the reclassification of noncurrent to current, remeasurement of actuarial assumptions,
foreign currency translation adjustments and interest accretion.

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Equity Activity:

3 Months Ended

Mar. 31, 2014

Equity Activity:

Equity Activity:

7. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2014:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(61)	$	10	$	(51)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	0	$	(0)	$	0
		Reclassification of (gains)/losses to other (income) and expense		4		(2)		3
		Subsequent changes in previously impaired securities arising during
		the period		—		—		—
	Total net changes related to available-for-sale securities		$	4	$	(2)	$	3
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	88	$	(33)	$	54
		Reclassification of (gains)/losses to:
		Cost of sales		26		(10)		16
		SG&A expense		2		0		2
		Other (income) and expense		(29)		11		(18)
		Interest expense		0		(0)		0
	Total unrealized gains/(losses) on cash flow hedges		$	87	$	(32)	$	55
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	1	$	(0)	$	0
		Net (losses)/gains arising during the period		32		(11)		21
		Curtailments and settlements		4		(1)		3
		Amortization of prior service (credits)/costs		(29)		10		(20)
		Amortization of net (gains)/losses		649		(214)		434
	Total retirement-related benefit plans		$	656	$	(217)	$	439
Other comprehensive income/(loss)			$	687	$	(241)	$	446
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2013:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(405)	$	(84)	$	(489)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	(3)	$	1	$	(2)
		Reclassification of (gains)/losses to other (income) and expense		1		(0)		0
		Subsequent changes in previously impaired securities arising during
		the period		1		(0)		1
	Total net changes related to available-for-sale securities		$	(1)	$	0	$	(0)
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	360	$	(128)	$	232
		Reclassification of (gains)/losses to:
		Cost of sales		(9)		3		(6)
		SG&A expense		(10)		3		(7)
		Other (income) and expense		(37)		14		(23)
		Interest expense		0		—		0
	Total unrealized gains/(losses) on cash flow hedges		$	305	$	(108)	$	197
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	33	$	(11)	$	22
		Net (losses)/gains arising during the period		(15)		5		(10)
		Curtailments and settlements		—		—		—
		Amortization of prior service (credits)/costs		(30)		10		(20)
		Amortization of net (gains)/losses		886		(293)		594
	Total retirement-related benefit plans		$	875	$	(289)	$	586
Other comprehensive income/(loss)			$	773	$	(480)	$	293
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2014		$	(165)	$	332	$	(21,767)	$	(1)	$	(21,602)
Other comprehensive income before
	reclassifications		54		(51)		21		0		24
Amount reclassified from accumulated
	other comprehensive income		1		0		417		3		421
Total change for the period			55		(51)		439		3		446
March 31, 2014		$	(111)	$	281	$	(21,328)	$	2	$	(21,156)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2013		$	(90)	$	1,733	$	(27,406)	$	4	$	(25,759)
Other comprehensive income before
	reclassifications		232		(489)		12		(1)		(245)
Amount reclassified from accumulated
	other comprehensive income		(35)		0		574		0		539
Total change for the period			197		(489)		586		(0)		293
March 31, 2013		$	107	$	1,243	$	(26,820)	$	4	$	(25,466)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Contingencies: (Details) (USD $) In Millions, unless otherwise specified		0 Months Ended	3 Months Ended		0 Months Ended
	Mar. 31, 2014 countries	Oct. 12, 2012 Litigation in United Kingdom regarding defined benefit plans (C Plan)	Sep. 30, 2012 Litigation in United Kingdom regarding defined benefit plans (C Plan)	Mar. 31, 2014 Former IBM UK Defined Benefit Plan Participants IBM United Kingdom Limited claims	Jul. 25, 2013 Civil enforcement action with the SEC IBM Korea, LG IBM, IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd.	Feb. 13, 2014 State of Indiana Pending Litigation	Jul. 18, 2012 State of Indiana Pending Litigation	Jul. 10, 2013 SCO Group Inc. claims	Apr. 16, 2014 Iusacell SA de C.V. Subsequent event Pending Litigation
Contingencies:
Clients presence in number of countries	175
Loss Contingencies
Amount of settlement to be (paid)/received						$ 50	$ 52
Claims pending				290
Additional pre-tax retirement-related obligation recorded			162
Retirement age of employee under the C Plan		60 years
Retirement age of employee under the C Plan before modifications		63 years
Period for which reports are to be submitted to SEC and court on certain matters, including those relating to compliance with the FCPA					2 years
Number of breaches of contract and copyright claims filed								10
Number of breaches of contract and copyright claims dismissed								7
Number of tortious interference claims dismissed								1
Damages sought, value									2,500
Income tax examination - Brazil, total potential liability	$ 720

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Stock-Based Compensation:

3 Months Ended

Mar. 31, 2014

Stock-Based Compensation:

Stock-Based Compensation:

5. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings:

(Dollars in millions)
For the three months ended March 31:		2014		2013
Cost	$	31	$	31
Selling, general and administrative		88		99
Research, development and engineering		14		14
Other (income) and expense*		(9)		—
Pre-tax stock-based compensation cost		124		144
Income tax benefits		(41)		(50)
Total stock-based compensation cost	$	83	$	94
* Reflects the one-time effects related to the divestiture of the customer care business.

The decrease in pre-tax stock-based compensation cost for the three months ended March 31, 2014, as compared to the corresponding period in the prior year, was due to decreases related to restricted stock units ($9 million), performance share units ($7 million) and the company’s assumption of stock-based awards previously issued by acquired entities ($4 million).

As of March 31, 2014, the total unrecognized compensation cost of $853 million related to non-vested awards is expected to be recognized over a weighted-average period of approximately 2.4 years.

There was no significant capitalized stock-based compensation cost at March 31, 2014 and 2013.

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Segments:

3 Months Ended

Mar. 31, 2014

Segments:

Segments:

6.Segments: The table on page 25 reflects the results of operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income. These results are used, in part, by senior management, both in evaluating the performance of, and in allocating resources to, each of the segments

SEGMENT INFORMATION
			Global Services
		Global			Global
		Technology			Business						Systems and			Global			Total
(Dollars in millions)		Services			Services			Software			Technology			Financing			Segments
For the three months
	ended March 31, 2014:
External revenue		$	9,330		$	4,483		$	5,661		$	2,391		$	512		$	22,376
Internal revenue			241			141			932			168			617			2,099
Total revenue		$	9,570		$	4,624		$	6,593		$	2,559		$	1,129		$	24,476
Pre-tax income		$	1,345		$	628		$	1,918		$	(660)		$	596		$	3,828
Revenue year-to-year change			(2.9)	%		(0.9)	%		3.0	%		(20.7)	%		8.6	%		(2.8)	%
Pre-tax income year-to-year
	change		(15.1)	%		(10.6)	%		(4.7)	%		(63.1)	%		10.7	%		(13.7)	%
Pre-tax income margin			14.1	%		13.6	%		29.1	%		(25.8)	%		52.8	%		15.6	%
nm - not meaningful
For the three months
	ended March 31, 2013:
External revenue		$	9,605		$	4,484		$	5,572		$	3,106		$	499		$	23,266
Internal revenue			248			180			831			120			541			1,919
Total revenue		$	9,852		$	4,664		$	6,403		$	3,226		$	1,040		$	25,185
Pre-tax income		$	1,585		$	703		$	2,014		$	(405)		$	538		$	4,435
Pre-tax income margin			16.1	%		15.1	%		31.5	%		(12.5)	%		51.8	%		17.6	%

Reconciliations to IBM as Reported:
(Dollars in millions)
For the three months ended March 31:		2014		2013
Revenue:
Total reportable segments		$	24,476	$	25,185
Eliminations of internal transactions			(2,099)		(1,919)
Other revenue adjustments			107		142
	Total IBM Consolidated	$	22,484	$	23,408
Pre-tax income:
Total reportable segments		$	3,828	$	4,435
Amortization of acquired intangible assets			(194)		(183)
Acquisition-related charges			(8)		(11)
Non-operating retirement-related (costs)/income			(123)		(283)
Eliminations of internal transactions			(524)		(339)
Unallocated corporate amounts			0		(13)
	Total IBM Consolidated	$	2,980	$	3,606

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Retirement-Related Benefits:

3 Months Ended

Mar. 31, 2014

Retirement-Related Benefits:

Retirement-Related Benefits:

8.Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the total retirement-related benefit plans’ impact on income before income taxes:

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended March 31:		2014		2013		Change
Retirement-related plans – cost
	Defined benefit and contribution pension plans – cost	$	474	$	674		(29.6)	%
	Nonpension postretirement plans – cost		67		80		(16.0)
	Total	$	541	$	754		(28.2)	%

The following tables provide the components of the cost/(income) for the company’s pension plans:

Cost/(Income) of Pension Plans
(Dollars in millions)		U.S. Plans				Non-U.S. Plans
For the three months ended March 31:		2014		2013		2014		2013
Service cost		$	—	$	—	$	116	$	131
Interest cost			555		496		390		382
Expected return on plan assets			(1,024)		(995)		(572)		(554)
Amortization of prior service costs/(credits)			2		2		(29)		(31)
Recognized actuarial losses			269		451		360		404
Curtailments and settlements			—		—		4		0
Multi-employer plans/other costs			—		—		79		30
Total net periodic pension (income)/cost of defined
	benefit plans		(198)		(46)		348		363
Cost of defined contribution plans			191		206		133		151
Total defined benefit and contribution plans cost recognized
	in the Consolidated Statement of Earnings	$	(7)	$	160	$	481	$	514

On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contributions plans. See page 35 for additional information. As a result of the ruling, the company recorded an additional pre-tax retirement-related obligation of $55 million in the first quarter of 2014 in selling, general and administrative expense in the Consolidated Statement of Earnings. This charge is not reflected in operating (non-GAAP) expense. This obligation is reflected in "Non-U.S. Plans - Multi-employer plans/other costs" in the table above. To date, the rulings in this case are declaratory only and there have been no quantifications of any individual remedies.

In March 2014, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2014 target asset allocation was modified, primarily by reducing equity securities from 42 percent to 32 percent, and increasing debt securities from 47 percent to 57 percent of total plan assets, respectively. The asset allocation change was substantially completed by March 31, 2014. This change is designed to reduce the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2015 expected long-term rate of return on assets to approximately 7.75 percent. See note S, "Retirement-Related Benefits," on page 135 in the company's 2013 Annual Report for additional information regarding the company's investment strategy.

In 2014, the company expects to contribute to its non-U.S. defined benefit and multi-employer plans approximately $600 million, which will be mainly contributed to the defined benefit pension plans in Japan, the UK, Switzerland and the Netherlands. This amount represents the legally mandated minimum contributions. Total net contributions to the non-U.S. plans in the first three months of 2014 were $126 million.

The following table provides the components of the cost/(income) for the company's nonpension postretirement plans:
Cost of Nonpension Postretirement Plans
		U.S. Plan				Non-U.S. Plans
(Dollars in millions)		2014		2013		2014		2013
For the three months ended March 31:
Service cost		$	7	$	9	$	2	$	3
Interest cost			45		42		16		16
Expected return on plan assets			0		(0)		(2)		(2)
Amortization of prior service costs/(credits)			(2)		—		(1)		(1)
Recognized actuarial losses			0		8		3		6
Total nonpension postretirement plan cost recognized in
	Consolidated Statement of Earnings	$	50	$	58	$	17	$	22

In connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the ‘Act’), the company qualified to receive a subsidy through 2013. Due to benefit plan changes effective January 1, 2014, the company no longer qualifies for the subsidy as of that date. The company is expected to receive additional subsidies after 2013 to true up the final subsidy amount due to IBM under the Act. The company received a $5.4 million subsidy in the first quarter of 2014 and a $6.1million subsidy in the first quarter of 2013.For further information related to the Act, see page 141 in the company’s 2013 Annual Report.

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Subsequent Events: (Details) (USD $)	3 Months Ended	0 Months Ended
	Dec. 31, 2013	Apr. 29, 2014 Subsequent event
Subsequent events:
Dividend declared (in dollars per share)	$ 0.95	$ 1.1
Dividend declared, date		Apr. 29, 2014
Dividend payable, date		Jun. 10, 2014
Shareholders of record, date		May 09, 2014
Dividend per share increase (in dollars per share)		$ 0.15
Dividend per share increase (as a percent)		16.00%

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Financial Instruments (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013	Dec. 31, 2013
Financial Instruments:
Impairments of non-financial assets	$ 0		$ 0
Financial assets and financial liabilities measured at fair value on a recurring basis:
Debt securities - noncurrent	9	[1]		9	[1]
Available-for-sale equity investments	4	[1]		18	[1]
Derivative assets	434			439
Derivative liabilities	220			250
Potential reduction in net position of total derivative liabilities	221			251
Recurring
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	7,032	[2],[3]		7,997	[2],[3]
Debt securities - current	295	[2],[4]		350	[2],[4]
Debt securities - noncurrent	9	[1]		9	[1]
Trading securities investments	77	[1]
Available-for-sale equity investments	4	[1]		18	[1]
Derivative assets	678	[5],[6]		719	[7],[8]
Total Assets	8,095	[6]		9,092	[8]
Total Liabilities	441	[6]		501	[8]
Potential reduction in net position of total derivative assets	221			251
Potential reduction in net position of total derivative liabilities	221			251
Recurring | Prepaid expenses and other current assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	202			318
Recurring | Investments and sundry assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	476			401
Recurring | Other accrued expenses and liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	370			375
Recurring | Other liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	71			126
Recurring | Interest rate contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	363	[5]		308	[7]
Derivative liabilities	12	[9]		13	[10]
Recurring | Foreign exchange contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	297	[5]		375	[7]
Derivative liabilities	427	[9]		484	[10]
Recurring | Equity contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	17	[5]		36	[7]
Derivative liabilities	2	[9]		4	[10]
Recurring | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	4,619	[3]		4,754	[3]
Recurring | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	559	[3]		1,507	[3]
Recurring | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	988	[3]		1,728	[3]
Recurring | U.S. government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	599	[3]
Recurring | Canadian government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	226	[3]
Recurring | Other securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	40	[3]		8	[3]
Recurring | Level 1
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	988	[2],[3]		1,728	[2],[3]
Debt securities - noncurrent	1	[1]		1	[1]
Available-for-sale equity investments	4	[1]		18	[1]
Total Assets	993	[6]		1,747	[8]
Recurring | Level 1 | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	988	[3]		1,728	[3]
Recurring | Level 2
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	6,044	[2],[3]		6,269	[2],[3]
Debt securities - current	295	[2],[4]		350	[2],[4]
Debt securities - noncurrent	8	[1]		7	[1]
Trading securities investments	77	[1]
Derivative assets	678	[5],[6]		719	[7],[8]
Total Assets	7,102	[6]		7,345	[8]
Total Liabilities	441	[6]		501	[8]
Recurring | Level 2 | Interest rate contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	363	[5]		308	[7]
Derivative liabilities	12	[9]		13	[10]
Recurring | Level 2 | Foreign exchange contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	297	[5]		375	[7]
Derivative liabilities	427	[9]		484	[10]
Recurring | Level 2 | Equity contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	17	[5]		36	[7]
Derivative liabilities	2	[9]		4	[10]
Recurring | Level 2 | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	4,619	[3]		4,754	[3]
Recurring | Level 2 | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	559	[3]		1,507	[3]
Recurring | Level 2 | U.S. government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	599	[3]
Recurring | Level 2 | Canadian government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	226	[3]
Recurring | Level 2 | Other securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	$ 40	[3]		$ 8	[3]

[1] Included within investments and sundry assets in the Consolidated Statement of Financial Position.

[2] Available-for-sale securities with carrying values that approximate fair value.

[3] Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

[4] Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position.

[5] The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at March 31, 2014 were $202 million and $476 million, respectively.

[6] If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $221 million each.

[7] The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2013 were $318 million and $401 million, respectively.

[8] If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $251 million each.

[9] The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at March 31, 2014 were $370 million and $71 million, respectively.

[10] The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2013 were $375 million and $126 million, respectively.

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Equity Activity: (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period	$ (21,602)		$ (25,759)
Other comprehensive income before reclassifications	24		(245)
Amount reclassified from accumulated other comprehensive income	421		539
Total change for the period	446		293
Balance at the End of the Period	(21,156)		(25,466)
Net Unrealized Gains/(Losses) on Cash Flow Hedges
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period	(165)		(90)
Other comprehensive income before reclassifications	54		232
Amount reclassified from accumulated other comprehensive income	1		(35)
Total change for the period	55		197
Balance at the End of the Period	(111)		107
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period	332	[1]	1,733	[1]
Other comprehensive income before reclassifications	(51)	[1]	(489)	[1]
Amount reclassified from accumulated other comprehensive income	0	[1]	0	[1]
Total change for the period	(51)	[1]	(489)	[1]
Balance at the End of the Period	281	[1]	1,243	[1]
Net Change Retirement-Related Benefit Plans
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period	(21,767)		(27,406)
Other comprehensive income before reclassifications	21		12
Amount reclassified from accumulated other comprehensive income	417		574
Total change for the period	439		586
Balance at the End of the Period	(21,328)		(26,820)
Net Unrealized Gains/(Losses) on Available-For-Sale Securities
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period	(1)		4
Other comprehensive income before reclassifications	0		(1)
Amount reclassified from accumulated other comprehensive income	3		0
Total change for the period	3		0
Balance at the End of the Period	$ 2		$ 4

[1] * Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Commitments:

3 Months Ended

Mar. 31, 2014

Commitments:

Commitments:

13. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $6,103 million and $5,028 million at March 31, 2014 and December 31, 2013, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $1,589 million and $1,769 million at March 13, 2014 and December 31, 2013, respectively.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $45 million and $44 million at March 13, 2014 and December 31, 2013, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty contracts are presented in the following tables:

Standard Warranty Liability
(Dollars in millions)	2014		2013
Balance at January 1	$	376	$	394
Current period accruals		54		71
Accrual adjustments to reflect actual experience		(3)		9
Charges incurred		(85)		(93)
Balance at March 31	$	342	$	381

Extended Warranty Liability
(Dollars in millions)	2014		2013
Aggregate deferred revenue at January 1	$	579	$	606
Revenue deferred for new extended warranty contracts		54		47
Amortization of deferred revenue		(73)		(82)
Other*		(11)		(7)
Aggregate deferred revenue at March 31	$	548	$	565
Current portion	$	268	$	286
Noncurrent portion		280		278
Aggregate deferred revenue at March 31	$	548	$	565
* Other primarily consists of foreign currency translation adjustments.

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Segments: (Tables)

3 Months Ended

Mar. 31, 2014

Segments:

Revenue and Pre-tax Income by Segment

SEGMENT INFORMATION
			Global Services
		Global			Global
		Technology			Business						Systems and			Global			Total
(Dollars in millions)		Services			Services			Software			Technology			Financing			Segments
For the three months
	ended March 31, 2014:
External revenue		$	9,330		$	4,483		$	5,661		$	2,391		$	512		$	22,376
Internal revenue			241			141			932			168			617			2,099
Total revenue		$	9,570		$	4,624		$	6,593		$	2,559		$	1,129		$	24,476
Pre-tax income		$	1,345		$	628		$	1,918		$	(660)		$	596		$	3,828
Revenue year-to-year change			(2.9)	%		(0.9)	%		3.0	%		(20.7)	%		8.6	%		(2.8)	%
Pre-tax income year-to-year
	change		(15.1)	%		(10.6)	%		(4.7)	%		(63.1)	%		10.7	%		(13.7)	%
Pre-tax income margin			14.1	%		13.6	%		29.1	%		(25.8)	%		52.8	%		15.6	%
nm - not meaningful
For the three months
	ended March 31, 2013:
External revenue		$	9,605		$	4,484		$	5,572		$	3,106		$	499		$	23,266
Internal revenue			248			180			831			120			541			1,919
Total revenue		$	9,852		$	4,664		$	6,403		$	3,226		$	1,040		$	25,185
Pre-tax income		$	1,585		$	703		$	2,014		$	(405)		$	538		$	4,435
Pre-tax income margin			16.1	%		15.1	%		31.5	%		(12.5)	%		51.8	%		17.6	%

Revenue and pre-tax income reconciliations to IBM as Reported

Reconciliations to IBM as Reported:
(Dollars in millions)
For the three months ended March 31:		2014		2013
Revenue:
Total reportable segments		$	24,476	$	25,185
Eliminations of internal transactions			(2,099)		(1,919)
Other revenue adjustments			107		142
	Total IBM Consolidated	$	22,484	$	23,408
Pre-tax income:
Total reportable segments		$	3,828	$	4,435
Amortization of acquired intangible assets			(194)		(183)
Acquisition-related charges			(8)		(11)
Non-operating retirement-related (costs)/income			(123)		(283)
Eliminations of internal transactions			(524)		(339)
Unallocated corporate amounts			0		(13)
	Total IBM Consolidated	$	2,980	$	3,606

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Segments: (Segment reconciliations) (Details3) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Pre-tax Income
Income before income taxes	$ 2,980	$ 3,606
Total reportable segments
Pre-tax Income
Income before income taxes	3,828	4,435
Pre-tax reconciliations items
Pre-tax Income
Amortization of acquired intangible assets	(194)	(183)
Acquisition-related charges	(8)	(11)
Non-operating retirement-related (costs)/income	(123)	(283)
Internal transactions
Pre-tax Income
Income before income taxes	(524)	(339)
Unallocated corporate amounts
Pre-tax Income
Income before income taxes	$ 0	$ (13)

XML

Financing Receivables: (Details 3) (USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Financing Receivables on Non-accrual Status
Total Receivables	$ 242	$ 191
Lease receivables
Financing Receivables on Non-accrual Status
Total Receivables	85	59
Lease receivables | Major Markets
Financing Receivables on Non-accrual Status
Total Receivables	24	25
Lease receivables | Growth Markets
Financing Receivables on Non-accrual Status
Total Receivables	62	34
Loan receivables
Financing Receivables on Non-accrual Status
Total Receivables	157	132
Loan receivables | Major Markets
Financing Receivables on Non-accrual Status
Total Receivables	41	40
Loan receivables | Growth Markets
Financing Receivables on Non-accrual Status
Total Receivables	$ 116	$ 92

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Notes and accounts receivable - trade, allowances	$ 305	$ 291
Short-term financing receivables, allowances	317	308
Other accounts receivable, allowances	36	36
Long-term financing receivables, allowances	$ 93	$ 80
Common stock, par value (in dollars per share)	$ 0.2	$ 0.2
Common stock, Shares authorized (in shares)	4,687,500,000	4,687,500,000
Common stock, Shares issued (in shares)	2,210,627,775	2,207,522,548
Treasury stock, Shares (in shares)	1,198,444,343	1,153,131,611

XML

Accounting Changes:

3 Months Ended

Mar. 31, 2014

Accounting Changes:

Accounting Changes:

2. Accounting Changes:In April 2014, the Financial Accounting Standards Board (FASB) issued guidance that changes the criteria for reporting a discontinued operation. According to the new guidance, only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results is a discontinued operation. The new guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The guidance is effective beginning January 1, 2015 with early adoption permitted, but only for disposals (or classifications as held for sale) that have not been reported in previously-issued financial statements. The impact to the company will be dependent on any transaction that is within the scope of the new guidance.

In July 2013, the FASB issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014, and was adopted by the company in the first quarter. The guidance is a change in financial statement presentation only and had no material impact in the consolidated financial results.

In March 2013, the FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance was effectiveJanuary 1, 2014 and did not have a material impact in the Consolidated Statement of Financial Position.

In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples include debt arrangements, other contractual obligations and settled litigation matters. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus additional amounts the reporting entity expects to pay on behalf of its co-obligors.The guidance was effective January 1, 2014 and did not have a material impact in the consolidated financial results.

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Intangible Assets Including Goodwill: (Details 3) (USD $) In Millions, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Changes in Goodwill Balances
Beginning Balance	$ 31,184	$ 29,247
Goodwill Additions	239	2,246
Purchase Price Adjustments	0	61
Divestitures	(52)	(7)
Foreign Currency Translation and Other Adjustments	(158)	(363)
Ending Balance	31,214	31,184
Goodwill impairment losses	0	0
Goodwill accumulated impairment losses	0	0
Global Business Services
Changes in Goodwill Balances
Beginning Balance	4,334	4,357
Purchase Price Adjustments		0
Divestitures		(3)
Foreign Currency Translation and Other Adjustments	4	(21)
Ending Balance	4,337	4,334
Global Technology Services
Changes in Goodwill Balances
Beginning Balance	4,129	2,916
Goodwill Additions		1,246
Purchase Price Adjustments		17
Divestitures	(52)
Foreign Currency Translation and Other Adjustments	16	(50)
Ending Balance	4,094	4,129
Software
Changes in Goodwill Balances
Beginning Balance	21,121	20,405
Goodwill Additions	239	987
Purchase Price Adjustments	0	11
Divestitures		(4)
Foreign Currency Translation and Other Adjustments	(170)	(279)
Ending Balance	21,190	21,121
Systems and Technology
Changes in Goodwill Balances
Beginning Balance	1,601	1,568
Goodwill Additions		13
Purchase Price Adjustments		33
Foreign Currency Translation and Other Adjustments	(8)	(14)
Ending Balance	$ 1,593	$ 1,601

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Equity Activity: (Tables)

3 Months Ended

Mar. 31, 2014

Equity Activity:

Schedule of Reclassifications and Taxes Related to items of Other Comprehensive Income

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2014:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(61)	$	10	$	(51)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	0	$	(0)	$	0
		Reclassification of (gains)/losses to other (income) and expense		4		(2)		3
		Subsequent changes in previously impaired securities arising during
		the period		—		—		—
	Total net changes related to available-for-sale securities		$	4	$	(2)	$	3
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	88	$	(33)	$	54
		Reclassification of (gains)/losses to:
		Cost of sales		26		(10)		16
		SG&A expense		2		0		2
		Other (income) and expense		(29)		11		(18)
		Interest expense		0		(0)		0
	Total unrealized gains/(losses) on cash flow hedges		$	87	$	(32)	$	55
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	1	$	(0)	$	0
		Net (losses)/gains arising during the period		32		(11)		21
		Curtailments and settlements		4		(1)		3
		Amortization of prior service (credits)/costs		(29)		10		(20)
		Amortization of net (gains)/losses		649		(214)		434
	Total retirement-related benefit plans		$	656	$	(217)	$	439
Other comprehensive income/(loss)			$	687	$	(241)	$	446
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions)				Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2013:				Amount		Benefit		Amount
Other comprehensive income/(loss):
	Foreign currency translation adjustments		$	(405)	$	(84)	$	(489)
	Net changes related to available-for-sale securities:
		Unrealized gains/(losses) arising during the period	$	(3)	$	1	$	(2)
		Reclassification of (gains)/losses to other (income) and expense		1		(0)		0
		Subsequent changes in previously impaired securities arising during
		the period		1		(0)		1
	Total net changes related to available-for-sale securities		$	(1)	$	0	$	(0)
	Unrealized gains/(losses) on cash flow hedges:
		Unrealized gains/(losses) arising during the period	$	360	$	(128)	$	232
		Reclassification of (gains)/losses to:
		Cost of sales		(9)		3		(6)
		SG&A expense		(10)		3		(7)
		Other (income) and expense		(37)		14		(23)
		Interest expense		0		—		0
	Total unrealized gains/(losses) on cash flow hedges		$	305	$	(108)	$	197
	Retirement-related benefit plans(1):
		Prior service costs/(credits)	$	33	$	(11)	$	22
		Net (losses)/gains arising during the period		(15)		5		(10)
		Curtailments and settlements		—		—		—
		Amortization of prior service (credits)/costs		(30)		10		(20)
		Amortization of net (gains)/losses		886		(293)		594
	Total retirement-related benefit plans		$	875	$	(289)	$	586
Other comprehensive income/(loss)			$	773	$	(480)	$	293
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, "Retirement-Related Benefits,"
for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

Accumulated Other Comprehensive Income/(Loss) (net of tax)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2014		$	(165)	$	332	$	(21,767)	$	(1)	$	(21,602)
Other comprehensive income before
	reclassifications		54		(51)		21		0		24
Amount reclassified from accumulated
	other comprehensive income		1		0		417		3		421
Total change for the period			55		(51)		439		3		446
March 31, 2014		$	(111)	$	281	$	(21,328)	$	2	$	(21,156)
						Net Change		Net Unrealized
		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
		Gains/(Losses)		Currency		Related		on Available-		Other
		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in Millions)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2013		$	(90)	$	1,733	$	(27,406)	$	4	$	(25,759)
Other comprehensive income before
	reclassifications		232		(489)		12		(1)		(245)
Amount reclassified from accumulated
	other comprehensive income		(35)		0		574		0		539
Total change for the period			197		(489)		586		(0)		293
March 31, 2013		$	107	$	1,243	$	(26,820)	$	4	$	(25,466)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Financial Instruments: (Details 5) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	$ 68	[1]	$ (387)	[1]
Gain (loss) recognized in earnings attributable to risk being hedged	(38)	[2]	76	[2]
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	62		579
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	1		56
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0	[3]	0	[3]
Interest rate contracts | Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0		0
Foreign exchange contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	88		360
Foreign exchange contracts | Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	(26)	[4]	219	[4]
Cost of financing | Interest rate contracts | Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income, recognized on derivative instruments in fair value hedges	48	[1]	(20)	[1]
Gain (loss) recognized in earnings attributable to risk being hedged	(23)	[2]	46	[2]
Interest expense | Interest rate contracts | Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income, recognized on derivative instruments in fair value hedges	33	[1]	(13)	[1]
Gain (loss) recognized in earnings attributable to risk being hedged	(15)	[2]	30	[2]
Interest expense | Foreign exchange contracts | Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0	[3],[4]	(1)	[3],[4]
Other (income) and expense | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	29		37
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0	[3]	1	[3]
Other (income) and expense | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	(34)	[1]	(439)	[1]
Cost of sales | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	(26)		9
SG&A expense | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	(2)		10
SG&A expense | Equity contracts | Derivative instruments not designated as hedging instruments
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	$ 21	[1]	$ 85	[1]

[1] The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

[2] The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

[3] The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.

[4] Instruments in net investment hedges include derivative and non-derivative instruments.

XML

Contingencies:

3 Months Ended

Mar. 31, 2014

Contingencies:

Contingencies:

12.Contingencies:As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise. 

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilitiesfor the quarter ended March 31, 2014 were not material to the Consolidated Financial Statements. 

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations. 

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions anddisclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter. 

Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters. 

The following is a summary of the more significant legal matters involving the company. 

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. On August 25, 2009, the U.S. Bankruptcy Court for the District of Delaware approved the appointment of a Trustee of SCO. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. On July 10, 2013, the Court entered an order dismissing seven of SCO's ten claims, specifically its breach of contract and copyright claims, and one tortious interference claim.

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. The State terminated the contract, claiming that IBM was in breach, and the State is seeking damages. IBM believes the State’s claims against it are without merit and is seeking payment of termination amounts specified in the contract. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. This matter remains pending in the Indiana courts.

On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claims $2.5 billion in damages for lost profits. Iusacell’s complaint relates to a contractual dispute in Mexico, which is the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement.

IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK is seeking a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. On April 4, 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. This judgment contemplates a future hearing to determine what remedies are available. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK and are currently stayed.

In a separate but related proceeding, in March 2011, the Trustee of the IBM UK Trust was granted leave to initiate a claim before the High Court in London against IBM UK and one member of the UK Trust membership, seeking an order modifying certain documents and terms relating to retirement provisions in IBM UK’s largest defined benefit plan (the C Plan) dating back to 1983. The trial of these proceedings began in May 2012 and finished in early June. On October 12, 2012, the High Court in London issued its ruling, holding that the 1983 Trust Deeds and Rules should be modified to allow certain categories of current IBM UK employees who are members of the C Plan to retire from the age of 60 (rather than from the age of 63) without actuarial reduction of their defined benefit pension. In a supplementary ruling on December 13, 2012, the Court declined to similarly modify the Trust Deeds and Rules for former employees who were C Plan members and who left the company prior to retirement. On February 7, 2013, the Court issued an order agreed to by all parties, under which there will be no appeals of the October 2012 and December 2012 judgments. As a result of the October 2012 ruling, IBM recorded an additional pre-tax retirement-related obligation of $162 million in the third quarter of 2012.

On March 24, 2014, in a suit brought by local Works Councils, the Supreme Court of Spain held that IBM Spain’s defined contribution (DC) plan implemented in 1993 was null and void, and held that current employees could reinstate their rights to a defined benefit (DB) plan, although with an offset for DC contributions paid to date. The Court held that IBM Spain did not consult with the Works Councils in seeking the voluntary participation of employees in changing the pension scheme, and recommended that IBM Spain and the Works Councils engage in discussions over how to carry out the offset. The ruling is declaratory only and there have been no quantifications of, or suits for, individual remedies. IBM Spain is considering its options for appeal.

In March 2011, the company announced that it had agreed to settle a civil enforcement action with the Securities and Exchange Commission (SEC) relating to alleged violations of the Foreign Corrupt Practices Act of 1977 (FCPA).On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company's global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

In May 2013, IBM learned that the SEC is conducting an investigation into how IBM reports cloud revenue. IBM is cooperating with the SEC in this matter.

In December 2013, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York related to the company’s third-quarter 2013 financial results disclosure. The company, its Chairman, President and Chief Executive Officer, and a former Senior Vice President and Chief Financial Officer of the company are named as defendants. Plaintiffs allege that defendants violated Section 20(a) and Section10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

The company is a defendant in numerous actions filed after January 1, 2008 in the Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and different causes of action, including for negligence and recklessness, private nuisance and trespass. Plaintiffs in these cases seek medical monitoring and claim damages in unspecified amounts for a variety of personal injuries and property damages allegedly arising out of the presence of groundwater contamination and vapor intrusion of groundwater contaminants into certain structures in which plaintiffs reside or resided, or conducted business, allegedly resulting from the release of chemicals into the environment by the company at its former manufacturing and development facility in Endicott. These complaints also seek punitive damages in an unspecified amount.  

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites. 

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters include claims for taxes on the importation of computer software. In November 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this decision. The total potential amount related to the remaining matters for all applicable years is approximately $720 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.