Exhibit 13

Report of Financials

International Business Machines Corporation and Subsidiary Companies

MANAGEMENT DISCUSSION
Overview		22
Forward-Looking and Cautionary Statements		23
Management Discussion Snapshot		23
Description of Business		26
Year in Review		33
Prior Year in Review		53
Other Information		64
Looking Forward		64
Liquidity and Capital Resources		65
Critical Accounting Estimates		68
Currency Rate Fluctuations		71
Market Risk		72
Financing Risks		72
Cybersecurity		73
Employees and Related Workforce		73
Global Financing		73

Report of Management		78

Report of Independent Registered Public Accounting Firm		79

CONSOLIDATED FINANCIAL STATEMENTS
Earnings		80
Comprehensive Income		81
Financial Position		82
Cash Flows		83
Changes in Equity		84


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A	Significant Accounting Policies	86
B	Accounting Changes	96
C	Acquisitions/Divestitures	97
D	Financial Instruments	103
E	Inventories	110
F	Financing Receivables	110
G	Property, Plant and Equipment	113
H	Investments and Sundry Assets	113
I	Intangible Assets Including Goodwill	114
J	Borrowings	115
K	Other Liabilities	118
L	Equity Activity	118
M	Contingencies and Commitments	122
N	Taxes	124
O	Research, Development and Engineering	127
P	Earnings Per Share of Common Stock	127
Q	Rental Expense and Lease Commitments	128
R	Stock-Based Compensation	128
S	Retirement-Related Benefits	131
T	Segment Information	145
U	Subsequent Events	150

Five-Year Comparison of Selected Financial Data		151

Selected Quarterly Data		152

Performance Graph		153

Board of Directors and Senior Leadership		154

Stockholder Information		155

Management Discussion

International Business Machines Corporation and Subsidiary Companies

OVERVIEW

The financial section of the International Business Machines Corporation (IBM or the company) 2014 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.

Organization of Information

· The Management Discussion is designed to provide readers with an overview of the business and a narrative on the company’s financial results and certain factors that may affect its future prospects from the perspective of the company’s management. The “Management Discussion Snapshot,” beginning on page 23, presents an overview of the key performance drivers in 2014.

· Beginning with the “Year in Review” on page 33, the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of the company’s financial position and cash flows. Other key sections within the Management Discussion include: “Looking Forward” on page 64, and “Liquidity and Capital Resources” on page 65.

· Global Financing is a reportable segment that is measured as a stand-alone entity. A separate “Global Financing” section is included in the Management Discussion beginning on page 73.

· The Consolidated Financial Statements are presented on pages 80 through 85. These statements provide an overview of the company’s income and cash flow performance and its financial position.

· The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain the company’s accounting policies (pages 86 through 96), acquisitions and divestitures (pages 97 through 102), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 122 to 124) and retirement-related plans information (pages 131 to 145).

· The Consolidated Financial Statements and the Notes have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).

· In October 2014, the company announced a definitive agreement to divest its Microelectronics business. The assets and liabilities of the Microelectronics business are reported as held for sale at December 31, 2014. The operating results of the Microelectronics business are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion, the Consolidated Financial Statements and the Notes, where applicable, to allow for a meaningful comparison of continuing operations.

· 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 page 71 for additional information.

· Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.

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 from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, retirement-related costs, discontinued operations 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 retirement-related 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.

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 comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The company’s reportable segment financial results reflect operating earnings from continuing operations, consistent with the company’s management and measurement system.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; the company assumes no obligation to update or revise any such statements. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including the company’s 2014 Form 10-K filed on February 24, 2015.

MANAGEMENT DISCUSSION SNAPSHOT

($ and shares in millions except per share amounts)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2014			2013			Change
Revenue	$	92,793		$	98,367		(5.7	)%*
Gross profit margin	50.0		%	49.5		%	0.5	pts.
Total expense and other (income)	$	26,421		$	28,440		(7.1	)%
Total expense and other (income)-to-revenue ratio	28.5		%	28.9		%	(0.4	)pts.
Income from continuing operations before income taxes	$	19,986		$	20,244		(1.3	)%
Provision for income taxes from continuing operations	$	4,234		$	3,363		25.9	%
Income from continuing operations	$	15,751		$	16,881		(6.7	)%
Income from continuing operations margin	17.0		%	17.2		%	(0.2	)pts.
Loss from discontinued operations, net of tax	$	(3,729	)	$	(398	)	NM
Net income	$	12,022		$	16,483		(27.1	)%
Earnings per share from continuing operations:
Assuming dilution	$	15.59		$	15.30		1.9	%
Consolidated earnings per share—assuming dilution	$	11.90		$	14.94		(20.3	)%
Weighted-average shares outstanding
Assuming dilution	1,010.0			1,103.0			(8.4	)%
Assets**	$	117,532		$	126,223		(6.9	)%
Liabilities**	$	105,518		$	103,294		2.2	%
Equity**	$	12,014		$	22,929		(47.6	)%

* (4.0) percent adjusted for currency; (1.5) percent adjusted for divestitures and currency.

** At December 31.

NM—Not meaningful

The following table provides the company’s operating (non-GAAP) earnings for 2014 and 2013.

($ in millions except per share amounts)

							Yr.-to-Yr.
							Percent
For the year ended December 31:	2014			2013			Change
Net income as reported	$	12,022		$	16,483		(27.1	)%
Loss from discontinued operations, net of tax	(3,729		)	(398		)	NM
Income from continuing operations	$	15,751		$	16,881		(6.7	)%
Non-operating adjustments (net of tax):
Acquisition-related charges	670			747			(10.3	)
Non-operating retirement-related costs/(income)	280			729			(61.5	)
Operating (non-GAAP) earnings*	$	16,702		$	18,356		(9.0	)%
Diluted operating (non-GAAP) earnings per share	$	16.53		$	16.64		(0.7	)%

* See pages 45 and 46 for a more detailed reconciliation of net income to operating earnings.

NM—Not meaningful

In 2014, the company reported $92.8 billion in revenue, and delivered $20.0 billion in pre-tax income and diluted earnings per share from continuing operations of $15.59 as reported and $16.53 on an operating (non-GAAP) basis. The results of continuing operations exclude a net loss from discontinued operations of $3.7 billion in 2014 and $0.4 billion in 2013 related to the expected divestiture of the Microelectronics business. On a consolidated basis, net income in 2014 was $12.0 billion, with diluted earnings per share of $11.90. The company generated $16.9 billion in cash from operations and $12.4 billion in free cash flow in 2014 enabling shareholder returns of $17.9 billion in gross common stock repurchases and dividends.

Total consolidated revenue decreased 5.7 percent as reported and 1 percent adjusted for divestitures (3 points) and currency (2 points) in 2014 versus 2013. In 2014, the company divested its industry standard server and customer care businesses. The company’s strategy is focused on leading in the areas with the most value in enterprise information technology (IT), and in 2014 the company made tremendous progress in repositioning its portfolio and making investments to shift into these areas.

The company’s portfolio includes: strategic imperatives for growth, recurring core franchises and high value transactional businesses. These areas of the portfolio span across all of the company’s business segments. Each area of the portfolio has different business model characteristics and objectives. The company’s results in 2014 reflected these characteristics.

First, the company has a set of strategic imperatives for growth that are focused on the market shifts in data, cloud and engagement. The model for these combined strategic imperatives is to deliver double-digit revenue growth, with high contribution from Software, which drives a more profitable business mix. In 2014, revenue from cloud, analytics, mobile, social and security solutions

combined increased 16 percent with double-digit growth in each quarter. In total, the strategic imperatives generated $25 billion in revenue, which represented approximately 27 percent of total revenue. Business analytics revenue of $17 billion increased 7 percent year to year with growth led by the consulting business as the company helps clients extract value from their data. Cloud revenue of $7 billion was up 60 percent year to year as client demand grows for higher-value cloud solutions across public, private and hybrid clouds. Cloud delivered as a service revenue increased approximately 75 percent to $3 billion in 2014, and exited the year with an annual run rate of $3.5 billion. Cloud revenue also includes the company’s foundational offerings where it provides software, hardware and services to clients to build private clouds. In engagement, the mobile business more than tripled year to year with strong growth in MobileFirst driven by the integrated portfolio of offerings. In addition, Social was up 3 percent and Security increased 19 percent year to year.

The company is continuing to shift its investments and resources to the strategic imperatives and solutions that address clients’ most critical needs. During 2014, the company spent approximately 6 percent of revenue in research and development and invested approximately $4 billion on capital investments— supporting actions in a number of areas that will yield financial benefits in the future. For example:

· Launched Bluemix, the company’s cloud platform-as-a-service for the enterprise.

· Investing to globally expand the SoftLayer cloud datacenters.

· Investing to bring Watson’s capabilities to the enterprise and building a partner ecosystem, effectively creating a market for cognitive computing.

· Introduced cloud application innovations around Watson Analytics and Verse.

· Launched POWER8, and building the OpenPOWER consortium.

· Formed a partnership with Apple for enterprise mobility, with Twitter for big data, and with SAP and Tencent for cloud.

The recurring core franchises include the annuity businesses, and the highly recurring portions of the transactions business, such as mainframe revenue from the largest clients. This content has annuity characteristics, and in many cases, it supports mission critical processes for clients. The model for these combined businesses is to have stable revenue, with improving margins. In 2014, revenue was down approximately 3 percent with a modest decline in margin. The decline was driven by the mainframe product cycle and currency.

The company’s high-value transactional businesses include project-based work in services, transactional software, Power Systems and Storage—in areas other than the strategic imperatives. The objective for these businesses is to optimize the business model and maintain margins. In 2014, revenue declined year to year, with gross margins over 40 percent. Performance reflected the secular challenges faced in some parts of the hardware business as the company works through the transitions resulting from the actions taken to reposition the hardware business for high value.

In 2014, the company divested businesses that no longer fit its strategic profile—industry standard servers, customer care business process outsourcing services and the announced divestiture of the Microelectronics business. These three businesses generated approximately $7 billion of revenue when reported in 2013, but had a pre-tax loss of approximately $500 million. The divestitures reduce revenue but improve the company’s profit profile, consistent with the shift to higher value.

From a segment perspective, Global Services revenue declined 3.5 percent as reported, but increased 1 percent adjusted for the divestitures (2 points) and currency (2 points). Global Technology Services (GTS) declined 3.7 percent as reported, but increased 2 percent adjusted for the divestitures (3 points) and currency (3 points) with growth in Outsourcing and Integrated Technology Services. Global Business Services revenue decreased 3.1 percent (1 percent adjusted for currency) with Application Outsourcing revenue down 8 percent (6 percent adjusted for currency). Software revenue declined 1.9 percent (1 percent adjusted for currency). Total middleware revenue was flat as reported, but increased 1 percent at constant currency. Systems and Technology revenue decreased 23.0 percent as reported and 17 percent adjusted for the divested industry standard server business (5 points) and currency (1 point). Performance reflected the impact of the System z product cycle as well as declines in Power Systems and Storage. In 2014, the company took significant actions to reposition the Systems and Technology business for higher value, and reinforced its commitment to driving innovation in high-end systems and storage.

From a geographic perspective, revenue in the major markets declined 4.3 percent as reported and 1 percent adjusted for the divestitures (2 points) and currency (1 point). Growth markets revenue decreased 9.9 percent as reported and 3 percent adjusted for the divestitures (3 points) and currency (4 points) compared to the prior year. Within the growth markets, the BRIC countries (Brazil, Russia, India and China) decreased 10.7 percent as reported and 5 percent adjusted for divestitures (3 points) and currency (3 points).

The consolidated gross profit margin of 50.0 percent improved 0.5 points year to year. The operating (non-GAAP) gross margin of 50.6 percent increased 0.1 points compared to the prior year primarily driven by an improved mix toward Software.

Total expense and other (income) decreased 7.1 percent in 2014 versus the prior year. Total operating (non-GAAP) expense and other (income) decreased 6.3 percent compared to the prior year.

The year-to-year drivers were approximately:

	Total	Operating
	Consolidated	(non-GAAP)
· Currency*	(1) point	(1) point
· Acquisitions**	2 points	2 points
· Base expense	(8) 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.

The reported base expense reflects not only the ongoing run rate of the business, but also the impact of divestitures and workforce rebalancing charges. The company recorded pre-tax gains of $1.6 billion in 2014 related to the divestitures of the industry standard server ($1.4 billion) and customer care ($0.2 billion) businesses. Workforce rebalancing charges in 2014 were $1.5 billion, an increase of $0.4 billion year to year. Excluding the gains from the divested businesses and the impact of workforce rebalancing charges, operating (non-GAAP) base expense decreased 3 points year to year versus the 7 point as reported decrease. Within base expense, the company is continuing to shift resources and spending to areas with the most opportunity—including Watson, SoftLayer, Bluemix and support of strategic partnerships, including the Apple partnership.

Pre-tax income from continuing operations decreased 1.3 percent and the pre-tax margin was 21.5 percent, an increase of 1.0 points versus 2013. The continuing operations effective tax rate for 2014 was 21.2 percent, an increase of 4.6 points versus the prior year primarily driven by benefits in the 2013 rate associated with discrete items. Income from continuing operations of $15.8 billion decreased 6.7 percent and the net income margin was 17.0 percent, a decrease of 0.2 points versus 2013. Losses from discontinued operations, net of tax, were $3.7 billion in 2014 compared to $0.4 billion 2013. Net income of $12.0 billion decreased $4.5 billion year to year. Operating (non-GAAP) pre-tax income from continuing operations decreased 4.4 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations improved 0.3 points to 22.8 percent versus the prior year. Operating (non-GAAP) income from continuing operations of $16.7 billion decreased 9.0 percent and the operating (non-GAAP) income margin from continuing operations of 18.0 percent decreased 0.7 points. The operating (non-GAAP) effective tax rate from continuing operations in 2014 was 21.0 percent versus 17.0 percent in 2013.

Diluted earnings per share from continuing operations of $15.59 increased 1.9 percent year to year reflecting the benefits of the common stock repurchase program. In 2014, the company repurchased 71.5 million shares of its common stock. Operating (non-GAAP) diluted earnings per share of $16.53 decreased 0.7 percent versus the prior year driven primarily by the impacts of decreased revenue and the higher tax rate, partially offset by the impact of share repurchases. Diluted earnings per share from discontinued operations was ($3.69) in 2014 compared to ($0.36) in 2013.

At December 31, 2014, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end was $8.5 billion, a decrease of $2.6 billion from December 31, 2013. Key drivers in the balance sheet and total cash flows were:

Total assets decreased $8.7 billion ($2.7 billion adjusted for currency) from December 31, 2013 driven by:

· Decreases in prepaid pension assets ($3.4 billion), property, plant and equipment ($3.1 billion) driven primarily by the expected divestiture of the Microelectronics business ($2.4 billion), cash and cash equivalents ($2.2 billion) and total receivables ($1.7 billion); partially offset by

· Increased deferred taxes ($2.2 billion).

Total liabilities increased $2.2 billion ($7.0 billion adjusted for currency) from December 31, 2013 driven by:

· Increases in pension liabilities ($2.0 billion) and total debt ($1.1 billion).

Total equity of $12.0 billion decreased $10.9 billion from December 31, 2013 as a result of:

· Increased treasury stock ($13.5 billion) primarily from share repurchases, and increased losses in accumulated other comprehensive income/(loss) ($6.3 billion), driven primarily by the year-end remeasurement of the retirement-related liabilities; partially offset by

· Higher retained earnings ($7.8 billion) and higher common stock ($1.1 billion).

The company generated $16.9 billion in cash flow provided by operating activities, a decrease of $0.6 billion when compared to 2013, driven primarily by a higher level of cash tax payments ($1.7 billion). Net cash used in investing activities of $3.0 billion was $4.3 billion lower than 2013, primarily due to a decrease in cash used for acquisitions ($2.4 billion) and an increase in cash provided from divestitures ($2.1 billion). Net cash used in financing activities of $15.5 billion increased $5.6 billion compared to the prior year, driven primarily by lower net cash proceeds from total debt ($5.2 billion).

In 2014, the company made significant progress in its continuing transformation, investing to position the business for the longer term. In January 2015, the company disclosed that it is expecting GAAP earnings in the range of $14.35 to $15.10 and operating (non-GAAP) earnings between $15.75 and $16.50 per diluted share from continuing operations for 2015. The company also stated that it expects free cash flow in 2015 to be relatively flat compared to 2014.

For the first quarter of 2015, the company expects mid single-digit earnings per share growth from continuing operations, primarily driven by the large workforce rebalancing charge that was recorded in the first quarter of 2014.

DESCRIPTION OF BUSINESS

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 24, 2015 for a more detailed version of this Description of Business, especially Item 1A. entitled “Risk Factors.”

The company creates value for clients through integrated solutions and products that leverage: data, information technology, deep expertise in industries and business processes, and a broad ecosystem of partners and alliances. IBM solutions typically create value by enabling new capabilities for clients that transform their businesses and help them engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of consulting and IT implementation services, cloud and cognitive offerings, and enterprise systems and software; all bolstered by one of the world’s leading research organizations.

Strategy

In a time of unprecedented technological change, IBM’s strategy remains one of innovation and a constant drive to deliver higher value for our clients.

Key tenets of the company’s strategy include:

1. Our strategic imperatives: Data, cloud and engagement are fundamentally transforming the IT industry, the company and our clients’ businesses. The tremendous growth of data is redefining today’s competitive advantage. With data as the world’s new “natural resource,” it is fundamentally transforming industries and professions. Yet as with all natural resources, only by refining data into actionable insights through analytics does it become valuable to the customer’s business. Cloud computing—the delivery of IT and business processes as digital services—offers opportunities for enterprises to reinvent not just their operations, but their entire business model and approaches to innovation. Engagement, including mobile and social technologies, is profoundly changing how people interact and the way work gets done. Finally, these transformations are all supported and protected by high levels of security to ensure privacy and integrity of action. These three imperatives—data, cloud and engagement—are the foundation of IBM’s strategy today and its vision for the future.

2. Our unique strength: Our ability to connect new technologies with the systems currently running today’s enterprises is a key value-added service and market differentiator for IBM. Clients today want more than just adopting new technologies—they want IBM to fuse new solutions with their existing systems. This “bringing together” is what the company calls Hybrid Cloud, and IBM is uniquely able to bring this value to its clients.

3. Our migration to higher levels of business value: Clients look to IBM to solve their business challenges and opportunities rather than just providing technology. Our evolution over decades—from hardware to software and services, and increasingly to full-fledged business solutions—reflects this critical shift in meeting client needs. IBM brings together the full breadth of its integrated offerings and industry expertise to be essential to its clients and deliver higher value.

1. Our Strategic Imperatives

Data: transforming industries and professions

Fueled by the proliferation of mobile devices, social media and the infusion of technology into virtually all aspects of business, data is the world’s new natural resource. Without powerful analytics, however, it is just data.

Across all industries, enterprises are working hard to harvest new insights from the explosion of available data—the new basis for today’s competitive advantage. The advantage for enterprises increases as they apply more sophisticated approaches to refining their data, turning them into insights that are actionable and add value. The advent of cognitive computing, which mirrors the same cognitive process that people use every day to understand the world around them, is profoundly redefining the relationship between humans and information. Cognitive systems learn, navigate the language and protocols of expert communities, and communicate in natural language.

IBM has invested more than $26 billion, including over $17 billion on more than 30 acquisitions, to build its capabilities in big data and analytics. One third of IBM Research’s spending is focused on data, analytics and cognitive computing.

In 2014, IBM reported nearly $17 billion in business analytics revenue, and the company established the Watson Group to develop and commercialize cognitive computing innovations. The company has committed a $1 billion investment to Watson, including $100 million dedicated to venture investments to support start-ups building cognitive apps through the Watson Developer Zone on Bluemix. The company is also making Watson more widely available through the Watson Ecosystem, which has grown to more than 160 partners with nearly 4,000 future partners seeking to build a new generation of cognitive apps. IBM also launched Watson Analytics, a breakthrough natural language-based cognitive service that provides instant access to powerful predictive and visual analytic tools for businesses. Through Watson Analytics, IBM is extending analytics to the end user, not just the data scientist. IBM’s goal is to give every business professional access to advanced cognitive-powered predictive analytics, coupled with new forms of data.

In addition in 2014, the company made bold moves by establishing key alliances. In the data space, the company announced a ground-breaking partnership with Twitter to incorporate Twitter’s massive data streams into IBM’s cloud-based analytics, customer engagement platforms and consulting services. Enterprises will now be able to understand customer sentiment more deeply and anticipate sudden shifts in moods and markets by tapping into the Twitter data in powerful new ways. This capability will also allow clients to integrate Twitter data into their own cloud services and mobile apps.

Cloud: reinventing IT

Cloud is at the heart of the digital revolution. No enterprise is untouched by this revolution and the shifts are occurring rapidly.

Enterprises are benefitting from cloud by using it to transform their IT and business processes into digital services. Much has been written about how cloud enables the sharing of infrastructure—this is true. However the real promise of cloud is much more profound. By forcing greater levels of standards up and down the technology value chain, new products and services, and even entire business models, are able to be created in weeks rather than months or years.

Cloud is a catalyst for innovation. IBM has invested more than $8 billion to acquire 18 companies related to cloud, and is investing more than $1 billion to expand its global footprint to 40 datacenters worldwide. IBM now has more than 120 software-as-a-service (SaaS) offerings, and IBM Cloud supports 24 of the top 25 Fortune 500 companies, driving $7 billion of revenue for cloud-based solutions in 2014.

· SoftLayer is the foundation for IBM’s expansive infrastructure-as-a-service portfolio. It offers bare metal, private cloud and virtual server instances, which means it can cover many different workloads with unprecedented performance. SoftLayer offers a built-in private network which can handle huge capacity and gives users the ability to isolate public/private networks with controls for access and location of data.

· Bluemix is IBM’s platform-as-a-service, built on the open standards foundation of Cloud Foundry and powered by SoftLayer’s cloud infrastructure. SoftLayer offers cloud-based services, APIs and leading third-party services to developers in an integrated platform. Bluemix also allows them to mix and match different tools to build apps in the cloud for mobile, Web, big data and analytics—to name just a few.

· IBM Cloud marketplace brings together the company’s vast portfolio of cloud capabilities, delivering a self-service, digital experience for developers, IT and business leaders. Visitors have access to a growing portfolio of cloud capabilities from IBM and qualified third-party vendors. Open integration including pre-built APIs and hybrid options enable enterprise integration and composable business models.

The IBM Cloud is the most powerful choice for enterprise-grade environments—bringing unparalleled levels of security, performance and scalability. As a result, in 2014, IBM formed a strategic alliance with SAP to run its business applications on IBM’s cloud.

Engagement: re-imagining work

Social, mobile and unprecedented access to data are changing how individuals and institutions work together. A new class of customer has emerged: one who is empowered with knowledge, enriched by networks and expects value in return for sharing information. Enterprises must create a systematic approach to engage these newly empowered customers through more personalized interactions. IBM calls these new forms of interactions “engagement”—and includes social collaboration and mobile—both underpinned by high levels of security.

In 2014, the mobile, social and security portfolio generated double-digit growth with mobile revenue more than tripling versus 2013, security revenue up 19 percent and social business growing 3 percent. In addition, IBM has acquired 23 companies related to mobile, social and security.

On the mobile front, IBM and Apple formed an historic partnership to transform enterprise mobility as we know it today. Together, IBM and Apple are joining forces to bring the ease-of-use of personal apps to the enterprise environment. Together, the two companies are bringing the first wave of industry-specific apps to the market—targeting the needs of individual workers and helping to solve long-standing industry challenges.

In addition, MobileFirst remains IBM’s unified approach to help clients and partners deliver best-in-class mobile solutions, take advantage of more commercial opportunities and provide a superior customer experience.

On the social collaboration front, in 2014, IDC named IBM the worldwide market share leader in Enterprise Social Software for the fifth consecutive year.(1) In addition, IBM Verse, powered by IBM analytics and advanced search, is a new cloud-based messaging and social collaboration solution to manage the workday. It provides a seamless user experience across social networking, meetings, chat, documents, mail, and an array of intelligent, security-rich and engaging social apps on mobile devices or the Web.

Security is a boardroom-level issue. It is also a key enabler for the continued growth of data, cloud and engagement. Enterprises—and their clients—demand that these activities be secure as a requirement for participation.

The magnitude, sophistication and complexity of today’s security threats are growing. With the proliferation of data on mobile devices, in social media and in the cloud, breaches are more visible and occur on a heightened scale. IBM Security solutions use sophisticated analytics to identify and thwart attacks in realtime—protecting our clients’ information, processes and people.

IBM Security brings to our clients high-end consulting, advanced fraud and threat protection, identity and access management, application and data security, mobile and cloud security, network and end-point protection with services for cloud.

(1) IDC Worldwide Enterprise Social Networks 2014—2018 Forecast and 2013 Vendor Shares, July 23, 2014.

2. Our Unique Strength

Data, cloud and engagement are powerful forces changing the landscape of technology and businesses. However, enterprise clients need more. Enterprises need to bring this new world of technology together with the existing systems that currently run their businesses if they are to capture their full value. This combination is what we refer to as Hybrid Cloud.

Without bringing these worlds together, these new technologies become “islands” within the enterprise. For example, a business that invests in a social media platform engages with and captures the sentiment of individual customers. These can be valuable interactions. However, much deeper insight into the needs and wants of an individual customer comes when combining the social media interactions with the historical purchase and engagement records of that customer—as stored in existing systems. By combining these insights, the enterprise personalizes interactions in ways that are relevant and meaningful to that customer.

IBM is unique in bringing this Hybrid world to its clients with our unparalleled strength in both the existing and the new worlds of IT.

IBM supports its clients’ mission critical processes, and remains the “go-to” platform for the enterprise. For example, more than 90 percent of the top 100 banks and the top 25 U.S. retailers run on IBM systems. In addition, nearly half of the Fortune 100 companies outsource IT operations to IBM. The company’s leadership in enterprise computing provides the foundation for strategic partnerships as leading companies want to work with IBM as evidenced by the Apple, SAP, Twitter and Tencent partnerships announced in 2014.

Combine this with the company’s strength in the new worlds of data, cloud and engagement—and IBM brings a unique and important capability to the market.

3. Our Migration to Higher Value

Technology by itself does not create value for a business. Technology enables a business to achieve its aspirations by facilitating richer interactions with clients and ecosystems, by unlocking deeper insight and by enabling faster actions.

IBM has continuously evolved its mission to deliver increasingly higher levels of business value to its clients. Starting primarily as a hardware company, IBM has added a rich portfolio of software and services to add higher value.

This next phase of IBM’s transformation will realize the full breadth of the portfolio by bringing higher-value added solutions to our clients. Examples include:

· Using predictive analytics to reduce customer attrition rates through the IBM Customer Data solution.

· Detecting fraudulent claims before payments are made through the IBM Counter Fraud solution.

· Preventing costly and unscheduled downtime of equipment through early detection of anomalies with the IBM Predictive Asset Optimization solution.

The focus on integrated solutions will make IBM a stronger partner with its clients as the company takes another step in its continuous evolution to higher levels of value.

Summary

One constant throughout IBM’s over 100-year history has been the need to continually transform the company in an ever-changing industry. Our industry, our clients—and IBM itself—is in the midst of such a fundamental transformation.

This is a transformation of unparalleled growth and promise:

· The promise of technology to bring extraordinary levels of insight to human endeavors through advances in analytics and cognitive computing.

· The promise of the cloud as a catalyst for innovation, freeing enterprises to focus more on the uses of technology rather than just the technology itself.

· The promise of enterprises engaging with their customers, their employees and their business partners through richer, more personalized means.

· All underscored by security to help protect the integrity of every interaction.

We are excited about the prospects for growth and value for our clients—and for IBM—and we look forward to helping our clients transform their businesses for the future.

Business Model

The company’s business model is built to support two principal goals: helping enterprise clients to become more innovative, efficient and competitive through the application of business insight and IT solutions; and providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have superior long-term growth and profitability prospects based on the value they deliver to clients.

The company’s global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide integrated solutions to the company’s clients.

The business model is dynamic, adapting to the continuously changing market and economic environment. The company continues to divest certain businesses and strengthen its position through strategic organic investments and acquisitions in higher-value areas. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and expanding participation in markets with significant long-term opportunity.

This business model, supported by the company’s financial model, has enabled the company to deliver strong earnings, cash flows and returns to shareholders over the long term.

Business Segments and Capabilities

The company’s major operations consists of five business segments: Global Technology Services and Global Business Services, which the company collectively calls Global Services, Software, Systems and Technology and Global Financing.

Global Services: is a critical component of the company’s strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and systems, other suppliers’ products are also used if a client solution requires it. Approximately 60 percent of external Global Services segment revenue is annuity based, coming primarily from outsourcing and maintenance arrangements. The Global Services backlog provides a solid revenue base entering each year. Within Global Services, there are two reportable segments: Global Technology Services and Global Business Services.

Global Technology Services (GTS) primarily provides IT infrastructure and business process services, creating business value for clients through unique technology and IP integrated services within its global delivery model. By leveraging insights and experience drawn from IBM’s global scale, skills and technology, with applied innovation from IBM Research, clients gain access to leading-edge, high-quality services with improved productivity, flexibility, cost and outcomes.

GTS Capabilities

Strategic Outsourcing: delivers comprehensive IT outsourcing services dedicated to transforming clients’ existing infrastructures to consistently deliver improved quality, flexibility, risk management and financial value. The company integrates long-standing expertise in service management and technology with the ability to exploit the power of new technologies from IBM systems and software, such as cloud computing, analytics and virtualization, to deliver high performance, innovation and improved ability to achieve business objectives.

Global Process Services: included within Strategic Outsourcing, delivers a range of offerings consisting of standardized through transformational solutions including processing platforms and business process outsourcing. These services deliver improved business results to clients through the strategic change and/or operation of the client’s business processes, applications and infrastructure. Global Process Services will be integrated within Global Business Services beginning in 2015.

Integrated Technology Services: delivers a portfolio of project-based and managed services that enable clients to transform and optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs. The standardized portfolio is built around key assets and patented software, and incorporates best practices and proven methodologies that ensure predictive quality of delivery, security and compliance.

Cloud: delivers a comprehensive set of cloud services ranging from assisting clients with building their own private clouds, to building customized dedicated managed clouds, to allowing clients to leverage standardized cloud infrastructure services from the SoftLayer and Cloud Managed Services offerings, to creating hybrid environments linking their private and public workloads together. This portfolio of cloud offerings spans across the GTS business lines.

Technology Support Services (Maintenance Services): delivers a complete line of support services from product maintenance through solution support to maintain and improve the availability of clients’ IT infrastructures.

Global Business Services (GBS) has the mission to deliver predictable business outcomes to the company’s clients across two primary business areas: Consulting and Systems Integration and Application Management Services. These professional services deliver business value and innovation to clients through solutions which leverage industry and business process expertise. The role of GBS is to drive initiatives that integrate IBM content and solutions and drive the progress of the company’s strategic imperatives. As clients transform themselves in response to market trends like big data, social and mobile computing, GBS helps clients use these technologies to reinvent relationships with their customers and realize new standards of efficacy and efficiency in the internal processes, data and applications that they use to run their businesses.

GBS Capabilities

Consulting and Systems Integration: delivering client value with solutions in Strategy and Transformation, Application Innovation Services, Enterprise Applications and Smarter Analytics. Consulting is also focused on bringing to market client solutions that drive Smarter Commerce, Cloud, Mobile and Social Business.

Application Management Services: delivers application management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through advanced capabilities in areas such as application testing and modernization, cloud application services, the company’s highly differentiated globally integrated capability model, industry knowledge and the standardization and automation of application management.

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform to improve their business results, solve critical problems and gain competitive advantage within their industries. IBM middleware is designed on open standards, making it easier to integrate disparate business applications, developed by different methods and implemented at different times. Operating systems are the software engines that run computers. Approximately 70 percent of external Software segment revenue is annuity based, coming from recurring license charges, software sold “as a service” and ongoing post-contract support. The remaining revenue relates to one-time charge (OTC) arrangements in which clients pay one, up-front payment for a perpetual license. Typically, the sale of OTC software includes one year of post-contract support. Clients can also purchase ongoing post-contract support after the first year, which includes unspecified product upgrades and technical support.

Software Capabilities

WebSphere: delivers capabilities that enable organizations to run high-performance business applications. With these applications, clients can integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions. Built on services-oriented architecture (SOA), and open standards support for cloud, mobile and social interactions, the WebSphere platform enables enterprises to extend their reach and optimize interactions with their key constituents. Smarter Commerce software helps companies better manage and improve each step of their value chain and capitalize on opportunities for profitable growth, efficiency and increased customer loyalty.

Information Management: enables clients to integrate, manage and analyze enormous amounts of data from a large variety of sources in order to gain competitive advantage and improve their business outcomes. With this approach, clients can extract real value out of their data and use it to make better business decisions. IBM’s middleware and integrated solutions include advanced database management, information integration, data governance, enterprise content management, data warehousing, business analytics and intelligence, predictive analytics and big data analytics.

Watson Solutions: the first commercially available cognitive computing platform that has the ability to interact in natural language, processing vast amounts of big data, and learning from its interactions with people and computers. As an advisor, Watson is able to sift through and understand large amounts of data delivering insights with unprecedented speeds and accuracy.

Tivoli: helps clients optimize the value they get from their infrastructures and technology assets through greater visibility, control and automation across their end-to-end business operations. These asset management solutions foster integrated service delivery for cloud and datacenter management, enterprise endpoint and mobile device management, asset and facilities management, and storage management. Tivoli includes security systems software that provides clients with a single security intelligence platform that enables them to better secure all aspects of their enterprise and prevent security breaches.

Workforce Solutions: enables businesses to connect people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software. By remaining at the forefront of collaboration tools, IBM’s social business offerings help organizations reap real benefits associated with social networking, as well as create a more efficient and effective workforce.

Rational: supports software development for both IT and complex embedded system solutions, with a portfolio of products and solutions supporting DevOps and Smarter Product Development, transforming the way lines of business, development and operations work together to deliver innovation via software.

Mobile: spans middleware and offers customers true end-to-end mobile solutions across platform and application development, mobile security, and mobile device management. Leveraging powerful analytics and usage data, customers are provided with the ability to have more compelling interactions with their clients and workforce, increasing touchpoints and deepening relationships. The mobile offerings provide the ability to increase workforce productivity through enhanced collaboration, improved knowledge sharing and increased response speed.

In January 2015, the company made several changes designed to more effectively align its key capabilities and resources to its strategic imperatives. These changes will enable the company to respond more quickly to critical client agendas and drive higher value. Across Software, the company is transitioning its portfolio to capture growth and continue to drive innovation. The focus will be centered around analytics, security, and commerce—similar to the action the company implemented in 2014 with Watson—utilizing its software assets to improve speed and agility in bringing integrated solutions to its clients.

Systems and Technology (STG) provides clients with innovative infrastructure technologies to help meet the new requirements of data, cloud and engagement—from deploying advanced analytics, to moving to digital service delivery with the cloud, and securing mobile transaction processing. Approximately half of Systems and Technology’s server and storage sales transactions are through the company’s business partners; with the balance direct to end-user clients. In addition, Systems and Technology provides leading semiconductor technology, products and packaging solutions for IBM’s own advanced technology needs.

Systems and Technology Capabilities

Servers: a range of high-performance systems designed to address capacity, security, speed and compute power needs for businesses, organizations and technical computing applications. After the divestiture of the System x industry standard server business, the portfolio includes System z, a trusted enterprise platform for integrating data, transactions and insight, and Power Systems, a system designed from the ground up for big data, optimized for scale-out cloud and Linux, and delivering open innovation with OpenPOWER. The company is also a founding member of the OpenPOWER foundation, a group of industry-leading companies working together to develop high-performance compute solutions based on the IBM POWER architecture.

Storage: data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information. These solutions address critical client requirements for information retention and archiving, security, compliance and storage optimization including data deduplication, availability and virtualization. The portfolio consists of a broad range of software defined storage solutions, disk and tape storage systems and Flash storage and solutions.

Technology: the company’s continued leadership in systems requires ongoing investments in semiconductor and material science research and development that drives innovation that matters for our clients. In 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations. This transaction is expected to close in 2015.

Global Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise. The financing arrangements are predominantly for products or services that are critical to the end users’ business operations. These financing contracts are entered into after a comprehensive credit evaluation and are secured by legal contracts. As a captive financier, Global Financing has the benefit of both deep knowledge of its client base and a clear insight into the products and services financed. These factors allow the business to effectively manage two of the major risks, credit and residual value, associated with financing while generating strong returns on equity. Global Financing also maintains a long term partnership with the companies’ clients through various stages of IT asset life cycle – from initial purchase and technology upgrades to asset disposition decisions.

Global Financing Capabilities

Client Financing: lease and loan financing to end users and internal clients for terms up to seven years. Assets financed are primarily it products and services where the company has expertise. Internal financing is predominantly in support of Global Services’ long-term client service contracts. Global Financing also factors a selected portion of the company’s accounts receivable, primarily for cash management purposes. All internal financing arrangements are at arm’s-length rates and are based upon market conditions.

Commercial Financing: short-term inventory and accounts receivable financing to dealers and remarketers of IBM and OEM products.

Remanufacturing and Remarketing: used equipment is returned from lease transactions, or may be surplus equipment internally or externally purchased. These assets may be refurbished or upgraded and sold or leased to new or existing clients both externally or internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold internally to Systems and Technology and Global Services. Systems and Technology may also sell the equipment that it purchases from Global Financing to external clients.

IBM Worldwide Organizations

The following worldwide organizations play key roles in IBM’s delivery of value to its clients:

· Sales and Distribution

· Research, Development and Intellectual Property

· Integrated Supply Chain

Sales and Distribution

IBM has a significant global presence, operating in more than 175 countries, with an increasingly broad-based geographic distribution of revenue. The company’s Sales and Distribution organization manages the IBM global footprint, with dedicated country-based operating units focused on delivering unique value and superior experiences for clients. Within these units, client relationship professionals work with integrated teams of consultants, product specialists and delivery fulfillment teams to enable clients’ business growth and innovation. These teams deliver value by understanding the clients’ businesses and needs, and then bring together capabilities from across IBM and an extensive network of Business Partners to develop and implement solutions.

By combining global expertise with local experience, IBM’s geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry-skilled resources to serve clients’ agendas. IBM extends capabilities to mid-market client segments by leveraging industry skills with marketing, Inside Sales and local Business Partner resources.

The company continues to invest to capture the long-term opportunity in key growth markets around the world—China, India and countries within Southeast Asia, Eastern Europe, the Middle East, Africa and Latin America. The company’s major markets include the G7 countries of Canada, France, Germany, Italy, Japan, the United States (U.S.) and the United Kingdom (UK) plus Austria, the Bahamas, Belgium, the Caribbean region, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

Research, Development and Intellectual Property

IBM’s research and development (R&D) operations differentiate the company from its competitors. IBM annually invests approximately 6 percent of total revenue for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and the company’s business units through global labs on near-term and mid-term innovations. It contributes many new technologies to IBM’s portfolio every year and helps clients address their most difficult challenges. IBM Research also explores the boundaries of science and technology—from nanotechnology to future systems, big data analytics, secure clouds and to IBM Watson, a “cognitive” learning system.

IBM Research also focuses on differentiating IBM’s services businesses, providing new capabilities and solutions. It has the world’s largest mathematics department of any public company, enabling IBM to create unique analytic solutions and actively engage with clients on their toughest challenges.

In February 2015, the company announced a new IBM Research lab to be located in South Africa. This will be IBM Research’s 13th global lab.

YEAR IN REVIEW

Results of Continuing Operations

Segment Details

The following is an analysis of the 2014 versus 2013 reportable segment results. The table below presents each reportable segment’s external revenue and gross margin results. Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items; see note T, “Segment Information,” on pages 145 to 150 for additional information.

($ in millions)

							Yr.-to-Yr.		Yr.-to-Yr.
							Percent/		Percent Change
							Margin		Adjusted for
For the year ended December 31:	2014			2013			Change		Currency
Revenue
Global Technology Services	$	37,130		$	38,551		(3.7	)%	1.6	%*
Gross margin	38.3		%	38.1		%	0.2	pts.
Global Business Services	17,825			18,396			(3.1	)%	(1.1	)%
Gross margin	30.8		%	30.9		%	0.0	pts.
Software	25,434			25,932			(1.9	)%	(0.9	)%
Gross margin	88.6		%	88.8		%	(0.2	)pts.
Systems and Technology	9,996			12,988			(23.0	)%	(16.8	)%*
Gross margin	39.5		%	40.8		%	(1.3	)pts.
Global Financing	2,034			2,022			0.6	%	3.0	%
Gross margin	49.4		%	45.6		%	3.7	pts.
Other	374			478			(21.7	)%	(20.4	)%
Gross margin	(215.0		)%	(195.6		)%	(19.4	)pts.
Total consolidated revenue	$	92,793		$	98,367		(5.7	)%	(1.5	)%*

Total consolidated gross profit	$	46,407		$	48,684		(4.7	)%
Total consolidated gross margin	50.0		%	49.5		%	0.5	pts.
Non-operating adjustments
Amortization of acquired intangible assets	416			388			7.2	%
Acquisition-related charges	—			5			(100.0	)%
Retirement-related costs/(income)	173			629			(72.4	)%
Operating (non-GAAP) gross profit	$	46,996		$	49,706		(5.5	)%
Operating (non-GAAP) gross margin	50.6		%	50.5		%	0.1	pts.

* Adjusted for divestitures and currency.

Global Services

In 2014, the Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS), delivered revenue of $54,954 million, a decrease of 3.5 percent as reported, but an increase of 1 percent adjusted for the divestitures of the customer care and industry standard server businesses (2 points) and currency (2 points). Pre-tax income decreased 8.4 percent and the pre-tax margin decreased 0.8 points to 16.5 percent. Total outsourcing revenue of $24,520 million decreased 6.3 percent as reported, but was flat year to year when adjusted for currency (2 points) and the divestitures (4 points). Total transactional revenue of $23,581 million decreased 0.4 percent, but increased 2 percent adjusted for currency.

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
For the year ended December 31:	2014		2013		Change		Currency
Global Services external revenue	$	54,954	$	56,947	(3.5	)%	0.7	%*
Global Technology Services	$	37,130	$	38,551	(3.7	)%	1.6	%*
Outsourcing	20,770		22,060		(5.8	)	1.2	*
Integrated Technology Services	9,506		9,380		1.3		3.7
Maintenance	6,853		7,111		(3.6	)	(0.1	)*
Global Business Services	$	17,825	$	18,396	(3.1	)%	(1.1	)%
Outsourcing	3,750		4,097		(8.5	)	(6.1	)
Consulting and Systems Integration	14,075		14,298		(1.6	)	0.4

* Adjusted for divestitures and currency.

Global Technology Services revenue of $37,130 million decreased 3.7 percent as reported in 2014 compared to the prior year, but increased 2 percent adjusted for currency (3 points) and the divestitures (3 points). Integrated Technology Services (ITS) revenue grew 1.3 percent (4 percent adjusted for currency) compared to 2013. The SoftLayer platform, which provides highly differentiated solutions for clients looking to deploy across public, private or hybrid clouds all unified on one platform, had strong performance. Throughout the year, SoftLayer attracted new workloads to the platform and the company is investing to expand its datacenter footprint globally. GTS Outsourcing revenue decreased 5.8 percent as reported in 2014, but increased 1 percent adjusted for currency (2 points) and the divestitures (5 points). Growth was driven by performance from the substantial new contracts brought on during 2013. In 2014, clients continued to sign large outsourcing engagements that leverage the company’s cloud, business analytics and mobile solutions. Maintenance revenue decreased 3.6 percent but was flat year to year adjusted for the divestiture of the industry standard server business (1 point) and currency (2 points).

Global Business Services revenue of $17,825 million decreased 3.1 percent (1 percent adjusted for currency) compared to the prior year. Consulting and Systems Integration (C&SI) revenue declined 1.6 percent as reported, but was flat adjusted for currency in 2014. There was strong growth in the practices that are highly differentiated in the marketplace which address cloud, analytics, mobile and social, offset by declines in the more traditional parts of the portfolio, such as back office implementations. As the new offerings continue to become a larger part of the portfolio they will contribute more meaningfully to the revenue performance. In July, the company announced a strategic partnership with Apple to deliver a new class of “enterprise ready” MobileFirst business applications for iOS combining mobility and analytics. In the fourth quarter of 2014, the first applications were launched with additional applications focused on healthcare, energy and utilities expected in the first quarter of 2015. GBS Outsourcing revenue decreased 8.5 percent (6 percent adjusted for currency) in 2014, but had sequential improvement in the year-to-year growth rate in the last two quarters of the year adjusted for currency. Throughout the year, performance was impacted by pricing pressure and client renegotiations, as well as a reduction in elective projects.

($ in millions)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2014			2013			Change
Global Services
Global Technology Services
External gross profit	$	14,237		$	14,691		(3.1	)%
External gross profit margin	38.3		%	38.1		%	0.2	pts.
Pre-tax income	$	6,340		$	6,983		(9.2	)%
Pre-tax margin	16.7		%	17.6		%	(1.0	)pts.
Global Business Services
External gross profit	$	5,493		$	5,676		(3.2	)%
External gross profit margin	30.8		%	30.9		%	0.0	pts.
Pre-tax income	$	2,999		$	3,214		(6.7	)%
Pre-tax margin	16.3		%	16.8		%	(0.5	)pts.

GTS gross profit margin increased 0.2 points to 38.3 percent in 2014. Pre-tax income decreased 9.2 percent to $6,340 million and the pre-tax margin declined 1.0 points to 16.7 percent compared to the prior year. While there was a benefit from the pre-tax gain of $202 million related to the customer care divestiture in 2014, this benefit was offset by investments in areas like new resiliency centers, additional security skills and the SoftLayer cloud hub expansion, plus the lost profit from the divested businesses. Overall, the profit performance in GTS reflects the actions that the company has taken to transform the business. The company has invested in its strategic imperatives to accelerate growth, continued to optimize its delivery platform through workforce rebalancing and broader use of automation, and divested businesses, all impacting the year-to-year results. While these actions all have near-term impacts to profit, they position the business more effectively going forward and will enable it to deliver more value to clients.

GBS gross profit margin of 30.8 percent was flat year to year compared to 2013. Pre-tax income decreased 6.7 percent to $2,999 million and the pre-tax margin declined 0.5 points to 16.3 percent. In 2014, profit was impacted by lower revenue on a relatively fixed cost base. In areas where the company has strong differentiation, such as solutions that address the strategic imperatives, there was good growth and gross margin performance. However, in the more traditional parts of the portfolio, there was continued price and profit pressure. The company will continue to invest in the strategic imperatives and accelerate the transition to global delivery. Additionally, Global Process Services, the business process outsourcing business, will be integrated with GBS beginning in 2015 to create a seamless end-to-end business transformation capability for clients.

Global Services Backlog

The estimated Global Services backlog at December 31, 2014 was $128 billion. This included a backlog reduction in 2014 of $3.7 billion associated with the customer care and industry standard server divestitures. Adjusting for the divested businesses, backlog was down 7.5 percent as reported, but flat adjusted for currency year to year. The estimated transactional backlog at December 31, 2014 decreased 7.6 percent (1 percent adjusted for currency) from the December 31, 2013 levels. The estimated outsourcing backlog decreased 11.0 percent as reported, but increased 1 percent adjusted for the customer care divestiture (4 points) and currency (8 points).

($ in billions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
At December 31:	2014		2013		Change		Currency
Backlog
Total backlog	$	128.4	$	142.8	(10.1	)%	(2.9	)%
Adjusted for divested businesses					(7.5	)	(0.2	)
Outsourcing backlog	80.8		90.8		(11.0	)	(3.3	)
Adjusted for customer care					(7.1	)	0.8

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.

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
For the year ended December 31:	2014		2013		Change		Currency
Total signings	$	51,569	$	63,203	(18.4	)%	(15.7	)%
Outsourcing signings	$	26,517	$	35,027	(24.3	)%	(21.1	)%
Transactional signings	25,052		28,176		(11.1	)	(8.9	)

Software

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
For the year ended December 31:	2014		2013		Change		Currency
Software external revenue	$	25,434	$	25,932	(1.9	)%	(0.9	)%
Middleware	$	21,474	$	21,557	(0.4	)%	0.6	%
Key Branded Middleware	17,098		17,322		(1.3	)	(0.2	)
WebSphere Family					2.7		3.5
Information Management					(4.1	)	(3.0	)
Workforce Solutions					(6.1	)	(5.1	)
Tivoli					2.0		3.0
Rational					(3.3	)	(1.3	)
Other middleware	4,376		4,235		3.3		4.2
Operating systems	2,119		2,447		(13.4	)	(12.6	)
Other	1,841		1,929		(4.5	)	(3.7	)

Software revenue of $25,434 million decreased 1.9 percent (1 percent adjusted for currency) in 2014 compared to the prior year. Middleware decreased 0.4 percent (increased 1 percent adjusted for currency) while operating systems were down 13.4 percent (13 percent adjusted for currency). The decline in operating systems impacted total software revenue growth year to year at constant currency by approximately 1 point. The company had solid growth in many of its solution areas, including security, mobile and cloud. In addition, across the software brands, software-as-a-service (SaaS) offerings grew rapidly throughout the year, increasing approximately 50 percent compared to 2013. In the first quarter of 2014, the company launched Bluemix, a cloud platform-as-a service for the enterprise and, during the year, the Software business completed five acquisitions adding to its capabilities in mobile, cloud and security. Across Software, the company is transitioning its portfolio to capture growth areas while continuing to drive innovation in its core franchises. It is growing and building capabilities in emerging areas like SaaS, mobile and security. Performance in 2014 reflected business model changes that impacted the transactional revenue growth. Given clients’ substantial investment in the IBM software platform, the company has been providing more flexibility on how clients deploy its software acquired through enterprise licensing agreements. This enables clients to more effectively manage their capacity and commit to the company’s platforms for the long term, however, it does impact period transactional revenue.

Key branded middleware revenue, which accounted for 67 percent of total Software revenue in 2014, decreased 1.3 percent (flat percent adjusted for currency) compared to the prior year. While there was growth in several strategic areas like cloud, mobile and security, other parts of the portfolio declined on a year-to-year basis.

WebSphere revenue increased 2.7 percent (4 percent adjusted for currency) in 2014 compared to the prior year. Revenue performance was driven by growth in Application Server, Business Integration and Commerce offerings. In Commerce, there was strong momentum in Commerce-as-a-service, which includes the acquisitions of Silverpop and Aspera. MobileFirst, the comprehensive portfolio of mobile software and services that enable clients to manage, integrate and leverage mobile devices, contributed to the significant growth of the company’s mobile business.

Information Management revenue decreased 4.1 percent (3 percent adjusted for currency) in 2014 compared to the prior year. With the 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.

Workforce Solutions revenue decreased 6.1 percent (5 percent adjusted for currency) in 2014 compared to the prior year. Performance has been impacted by the transition from on premise Notes to SaaS offerings. The company is working to transform this business and build recurring revenue streams from the SaaS offerings.

Tivoli revenue increased 2.0 percent (3 percent adjusted for currency) in 2014 compared to the prior year. Year-to-year revenue growth was driven by security software which grew at double digit rates again this year. As cybersecurity threats are a key issue faced by all customers, these strong results are being driven in part by incremental requirements for security with the expansion into cloud and mobile computing.

Rational revenue decreased 3.3 percent (1 percent adjusted for currency) in 2014 year over year

Operating systems revenue decreased 13.4 percent (13 percent adjusted for currency) in 2014 compared to 2013. This decline was primarily driven by declines in Power Systems.

($ in millions)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2014			2013			Change
Software
External gross profit	$	22,533		$	23,032		(2.2	)%
External gross profit margin	88.6		%	88.8		%	(0.2	)pts.
Pre-tax income	$	10,699		$	11,106		(3.7	)%
Pre-tax margin	37.0		%	38.1		%	(1.2	)pts.

Software gross profit decreased 2.2 percent, with a gross profit margin of 88.6 percent. Software pre-tax income decreased 3.7 percent year to year and pre-tax margin declined 1.2 points. Across software, the company continues to drive innovation and capture growth areas, integrating analytics and security capabilities that are needed to operate seamlessly in a hybrid environment. For example, the company is introducing several new offerings that further enable its analytics portfolio in a cloud environment. It recently announced IBM Verse, a cloud based email and collaboration offering that integrates Watson capabilities. This type of continued innovation in offerings, together with expanding services on the Bluemix platform-as-a-service, will better allow customers to move to a hybrid environment.

Systems and Technology

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
For the year ended December 31:	2014		2013		Change		Currency
Systems and Technology external revenue	$	9,996	$	12,988	(23.0	)%	(16.8	)%*
System z					(23.3	)%	(22.6	)%
Power Systems					(18.9	)	(18.2	)
Storage					(12.0	)	(11.0	)
System x					(35.1	)	(34.9	)

* Adjusted for divestitures and currency.

Systems and Technology (STG) revenue of $9,996 million decreased 23.0 percent as reported in 2014, 17 percent adjusted for the divestiture of the industry standard server business (5 points) and currency (1 point). In 2013, the STG business reported a profit decline of $1,653 million compared to 2012. During 2014, the company worked to reposition this business and to stabilize profit. It divested the industry standard server business and announced the divestiture of the Microelectronics business. Performance in 2014 reflected year-to-year declines related to the System z product cycle as well as declines in Power Systems and Storage. STG grew profit in the fourth quarter, and was profitable for the year. Profit performance year to year was impacted by the divestiture and currency, in addition to the revenue impacts.

System z revenue decreased 23.3 percent (23 percent adjusted for currency) compared to the prior year. The fourth quarter of 2014 marked the tenth quarter of the current product cycle. In January 2015, the company announced the z13, the new generation mainframe. The z13 system culminates a billion dollar investment and five years of development, leverages the innovation of more than 500 new patents and represents a collaboration with more than 60 clients. The result of this effort is a mainframe that has the world’s fastest processor that can execute two-and-a-half billion transactions a day. With this generation of mainframe, the company has dramatically enhanced its capabilities around analytics,

mobile, security and cloud to address the needs clients see in their businesses. These capabilities span from real-time insights to real-time fraud detection in a system that can consistently run at 100-percent utilization with 100-percent uptime. The company continues to innovate on the platform to address client needs and extend its leadership in high-end systems, a core franchise that has nearly doubled in installed capacity over the last five years.

Power Systems revenue decreased 18.9 percent (18 percent adjusted for currency) in 2014 compared to the prior year. Although down year to year, there was sequential improvement in the year-to-year revenue growth rate at constant currency in the last two quarters of the year. The company has repositioned Power which is not only a systems business, but also an open chip processor and an IP income opportunity through the OpenPOWER foundation. In June, scale-out systems based on POWER8 were introduced and high-end POWER8-based enterprise systems were announced in October. These newly announced systems are highly scalable and can handle the most data intensive, mission critical applications in the industry. In addition, the company saw continued expansion of the OpenPOWER consortium, now with over 80 members, 14 of which are in greater China. Since the establishment of the consortium a year ago, several offerings have been introduced by consortium members based on the POWER architecture. In addition, the company has initiated a strategic partnership with Suzhou PowerCore, which intends to use POWER architecture to develop and market processors for servers in China.

Storage revenue decreased 12.0 percent (11 percent adjusted for currency) in 2014 compared to the prior year. However, at constant currency, it delivered sequential improvement in the year-to-year growth rate over the last three quarters of 2014. Full-year performance included strong contribution from FlashSystem and the Storwize portfolio. However, this was more than offset by weakness in high-end disk and the continued wind-down of the legacy storage-related OEM business.

($ in millions)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2014			2013			Change
Systems and Technology
External gross profit	$	3,945		$	5,299		(25.6	)%
External gross profit margin	39.5		%	40.8		%	(1.3	)pts.
Pre-tax income	$	34		$	213		(84.1	)%
Pre-tax margin	0.3		%	1.6		%	(1.3	)pts.

Systems and Technology’s gross profit margin of 39.5 percent decreased 1.3 points versus the prior year. The decrease was driven by lower margins in Power Systems (1.3 points) and Storage (0.9 points), partially offset by an increase due to mix (0.7 points), driven by the divestiture of the industry standard server business. Pre-tax income decreased $179 million or 84.1 percent and pre-tax margin decreased 1.3 points in 2014 versus the prior year.

In 2014, the company took significant actions to reposition its Systems and Technology business for higher value, and reinforced its commitment to driving innovation in high-end systems and storage. It repositioned Power through the development of the POWER8 systems which are built for cloud and big data, and it made available the POWER8 architecture through the OpenPOWER consortium to build an open ecosystem and an IP opportunity. The company is divesting its Microelectronics business with future chip supply coming from an at-scale provider, and has committed $3 billion of investment over five years in the next era of chip technology as it strengthens its semiconductor research and development and systems innovation. The company also divested System x, the industry standard server business, and announced the z13, the new generation of the mainframe. With its portfolio repositioned and the introduction of the new mainframe, this business segment should now see profit leverage going forward.

Global Financing

See pages 73 through 77 for an analysis 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.

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Percent Change
					Percent		Adjusted for
For the year ended December 31:	2014		2013		Change		Currency*
Total revenue	$	92,793	$	98,367	(5.7	)%	(1.5	)%
Geographies	$	92,326	$	97,800	(5.6	)%	(1.5	)%
Americas	41,410		43,249		(4.3	)	(0.8	)
Europe/Middle East/Africa	30,700		31,628		(2.9	)	(0.6	)
Asia Pacific	20,216		22,923		(11.8	)	(4.1	)

Major markets					(4.3	)%	(1.0	)%
Growth markets					(9.9	)%	(3.2	)%
BRIC countries					(10.7	)%	(4.5	)%

* Adjusted for divestitures and currency.

Total geographic revenue of $92,326 million decreased 5.6 percent as reported and 1 percent adjusted for divestitures (2 points) and currency (2 points) in 2014 compared to the prior year. In total, major market countries decreased 4.3 percent as reported and 1 percent adjusted for divestitures (2 points) and currency (1 point). Growth market countries decreased 9.9 percent as reported and 3 percent adjusted for divestitures (3 points) and currency (4 points) compared to 2013.

The year-to-year decline in growth markets revenue adjusted for currency and the divestitures reflected growth in the Latin American and Europe growth markets, more than offset by decreased revenue in the Asia Pacific growth markets. The Latin American growth market countries decreased 1.0 percent as reported, but grew 8 percent adjusted for divestitures (2 points) and currency (7 points). Within Latin America, Brazil decreased 3.1 percent as reported, but grew 4 percent adjusted for divestitures (1 point) and currency (6 points). There was also growth in most other Latin American countries at constant currency. European growth markets were down 5.3 percent as reported, but increased 1 percent adjusted for divestitures (3 points) and currency (3 points) compared to the prior year. Asia Pacific growth market countries decreased 14.6 percent as reported and 9 percent adjusted for divestitures (3 points) and currency (2 points). This performance was driven by China and several of the other larger growth market countries. China decreased 17.2 percent as reported and 15 percent adjusted for divestitures (3 points) and currency (0 points), but reflected improvement in its sequential year-to-year growth rate in the last quarter of the year with strong software performance and several large mainframe transactions. In the fourth quarter, China revenue decreased 19.9 percent as reported, but declined 1 percent adjusted for currency and divestitures. Australia, India and Korea, which are some of the larger countries within the Asia Pacific growth markets, also declined compared to the prior year. Within the BRIC countries, combined revenue decreased 10.7 percent as reported and 5 percent adjusted for divestitures (3 points) and currency (3 points) compared to the prior year. On an adjusted basis, this performance reflects growth in Brazil and Russia, more than offset by the declines in China and India.

Americas revenue of $41,410 million decreased 4.3 percent as reported and 1 percent adjusted for divestitures (2 points) and currency (1 point) compared to the prior year. On an adjusted basis, there was increased revenue in the growth markets offset by year-to-year declines in the major market countries. Within the North American major markets, the U.S. declined 4.0 percent as reported and 2 percent adjusted for divestitures (2 points). Canada was down 9.8 percent as reported and 2 percent adjusted for divestitures (1 point) and currency (7 points).

Europe/Middle East/Africa (EMEA) revenue of $30,700 million decreased 2.9 percent as reported and 1 percent adjusted for divestitures (3 points) and offset by currency (1 point). Major market countries were down 2.6 percent as reported and 1 percent adjusted for divestitures (2 points), offset by currency (1 point). This was offset by growth of 1 percent on an adjusted basis in the growth market countries. Major market performance adjusted for the divestitures and currency included growth in Germany, Italy and Spain, which was more than offset by declines in the UK and France compared to the prior year.

Asia Pacific revenue of $20,216 million decreased 11.8 percent as reported and 4 percent adjusted for the divested businesses (3 points) and currency (5 points). Japan was down 7.6 percent as reported, but increased 3 percent adjusted for divestitures (3 points) and currency (8 points). On this basis, Japan reflected year-to-year growth in every quarter of 2014. However, this growth was more than offset by declines in the Asia Pacific growth markets.

Total Expense and Other (Income)

($ in millions)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2014			2013			Change
Total consolidated expense and other (income)	$	26,421		$	28,440		(7.1	)%
Non-operating adjustments
Amortization of acquired intangible assets	(374		)	(370		)	1.2
Acquisition-related charges	(12		)	(40		)	(70.0	)
Non-operating retirement-related (costs)/income	(180		)	(433		)	(58.4	)
Operating (non-GAAP) expense and other (income)	$	25,855		$	27,597		(6.3	)%
Total consolidated expense-to-revenue ratio	28.5		%	28.9		%	(0.4	)pts.
Operating (non-GAAP) expense-to-revenue ratio	27.9		%	28.1		%	(0.2	)pts.

The key drivers of the year-to-year change in total expense and other (income) were approximately:

	Total	Operating
	Consolidated	(non-GAAP)
· Currency*	(1) point	(1) point
· Acquisitions**	2 points	2 points
· Base expense	(8) 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.

Base expense includes the gains from the divestitures of the industry standard server and customer care businesses, as well as the impact of higher workforce rebalancing charges year to year. Excluding the gains from the divested businesses and the impact of workforce rebalancing, operating (non-GAAP) base expense decreased 3 points year to year versus the 7 point as reported decrease. Within base expense, the company is continuing to shift its resources and spending to the strategic imperatives.

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

Selling, General and Administrative

($ in millions)

							Yr.-to-Yr.
							Percent
For the year ended December 31:	2014			2013			Change
Selling, general and administrative expense
Selling, general and administrative—other	$	18,532		$	19,178		(3.4	)%
Advertising and promotional expense	1,307			1,294			1.1
Workforce rebalancing charges	1,472			1,031			42.7
Retirement-related costs	811			986			(17.8	)
Amortization of acquired intangible assets	374			370			1.2
Stock-based compensation	350			435			(19.4	)
Bad debt expense	334			156			113.8
Total consolidated selling, general and administrative expense	$	23,180		$	23,451		(1.2	)%
Non-operating adjustments
Amortization of acquired intangible assets	(374		)	(370		)	1.2
Acquisition-related charges	(11		)	(25		)	(54.1	)
Non-operating retirement-related (costs)/income	(257		)	(376		)	(31.7	)
Operating (non-GAAP) selling, general and administrative expense	$	22,537		$	22,680		(0.6	)%

Total selling, general and administrative (SG&A) expense decreased 1.2 percent in 2014 versus 2013. The decrease was primarily driven by the effects of currency (2 points) and lower base expense (1 point), partially offset by acquisition-related spending (2 points). Operating (non-GAAP) SG&A expense decreased 0.6 percent primarily driven by the effects of currency (2 points), partially offset by acquisition-related spending (1 point). Workforce rebalancing charges in 2014 were $1,472 million, an increase of $440 million year to year, which resulted in a 2 point year-to-year impact in operating (non-GAAP) SG&A base expense. Bad debt expense increased $178 million year to year driven by higher specific provision additions, primarily in China and Latin America. The receivables provision coverage was 2.2 percent at December 31, 2014, an increase of 60 basis points from year-end 2013.

Research, Development and Engineering

($ in millions)

						Yr.-to-Yr.
						Percent
For the year ended December 31:	2014		2013			Change
Total consolidated research, development and engineering	$	5,437	$	5,743		(5.3	)%
Non-operating adjustment
Non-operating retirement-related (costs)/income	77		(57		)	NM
Operating (non-GAAP) research, development and engineering	$	5,514	$	5,686		(3.0	)%

NM—Not meaningful

Research, development and engineering (RD&E) expense in continuing operations was 5.9 percent of revenue in 2014 and 5.8 percent of revenue in 2013. RD&E expense decreased 5.3 percent in 2014 versus 2013 primarily driven by: lower base expense (7 points) and the effects of currency (1 point), partially offset by higher expense due to acquisitions (2 points). Operating (non-GAAP) RD&E expense decreased 3.0 percent in 2014 compared to the prior year, primarily driven by lower base expense (4 points) and the effects of currency (1 point), partially offset by higher expense due to acquisitions (2 points).

Intellectual Property and Custom Development Income

($ in millions)

					Yr.-to-Yr.
					Percent
For the year ended December 31:	2014		2013		Change
Sales and other transfers of intellectual property	$	283	$	352	(19.7	)%
Licensing/royalty-based fees	129		150		(13.9	)
Custom development income	330		320		3.1
Total	$	742	$	822	(9.8	)%

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 individual IP transactions in 2014 or 2013.

Other (Income) and Expense

($ in millions)

							Yr.-to-Yr.
							Percent
For the year ended December 31:	2014			2013			Change
Other (income) and expense
Foreign currency transaction losses/(gains)	$	(599	)	$	(260	)	130.4	%
(Gains)/losses on derivative instruments	654			166			293.3
Interest income	(90		)	(74		)	22.1
Net (gains)/losses from securities and investment assets	(26		)	(29		)	(11.5	)
Other	(1,878		)	(137		)	NM
Total consolidated other (income) and expense	$	(1,938	)	$	(333	)	482.4	%
Non-operating adjustment
Acquisition-related charges	(1		)	(16		)	(94.7	)
Operating (non-GAAP) other (income) and expense	$	(1,939	)	$	(349	)	456.2	%

NM—Not meaningful

The increase in income of $1,605 million year over year was primarily driven by higher gains associated with divestitures ($1,710 million), driven by the industry standard server ($1,400 million) and customer care ($202 million) transactions. Divestiture gains are reflected in Other in the table above.

Interest Expense

($ in millions)

					Yr.-to-Yr.
					Percent
For the year ended December 31:	2014		2013		Change
Interest expense
Total	$	484	$	402	(20.4	)%

The increase in interest expense in 2014 versus 2013 was primarily driven by higher average debt levels, partially offset by lower average interest rates. 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. Overall interest expense (excluding capitalized interest) in 2014 was $1,025 million, an increase of $36 million year to year.

Stock-Based Compensation

Total pre-tax stock-based compensation cost of $512 million decreased $102 million compared to 2013. The decrease was primarily related to performance share units ($58 million), restricted stock units ($26 million) and the company’s assumption of stock-based awards previously issued by acquired entities ($18 million). Stock-based compensation cost, and the year-to-year change, was reflected in the following categories: Cost: $121 million, down $1 million; SG&A expense: $350 million, down $85 million; RD&E expense: $54 million, down $3 million and Other (income) and expense: ($13 million), down $13 million. The amount of stock-based compensation cost included in the loss from discontinued operations, net of tax, was immaterial.

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.

($ in millions)

							Yr.-to-Yr.
							Percent
For the year ended December 31:	2014			2013			Change
Retirement-related plans—cost
Service cost	$	482		$	545		(11.5	)%
Amortization of prior service cost/(credits)	(114		)	(114		)	(0.1	)
Cost of defined contribution plans	1,253			1,384			(9.5	)
Total operating costs	$	1,621		$	1,815		(10.7	)%
Interest cost	3,994			3,728			7.1
Expected return on plan assets	(6,351		)	(6,187		)	2.7
Recognized actuarial losses	2,467			3,434			(28.2	)
Plan amendments/curtailments/ settlements	25			0			NM
Multi-employer plan/other costs	218			86			154.5
Total non-operating costs/ (income)	$	353		$	1,062		(66.7	)%
Total retirement-related plans—cost	$	1,974		$	2,876		(31.4	)%

NM—Not meaningful

In 2014, total retirement-related plan cost decreased by $902 million compared to 2013, primarily driven by a decrease in recognized actuarial losses ($967 million), higher actual return on plan assets ($165 million) and lower defined contribution plans cost ($131 million), partially offset by higher interest cost ($266 million) and higher pension obligations related to litigation ($139 million).

As discussed in the “Operating (non-GAAP) Earnings” section on page 22, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in 2014 were $1,621 million, a decrease of $194 million compared to 2013, primarily driven by lower defined contribution plans cost ($131 million) and decreased service cost ($63 million). Non-operating costs of $353 million decreased $709 million in 2014, compared to the prior year, driven primarily by the decrease in recognized actuarial losses ($967 million) and higher actual return on plan assets ($165 million), partially offset by higher interest cost ($266 million) and higher pension obligations related to litigation ($139 million).

Income Taxes

The continuing operations effective tax rate for 2014 was 21.2 percent, an increase of 4.6 points versus the prior year, driven by the following factors:

· The year-to-year impact of factors that benefited the 2013 rate (14.5 points), including completion of the U.S. 2008-2010 tax audit and the associated reserve redeterminations (11.1 points), the retroactive impact of the 2012 American Taxpayer Relief Act (0.7 points), a tax agreement which required a reassessment of certain valuation allowances on deferred tax assets (1.4 points), the resolution of certain non-U.S. tax audits (0.7 points) and newly enacted U.S. state tax legislation (0.6 points); and

· A tax charge related to the sale of the industry standard server business (0.9 points); partially offset by;

· A year-to-year benefit of reduced tax charges related to certain intercompany payments made by foreign subsidiaries and the intercompany licensing of certain IP (3.7 points);

· An increased benefit in the utilization of foreign tax credits (4.7 points); and

· A benefit due to a more favorable geographic mix of pre-tax income in 2014 (2.5 points).

The continuing operations operating (non-GAAP) effective tax rate was 21.0 percent, an increase of 4.0 points versus 2013 principally driven by the same factors described above.

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 year ended December 31:	2014		2013		Change
Earnings per share of common stock from continuing operations
Assuming dilution	$	15.59	$	15.30	1.9	%
Basic	$	15.68	$	15.42	1.7	%
Diluted operating (non-GAAP)	$	16.53	$	16.64	(0.7	)%
Weighted-average shares outstanding (in millions)
Assuming dilution	1,010.0		1,103.0		(8.4	)%
Basic	1,004.3		1,094.5		(8.2	)%

Actual shares outstanding at December 31, 2014 and 2013 were 990.5 million and 1,054.4 million, respectively. The average number of common shares outstanding assuming dilution was 93.0 million shares lower in 2014 versus 2013. The decrease was primarily the result of the common stock repurchase program.

Results of Discontinued Operations

The loss from discontinued operations, net of tax, was $3.7 billion in 2014 and $0.4 billion in 2013. The loss in 2014 included a non-recurring pre-tax charge of $4.7 billion, or $3.4 billion, net of tax. The charge included an impairment to reflect the fair value less estimated costs to sell the Microelectronics business, which the company initially reported as held for sale at September 30, 2014. The charge also included other estimated costs related to the transaction, including cash consideration expected to be transferred of approximately $1.5 billion. The cash consideration is expected to be paid over the next three years and will be adjusted down by the amount of the working capital due from GLOBALFOUNDRIES, estimated to be $0.2 billion. In addition, discontinued operations includes the operational net losses from the Microelectronics business of $0.3 billion in 2014 and $0.4 billion in 2013. The discontinued operations effective tax rate in 2014 was 30.2 percent compared to 44.8 percent in 2013. The year-to-year decrease in the rate was driven primarily by a one-time tax charge of $428 million in the third quarter of 2014 in connection with the disposal.

See note C, “Acquisitions/Divestitures,” on pages 100 and 101 for additional information regarding the divestiture transaction.

Financial Position

Dynamics

At December 31, 2014, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end were $8,476 million. During the year, the company continued to manage the investment portfolio to meet its capital preservation and liquidity objectives.

Total debt of $40,804 million increased $1,087 million from prior year-end levels. The commercial paper balance at December 31, 2014, was $650 million, a decrease of $1,808 million from the prior year end. Within total debt, $29,103 million is in support of the Global Financing business which is leveraged at a 7.2 to 1 ratio. The company continues to have substantial flexibility in the market. During 2014, the company completed bond issuances totaling $6,852 million, with terms ranging from 2 to 10 years, and interest rates ranging from 0.30 to 3.63 percent depending on maturity. 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, with 100 percent of the facility available on a same day basis.

Consistent with accounting standards, the company remeasures the funded status of its retirement and postretirement plans at December 31. At December 31, 2014, the overall net underfunded position was $16,932 million, an increase of $5,498 million from December 31, 2013 driven by a decrease in discount rates and changes in U.S. mortality rate assumptions, partially offset by strong asset returns worldwide. At year end, the company’s qualified defined benefit plans were well funded and the cash requirements related to these plans remain stable going forward at approximately $600 million per year through 2019. In 2014, the return on the U.S. Personal Pension Plan assets was 10.1 percent and the plan was 102 percent funded at December 31. Overall, global asset returns were 12.2 percent and the qualified defined benefit plans worldwide were 97 percent funded at December 31.

During 2014, the company generated $16,868 million in cash from operations, a decrease of $616 million compared to 2013. In addition, the company generated $12,372 million in free cash flow, a decrease of $2,649 million versus the prior year. See pages 66 to 67 for additional information on free cash flow. The company returned $17,944 million to shareholders in 2014, with $13,679 million in gross share repurchases and $4,265 million in dividends. In 2014, the company repurchased approximately 71.5 million shares and had approximately $6.3 billion remaining in share repurchase authorization at year end. The company’s cash generation 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 page 82 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 73, are supplementary data presented to facilitate an understanding of the Global Financing business.

Working Capital

($ in millions)

At December 31:	2014		2013
Current assets	$	49,422	$	51,350
Current liabilities	39,600		40,154
Working capital	$	9,822	$	11,196
Current ratio	1.25:1		1.28:1

Working capital decreased $1,374 million from the year-end 2013 position. The key changes are described below:

Current assets decreased $1,928 million (an increase of $1,119 million adjusted for currency), as a result of:

· A decrease of $2,589 million in cash and cash equivalents and marketable securities; and

· A decline of $1,375 million ($734 million adjusted for currency) in trade receivables primarily due to the decline in revenue and improved customer collections; partially offset by

· An increase of $1,322 million ($1,378 million adjusted for currency) in other receivables driven by anticipated tax refunds; and

· An increase in deferred taxes of $394 million ($507 million adjusted for currency) primarily due to the expected Microelectronics business divestiture.

Current liabilities decreased $554 million (an increase of $1,623 million adjusted for currency), as a result of:

· A decrease in short-term debt of $1,131 million ($1,074 million adjusted for currency); and

· A decrease in deferred income of $680 million (an increase of $42 million adjusted for currency) driven by currency; partially offset by

· Other accrued expenses and liabilities increases of $1,265 million ($1,840 million adjusted for currency) driven by charges and expected payments related to the expected divestiture of the Microelectronics business and workforce rebalancing accruals.

Cash Flow

The company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 83 are summarized in the table below. These amounts include the cash flows associated with the Global Financing business.

($ in millions)

For the year ended December 31:	2014			2013
Net cash provided by/(used in) continuing operations
Operating activities	$	16,868		$	17,485
Investing activities	(3,001		)	(7,326		)
Financing activities	(15,452		)	(9,883		)
Effect of exchange rate changes on cash and cash equivalents	(655		)	28
Net change in cash and cash equivalents	$	(2,240	)	$	304

Net cash provided by operating activities decreased by $616 million in 2014 driven by the following key factors:

· An increase in income taxes paid of $1,724 million primarily driven by audit settlement payments and other prior period discrete tax impacts settled in 2014;

· A decrease in cash associated with deferred income of $814 million due to lower levels of customer prepayments; and

· Performance-related declines within net income; partially offset by

· An increase in cash provided by receivables of $2,676 million, primarily driven by financing receivables; and

· A decrease in cash payments for performance-related compensation of $772 million.

Net cash used in investing activities decreased $4,325 million driven by:

· A decrease in cash used for acquisitions of $2,401 million; and

· An increase in cash provided by divestitures of $2,061 million.

Net cash used in financing activities increased $5,569 million as compared to the prior year driven by the following factors:

· Lower cash from debt transactions (including short-term borrowings) of $5,177 million; and

· An increase of $392 million in net cash used for equity transactions impacted by increased dividend payments in 2014.

Noncurrent Assets and Liabilities

($ in millions)

At December 31:	2014		2013
Noncurrent assets	$	68,110	$	74,873
Long-term debt	$	35,073	$	32,856
Noncurrent liabilities (excluding debt)	$	30,844	$	30,284

The decrease in noncurrent assets of $6,763 million ($3,790 million adjusted for currency) was driven by:

· A decrease of $3,392 million ($3,260 million adjusted for currency) in prepaid pension assets primarily driven by plan remeasurements;

· A decrease in property, plant and equipment, net of $3,050 million ($2,381 million adjusted for currency) primarily driven by a charge of $2,358 million associated with the expected divestiture of the Microelectronics business; and

· A decrease of $1,646 million ($917 million adjusted for currency) in long term financing receivables; partially offset by

· An increase in deferred taxes of $1,757 million ($2,054 adjusted for currency) driven by retirement related plan activity.

Long-term debt increased $2,218 million ($3,042 million adjusted for currency) driven by new debt of $7,657 million offset by reclasses to short-term debt of $4,809 million.

Other noncurrent liabilities, excluding debt, increased $561 million ($2,330 million adjusted for currency) primarily driven by:

· An increase in retirement and nonpension benefit obligations of $2,019 million ($3,210 million adjusted for currency) driven by plan remeasurements, partially offset by

· Declines of $1,041 million ($708 million adjusted for currency) in other liabilities driven by declines in deferred taxes.

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.

($ in millions)

At December 31:	2014		2013
Total company debt	$	40,804	$	39,718
Total Global Financing segment debt	$	29,103	$	27,504
Debt to support external clients	25,531		24,471
Debt to support internal clients	3,572		3,033
Non-Global Financing debt	11,701		12,214

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 80-81.

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 59.4 percent at December 31, 2014 compared to 39.0 percent at December 31, 2013. The ratio was impacted by retirement-related declines in equity of $6,366 million primarily driven by plan remeasurements, the non-recurring charge associated with the disposal of the Microelectronics business of $3,381 million and declines from translation of $2,074 million due to the strengthening U.S. dollar.

Consolidated debt-to-capitalization ratio at December 31, 2014 was 77.3 percent versus 63.4 percent at December 31, 2013 and was similarly impacted by the retirement plan remeasurements and strengthening of the U.S. dollar as noted above.

Equity

Total equity decreased by $10,916 million from December 31, 2013 as a result of an increase in treasury stock of $13,474 million mainly due to gross common stock repurchases, an increase in other comprehensive losses of $6,274 million primarily due to retirement plan remeasurements, partially offset by an increase in retained earnings of $7,751 million. The retirement plan remeasurement impact to other comprehensive losses was driven by: changes in discount rates ($7.4 billion) and in mortality rate assumptions ($1.7 billion), partially offset by improved asset returns ($3.1 billion).

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 (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section on page 26 for the company’s rationale for presenting operating earnings information.

($ in millions except per share amounts)

Acquisition-

Retirement-

Related

Operating

For the year ended December 31, 2014:

GAAP

Adjustments

(non-GAAP)

Gross profit

46,407

416

173

46,996

Gross profit margin

50.0

0.4

pts.

0.2

pts.

50.6

SG&A

23,180

(385

)

(257

)

22,537

RD&E

5,437

—

5,514

Other (income) and expense

(1,938

)

—

(1,939

)

Total expense and other (income)

26,421

(386

)

(180

)

25,855

Pre-tax income margin from continuing operations

19,986

803

353

21,142

Pre-tax income from continuing operations

21.5

0.9

pts.

0.4

pts.

22.8

Provision for income taxes*

4,234

133

4,440

Effective tax rate

21.2

(0.2

)pts.

0.0

pts.

21.0

Income from continuing operations

15,751

670

280

16,702

Income margin from continuing operations

17.0

0.7

pts.

0.3

pts.

18.0

Loss from discontinued operations, net of tax

(3,729

)

—

(3,729

)

Net income

12,022

670

280

12,973

Diluted earnings per share:

Continuing operations

15.59

0.66

0.28

16.53

Discontinued operations

(3.69

)

—

(3.69

)

* 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.

($ in millions except per share amounts)

				Acquisition-			Retirement-
				Related			Related			Operating
For the year ended December 31, 2013:	GAAP			Adjustments			Adjustments			(non-GAAP)
Gross profit	$	48,684		$	394		$	629		$	49,706
Gross profit margin	49.5		%	0.4		pts.	0.6		pts.	50.5		%
SG&A	$	23,451		$	(394	)	$	(376	)	$	22,680
RD&E	5,743			—			(57		)	5,686
Other (income) and expense	(333		)	(16		)	—			(349		)
Total expense and other (income)	28,440			(410		)	(433		)	27,597
Pre-tax income from continuing operations	20,244			804			1,062			22,110
Pre-tax margin from continuing operations	20.6		%	0.8		pts.	1.1		pts.	22.5		%
Provision for income taxes*	$	3,363		$	57		$	333		$	3,753
Effective tax rate	16.6		%	(0.4		)pts.	0.7		pts.	17.0		%
Income from continuing operations	$	16,881		$	747		$	729		$	18,356
Income margin from continuing operations	17.2		%	0.8		pts.	0.7		pts.	18.7		%
Loss from discontinued operations, net of tax	$	(398	)	$	—		$	—		$	(398	)
Net income	$	16,483		$	747		$	729		$	17,959
Diluted earnings per share:
Continuing operations	$	15.30		$	0.68		$	0.66		$	16.64
Discontinued operations	$	(0.36	)	$	—		$	—		$	(0.36	)

Consolidated Fourth-Quarter Results

($ and shares in millions except per share amounts)

							Yr.-to-Yr.
							Percent/
							Margin
For the fourth quarter:	2014			2013			Change
Revenue	$	24,113		$	27,385		(11.9	)%*
Gross profit margin	53.3		%	52.4		% <