SECURITIES AND EXCHANGE COMMISSION

FORM 10-K Annual report pursuant to section 13 and 15(d)

Filing Date: 2017-02-28 | Period of Report: 2016-12-31 SEC Accession No. 0001047469-17-001061

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FILER INTERNATIONAL BUSINESS MACHINES CORP Mailing Address Business Address 1 NEW ORCHARD RD 1 NEW ORCHARD ROAD CIK:51143| IRS No.: 130871985 | State of Incorp.:NY | Fiscal Year End: 1231 ARMONK NY 10504 ARMONK NY 10504 Type: 10-K | Act: 34 | File No.: 001-02360 | Film No.: 17647989 9144991900 SIC: 3570 Computer & office equipment

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-K ANNUAL REPORT pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 FOR THE YEAR ENDED DECEMBER 31, 2016 1-2360 (Commission file number) INTERNATIONAL BUSINESS MACHINES CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 13-0871985 (State of Incorporation) (IRS Employer Identification Number)

ARMONK, NEW YORK 10504 (Address of principal executive offices) (Zip Code) 914-499-1900 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Voting shares outstanding Name of each exchange Title of each class at February 10, 2017 on which registered Capital stock, par value $.20 per share 943,212,551 New York Stock Exchange Chicago Stock Exchange

1.375% Notes due 2019 New York Stock Exchange 2.750% Notes due 2020 New York Stock Exchange 1.875% Notes due 2020 New York Stock Exchange 0.500% Notes due 2021 New York Stock Exchange 2.625% Notes due 2022 New York Stock Exchange 1.25% Notes due 2023 New York Stock Exchange 1.125% Notes due 2024 New York Stock Exchange 2.875% Notes due 2025 New York Stock Exchange 0.300% Notes due 2026 New York Stock Exchange 1.750% Notes due 2028 New York Stock Exchange 8.375% Debentures due 2019 New York Stock Exchange 7.00% Debentures due 2025 New York Stock Exchange 6.22% Debentures due 2027 New York Stock Exchange 6.50% Debentures due 2028 New York Stock Exchange 7.00% Debentures due 2045 New York Stock Exchange 7.125% Debentures due 2096 New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ý No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ý Accelerated filer o Non-Accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ý The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $145.0 billion. Documents incorporated by reference: Portions of IBM's Annual Report to Stockholders for the year ended December 31, 2016 are incorporated by reference into Parts I, II and IV of this Form 10-K. Portions of IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017 are incorporated by reference into Part III of this Form 10-K.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PART I Item 1. Business: International Business Machines Corporation (IBM or the company) was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. (C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating Machine Co. and The International Time Recording Co. of New York. Since that time, IBM has focused on the intersection of business insight and technological innovation, and its operations and aims have been international in nature. This was signaled over 90 years ago, in 1924, when C-T-R changed its name to International Business Machines Corporation. And it continues today—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 IBM has a history of continuous re-invention, transforming itself throughout its 100-plus year history. In the past five decades alone, IBM has ushered in the eras of the mainframe, the personal computer, IT services and enterprise software. In its current transformation, IBM is once again leading the reordering of the technology industry. A number of years ago, the company declared its focus on the strategic forces behind the "digital" revolution; data, cloud and engagement, driven by mobile and social, and underpinned by security. Since 2010, IBM has invested approximately $40 billion in these areas, built out the IBM Cloud on a global scale and extended cognitive systems to numerous enterprises and industries. The company made 55 acquisitions and has formed partnerships with organizations that are leading players in key industries. Because of this transformation, IBM today is much more than a hardware, software and services company; IBM is a cognitive solutions and cloud platform company, with a focus on industry capabilities and expertise: Cognitive Solutions: With the highest level of intelligence that exists in technology systems, these solutions tackle challenges ranging from answering client inquiries to helping physicians fight cancer. Cloud Platform: IBM Cloud is the leading cloud platform for the enterprise, providing what enterprises need for speed, agility and, combined with Watson, for cognitive capability. Industry Focus: As IBM brings higher levels of value to its clients, as its offerings are being built for the needs of individual industries. Healthcare and Financial Services are two examples of the company's initial cognitive focus. Cognitive Solutions Since IBM's Watson was introduced in 2011, the company has been developing a new generation of cognitive systems that can see and analyze the massive amounts of data that have previously been invisible to computers and enterprises. IBM's cognitive systems have the capability to inject a kind of thinking ability into every digitized object, process and service, and learn from interactions. IBM is on the forefront of deploying these systems and helping clients to embrace the cognitive era. 1

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cognitive systems are not programmed; like humans, they learn from experts and from every interaction, and they are uniquely able to find patterns in big data. They learn by using advanced algorithms to sense, predict and infer. Doing so, they augment human intelligence, allowing individuals to make faster and more informed decisions. Since Watson's debut, many technologies have entered the market under the banner of artificial intelligence. However, IBM's approach to cognitive systems is quite unique: • Highly adaptable intelligence systems: Watson has broad applicability and can help clients tackle challenges ranging from oncology to customer support.

• Protect and respect client data: Watson learns through data, both public data as well as clients' private data. Clients choose whether their data or insights are shared. IBM respects the clients' ownership and control of their own data.

• Easy entry points: Watson's open APIs offer easy on-ramps to experiment with speech, vision and other data.

• Trained in domain depth: Watson is trained to be an expert in industries and functional specialties. It augments the knowledge of professionals, giving them access to the insights of their best colleagues and the world's leading experts.

• Transformational services: IBM's Cognitive Solutions and Watson Internet of Things (IoT) practices help clients build their cognitive strategies. GBS provides outcome-focused methodologies, domain skills and deep industry expertise.

Cloud Platform Cloud represents more than a new architecture for delivering infrastructure and applications as services; it is also a catalyst for innovation, speed and agility. Cloud enables companies to focus on differentiating their strategies, capabilities and business models rather than on the underlying technology. The IBM Cloud brings a unique set of characteristics to clients: • It is a world-class cloud platform designed for enterprises, where security, reliability, scalability and performance are critical.

• It is the industry-leading hybrid cloud, enabling clients to extend their existing IT investments, connecting valuable data and applications across public and private clouds.

• It is a world-class cognitive cloud platform with IBM Watson services that developers can embed into their applications to create differentiating customer experiences and powerful insights.

The IBM Cloud has a strong global presence, with more than 50 cloud data centers around the world giving clients the flexibility to optimize the deployment of data and application, for performance, security and compliance. The IBM Cloud is also continually expanding its base of advanced capabilities including cloud data services, cloud object storage, cloud video services, as well as Internet of Things, blockchain and analytics services. In 2016, IBM brought new cognitive solutions to professionals in marketing, commerce, supply chain and human resources, extending industry clouds to further differentiate its cloud offerings. Industry Focus To bring higher value to clients, IBM is providing solutions that are specific and tailored to challenges clients face in their industry, using the power of IBM's advanced cognitive computing

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document capabilities built on the IBM Cloud. In 2016, IBM deepened its commitment to delivering higher value in several key ways: • In the healthcare industry, IBM Watson Health combines the power of cloud and cognitive with value-based solutions to optimize performance, engage consumers, enable effective care and manage population health. Significant investment in the healthcare space, including the acquisition of Merge and Truven, has enabled the company to expand the scope of solutions aimed at solving some of the most pressing health challenges.

• IBM continues to partner with financial services clients to build a robust infrastructure addressing increasingly complex and fast-changing demands. From preventing fraud to supporting cyber security efforts, IBM is becoming ever-more essential to the financial industry.

• IBM offers analytics to help clients assess their risk and compliance against industry guidelines, and uses a cognitive approach to provide deeper and faster findings. In late 2016, the company acquired Promontory Financial Group, LLC (Promontory), one of the world's leading regulatory consulting firms. Promontory is training Watson to be a market- leading expert in the regulatory field, which will allow the company to deliver services at new levels of efficiency and transparency.

• IBM is committed to blockchain to provide a highly secure method of facilitating multi-step transactions, reducing the number of disputes and points of friction, including its participation in the Hyperledger Project. This cross-industry consortium is working to build the blockchain network in the cloud, doing for trusted transactions what the Internet did for information, and setting industry standards for years to come. Blockchain will enable financial institutions to settle securities in minutes instead of days; manufacturers to reduce product recalls by sharing production logs along their supply chain; and businesses of all types to more closely manage the flow of goods and payments. IBM is working with companies ranging from retailers, banks and shippers to apply this technology to transform their ecosystems through open standards and open platforms.

• IBM's Global Business Services consulting business, with broad expertise across industries and a strong global footprint and scale, provides a unique combination of technologies and services to help clients achieve their business outcomes.

Transforming Core Businesses While the company is focused on cognitive solutions, cloud platform and industry, it is important to note cognitive, cloud and industry are being embedded across IBM's offerings. These core businesses continue to run clients' most critical business processes. IBM's hardware systems are being designed from the ground up to power the cloud and cognitive systems of the future. The company's technology services help clients move to the cloud, embedding cognitive capabilities tailored for their industry. The company's software offerings are simultaneously being made available for the cloud as well as being connected to the cloud where our clients choose to keep them on premises. Additionally, cognitive capabilities are being added to these offerings to provide new levels of innovation. In short, all of IBM is transforming to support the way its clients are transforming. Summary Each transformation of IBM ushers in a new capability to the world. More than 50 years ago, IBM introduced the programmable era and transformed the world's transactions through the mainframe. In the decades that followed, IBM commercialized the personal computer, created an industry around IT services and a software market around middleware. Each of these innovations remains essential to business and the world today. 3

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company's current chapter is ushering in an entirely new era of human-computer interaction, embodied in cognitive solutions and the cloud platform for the needs of industries. The company is embarking on an era where it will create new capabilities at speeds and depth never previously witnessed. 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 as a cognitive solutions and cloud platform company include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide integrated solutions and platforms to the company's clients. The business model is dynamic, adapting to the continuously changing industry and economic environment, including the company's transformation into cloud and as-a-Service delivery models. The company continues to strengthen its position through strategic organic investments and acquisitions in higher-value areas, strengthening its industry expertise and applying advanced analytics across virtually all its offerings. In addition, the company is transforming into a more agile enterprise to drive innovation and speed, as well as helping to drive productivity, which supports investments for 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 consist of five business segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems and Global Financing. Cognitive Solutions comprises a broad portfolio of capabilities that help IBM's clients to identify actionable new insights and inform decision-making for competitive advantage. Leveraging IBM's research, technology and industry expertise, this business delivers a full spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, the first commercially available cognitive computing platform that has the ability to interact in natural language, process vast amounts of big data, and learn from interactions with people and computers. These solutions are provided through the most contemporary delivery methods including through cloud environments and "as-a-Service" models. Cognitive Solutions consists of Solutions Software and Transaction Processing Software. Cognitive Solutions Capabilities Solutions Software: provides the basis for many of the company's strategic areas including analytics, security and social. IBM has established the world's deepest portfolio of data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry. Watson Platform, Watson Health and Watson Internet of Things capabilities are included in Solutions Software. IBM's world-class security platform delivers integrated security intelligence across clients' entire operations, including their cloud, applications, networks and data, helping them to prevent, detect and remediate potential threats. 4

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Transaction Processing Software: includes software that primarily runs mission-critical systems in industries such as banking, airlines and retail. Most of this software is on-premise and annuity in nature. Global Business Services (GBS) provides clients with consulting, application management services and global process services. These professional services deliver business value and innovation to clients through solutions which leverage industry, technology and business process expertise. GBS is the digital reinvention partner for IBM clients, combining industry knowledge, functional expertise, and applications with the power of design, cognitive and cloud. The full portfolio of GBS services is backed by its globally integrated delivery network and integration with IBM solutions and services including Watson, cloud, blockchain, and Technology Services. To deepen its capabilities, in 2016 IBM acquired four consulting and design firms to enhance the GBS global network of 35 digital experience design studios. IBM also announced Watson IoT Consulting Solutions, a new practice that brings together IBM's industry and technical expertise to help clients introduce IoT innovation into their businesses. GBS Capabilities Consulting: provides business consulting services focused on bringing to market solutions that help clients shape their digital blueprints and customer experiences, define their cognitive operating models, set their next-generation talent strategies and create new technology visions and architectures in a cloud-centric world. Application Management: delivers system integration, 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 security and privacy, application testing and modernization, cloud application migration and automation. Global Process Services: GBS' business process outsourcing service line, delivers finance, procurement, HR, and industry-specific business processes. These services deliver improved business results to clients through the strategic change and/or operation of the client's business processes, applications and infrastructure. GBS is redefining the efficiency and cost profiles of clients' core processes through the application of the power of Watson, cognitive and deep analytics. Technology Services & Cloud Platforms provides comprehensive IT infrastructure services creating business value for clients through integrated services that incorporate unique intellectual property 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. Technology Services & Cloud Platforms Capabilities Infrastructure Services: delivers a portfolio of cloud, project-based, outsourcing and other managed services focused on clients' enterprise IT infrastructure environments to enable digital transformation and deliver improved quality, flexibility, risk management and financial value. The portfolio includes a comprehensive set of hybrid cloud services and solutions to assist clients in building and running enterprise IT environments that utilize public and private clouds and traditional IT. The IBM Cloud Platform offers leading edge services to developers and IBM's Cloud Infrastructure-as-a-Service covers a wide variety of workloads with unprecedented performance. These offerings integrate long-standing expertise in service management and technology with the ability to utilize the power of new technologies, including those from other IBM business segments. The portfolio is built around a key set of predictive and proactive solutions addressing systems, mobility, resiliency, networking, cloud and security. The company's capabilities, including IBM Cloud, cognitive computing and hybrid cloud implementation, can help to deliver high-performance, end-to-end innovation and an improved ability to achieve business objectives. 5

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Technical Support Services: delivers a comprehensive line of support services to maintain and improve the availability of clients' IT infrastructures. These offerings include maintenance for IBM products and other technology platforms, as well as software and solution support. Integration Software: delivers industry-leading hybrid cloud solutions that empower clients to achieve rapid innovation, hybrid integration, and process transformation with choice and consistency across public, dedicated and local cloud environments, leveraging IBM's Bluemix Platform-as-a-Service solution. Integration Software offerings and capabilities help clients address the digital imperatives to create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses. Systems provides clients with innovative infrastructure technologies to help meet the new requirements of hybrid cloud and cognitive workloads—from deploying advanced analytics, to moving to digital service delivery with the cloud, and securing mobile transaction processing. Approximately half of Systems Hardware's server and storage sales transactions are through the company's business partners, with the balance direct to end-user clients. IBM Systems also designs advanced semiconductor and systems technology in collaboration with IBM Research, primarily for use in the company's systems. Systems Capabilities Servers: a range of high-performance systems designed to address computing capacity, security and performance needs of businesses, hyperscale cloud service providers and scientific computing organizations. The portfolio includes z Systems, a trusted enterprise platform for integrating data, transactions and insight, and Power Systems, a system designed from the ground up for big data and analytics, optimized for scale-out cloud and Linux, and delivering open innovation with OpenPOWER. The company is a founding member of the OpenPOWER foundation, a group of industry-leading companies developing high- performance compute technologies and 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 and to fuel data-centric cognitive applications. 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, flash storage, disk and tape storage solutions. Operating Systems Software: The company's z/OS is a security-rich, scalable, high-performance enterprise operating system for z Systems. Power Systems offers a choice of AIX or Linux operating systems. These operating systems leverage POWER architecture to deliver secure, reliable and high- performing enterprise-class workloads across a breadth of server offerings. 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. 6

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Global Financing Capabilities Client Financing: lease, installment payment plan and loan financing to end users and internal clients for terms up to seven years. Assets financed are primarily new and used IT hardware, software and services where the company has expertise. Internal financing is predominantly in support of Technology Services & Cloud Platforms' long-term client service contracts. 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 suppliers, distributors and remarketers of IBM and OEM products. This includes internal activity where Global Financing factors a selected portion of the company's accounts receivable primarily for cash management purposes, at arm's-length rates. Remanufacturing and Remarketing: assets include used equipment returned from lease transactions, or used and surplus equipment acquired internally or externally. 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 Services & Cloud Platforms. Systems 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: • Global Markets (formerly Sales and Distribution)

• Research, Development and Intellectual Property

• Integrated Supply Chain

Global Markets IBM has a global presence, operating in more than 175 countries with a broad-based geographic distribution of revenue. The company's Global Markets organization manages IBM's global footprint, working closely with dedicated country-based operating units to serve clients locally. These country teams have client relationship managers who lead integrated teams of consultants, solution specialists and delivery professionals to enable clients' growth and innovation. These local teams develop deep relationships with their clients to bring together capabilities from IBM and its network of Business Partners to develop and implement solutions. By complementing local expertise with global experience and digital capabilities, IBM builds broad-based client relationships. This local management focus fosters speed in addressing new markets and making investments in emerging opportunities. The Global Markets organization serves clients with expertise in their industry as well as through the products and services that IBM and partners supply. IBM is also expanding its reach to smaller clients through digital marketing, digital marketplaces, inside sales and local Business Partner resources. IBM continues to invest to capture opportunities in key growth markets around the world—India, China and Southeast Asia; Eastern Europe; the Middle East and Africa; and Latin America. Major IBM markets include the G7 countries of Canada, France, Germany, Italy, Japan, the United States (U.S.) and the United Kingdom (U.K.), as well as Austria, the Bahamas, Belgium, the Caribbean, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland. 7

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Research, Development and Intellectual Property IBM's research and development (R&D) operations differentiate the company from its competitors. IBM annually invests 6 to 7 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 midterm innovations. It contributes many new technologies to IBM's portfolio every year and helps clients address their most difficult challenges. IBM Research scientists are conducting pioneering work in artificial intelligence, analytics, security, nanotechnology, cloud computing, blockchain, quantum computing, silicon and post-silicon computing architectures, data-centric systems and more—applying these technologies across industries including healthcare, Internet of Things, education and financial services. In 2016, IBM was awarded more U.S. patents than any other company for the 24th consecutive year. IBM's 8,088 patents awarded in 2016 represent a diverse range of inventions in artificial intelligence and cognitive computing, cognitive health, cloud, cybersecurity and other strategic growth areas for the company. The company continues to actively seek intellectual property (IP) protection for its innovations, while increasing emphasis on other initiatives designed to leverage its IP leadership. Some of IBM's technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in IBM products and/or the products of the licensee. As part of its business model, the company licenses certain of its intellectual property, which is high-value technology, but may be in more mature markets. The licensee drives the future development of the IP and ultimately expands the customer base. This generates IP income for the company both upon licensing, and with ongoing royalty arrangements between it and the licensee. While the company's various proprietary IP rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. Integrated Supply Chain IBM has an extensive integrated supply chain, procuring materials and services globally. Additionally, growth in client spend managed by IBM's procurement organization continues to demonstrate clients' faith that IBM can reduce clients' cost through the transformation of source-to-pay operations. The supply, manufacturing and logistics operations are seamlessly integrated and have optimized inventories over time. Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency. Supply chain resiliency enables IBM to reduce its risk during marketplace changes. The company continues to derive business value from its own globally integrated supply chain providing a strategic advantage for the company to create value for clients. IBM leverages its supply chain expertise for clients through its supply chain business transformation outsourcing service to optimize and help operate clients' end-to-end supply chain processes, from procurement to logistics. Utilizing analytics, mobile, cloud and social—with numerous projects, has allowed the integrated supply chain to drive positive business outcomes for the company and its clients. 8

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document COMPETITION The company is a globally-integrated enterprise, operating in more than 175 countries. The company participates in a highly competitive environment, where its competitors vary by industry segment, and range from large multinational enterprises to smaller, more narrowly focused entities. Overall, across its business segments, the company recognizes hundreds of competitors worldwide. Across its business, the company's principal methods of competition are: technology innovation; performance; price; quality; brand; its broad range of capabilities, products and services; client relationships; the ability to deliver business value to clients; and service and support. In order to maintain leadership, a corporation must continue to invest, innovate and integrate. The company has been executing a strategy to transform its business, including shifting to higher value market segments and offerings and increasing its capabilities through organic investments, partnerships and strategic acquisitions. As the company executes its strategy, it has entered into new markets, such as cloud and cognitive, including business analytics and "as-a-service" solutions, which exposes the company to new competitors. Overall, the company is the leader or among the leaders in each of its business segments. A summary of the competitive environment for each business segment is included below: Cognitive Solutions: The Cognitive Solutions segment leads the burgeoning market for artificial intelligence infused software solutions. Increasingly, technology companies are looking to implement software solutions that will take advantage of the massive amounts of data businesses hold in order to improve business outcomes for their clients. The Watson platform is integrated throughout the Cognitive Solutions segment. Watson is the first commercially available cognitive computing capability, representing a new era in computing. Delivered through the cloud, the platform analyzes high volumes of data, understands complex questions posed in natural language, and proposes evidence-based answers. Watson continuously learns in three ways: by being taught by its users, by learning from prior interactions, and by being presented with new information. Its key competitive factors include a wide range of powerful cognitive services—from conversation services and machine vision to deep learning. IBM is unique amongst its competitors in providing transparency so users and decision makers can see the data sources and training methods and thus have confidence in the recommendations. The insights produced by IBM's cognitive systems are trained and designed for specific industries including Health, Financial Services, Education, Retail and others. Specifically, Cognitive Solutions includes solutions software, delivered both on-premise and "as-a-service", and transaction processing software. The solutions software portfolio, which spans Watson data management, analytics, security, and social capabilities, provides comprehensive business and industry-specific offerings to IT decision makers. IT buyers include chief information officers as well as line of business buyers, such as chief marketing and procurement officers, chief information security officers and chief financial officers. The transaction processing software portfolio, mostly delivered on-premise, runs mission-critical systems in industries such as banking, airlines and retail. The depth and breadth of the software offerings, coupled with the company's global markets and technical support infrastructure, differentiate its capabilities from its competitors. The company's research and development capabilities and intellectual property patent portfolio also contribute to its differentiation. The company's principal competitors in this segment include Alphabet Inc. (Google), Amazon.com, Inc. (Amazon) Cisco Systems, Inc. (Cisco), Microsoft Corporation (Microsoft), Oracle Corporation (Oracle), Salesforce.com and SAP. The company also competes with smaller, niche competitors in specific geographic or product markets worldwide. 9

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Global Business Services and Technology Services & Cloud Platforms: The company's services segments, Global Business Services and Technology Services & Cloud Platforms, operate in a highly competitive and continually evolving global market. The principal competitive factors in these business segments include: technical skills and capabilities, innovative service and product offerings, industry knowledge and experience, value and speed, price, client relationships, quality of sales and delivery, reliability, security and the availability of resources. The company's competitive advantages in these businesses include its global reach and scale, global delivery model, best-of-breed process and industry skills, extensive technology expertise, services assets, an ability to deliver integrated solutions that can address clients' needs in any environment and with a strong set of relationships with clients and strategic business partners worldwide. Global Business Services: GBS competes in consulting, systems integration, application management and business process outsourcing services. The company competes with broad based competitors including: Accenture, Capgemini, Computer Sciences Corporation, Fujitsu, Google, Hewlett-Packard (HPE) and Microsoft; India-based service providers; the consulting practices of public accounting firms; and many companies that primarily focus on local markets or niche service areas. Technology Services & Cloud Platforms: Technology Services & Cloud Platforms competes in strategic outsourcing, cloud services, and a wide range of technical and IT support services. The company competes with broad based competitors including: Accenture, Amazon, Computer Sciences Corporation, Fujitsu, Google, HPE and Microsoft; India-based service providers; and many companies that primarily focus on local markets or niche service areas. This segment also includes the company's Integration Software offerings. Integration Software helps clients address the digital imperatives to create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses. The company competes with Amazon, BMC, Microsoft, Oracle, VMWare as well as companies that primarily focus on niche solutions and offerings. Systems: The enterprise server and storage market is characterized by competition in technology and service innovation focused on value, function, reliability, price and cost performance. The company's principal competitors include Dell Technologies, HPE, Intel, Pure Storage, Oracle, and lower cost original device manufacturer systems that are often re-branded. Also, alternative as-a-service providers are leveraging innovation in technology and service delivery both to compete with traditional providers and to offer new routes to market for server and storage systems. These alternative providers include Amazon, Google, Microsoft, and IBM's own cloud-based services. The company gains advantage and differentiation through investments in higher value capabilities—from semiconductor through software stack innovation—that increase efficiency, lower cost and improve performance. The company's research and development capabilities and intellectual property patent portfolio contribute significantly to this segment's leadership across areas as diverse as high performance computing, virtualization technologies, software optimization, power management, security, multi-operating system capabilities and open technologies like interconnect standards to be leveraged by broad ecosystems. 10

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Global Financing: Global Financing provides client financing, commercial financing and participates in the remarketing of used equipment. Global Financing's access to capital and its ability to manage increased exposures provide a competitive advantage for the company. The key competitive factors include price, IT product expertise, client service, contract flexibility, ease of doing business, global capabilities and residual values. In client and commercial financing, Global Financing competes with three types of companies in providing financial services to IT customers: other captive financing entities of IT companies such as Cisco and HP, non-captive financing entities of companies such as General Electric Company and banks or financial institutions. In remarketing, the company competes with local and regional brokers plus original manufacturers in the fragmented worldwide used IT equipment market. Forward-looking and Cautionary Statements Certain statements contained in this Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). 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. The company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, the company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Any forward-looking statement in this Form 10-K speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, set forth under Item 1A. "Risk Factors" on pages 12 to 18 are cautionary statements that accompany those forward-looking statements. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in the company's filings with the Securities and Exchange Commission or in materials incorporated therein by reference. The following information is included in IBM's 2016 Annual Report to Stockholders and is incorporated herein by reference: Segment information and revenue by classes of similar products or services—pages 150 to 154. Financial information by geographic areas—page 154. Amount spent during each of the last three years on R&D activities—page 132. Financial information regarding environmental activities—page 123. The number of persons employed by the registrant—page 76. The management discussion overview—pages 27 to 30. Available information—page 159. Also refer to Item 1A. entitled "Risk Factors" in Part I of this Form. 11

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Executive Officers of the Registrant (at February 28, 2017): Officer Age since Virginia M. Rometty, Chairman of the Board, President and Chief Executive Officer* 59 2005 Michelle H. Browdy, Senior Vice President, Legal and Regulatory Affairs, and General 52 2015 Counsel Erich Clementi, Senior Vice President, IBM Global Markets 58 2010 Robert F. Del Bene, Vice President and Controller 57 2017 Diane J. Gherson, Senior Vice President, Human Resources 59 2013 James J. Kavanaugh, Senior Vice President, Transformation and Operations 50 2008 John E. Kelly III, Senior Vice President, IBM Cognitive Solutions and IBM Research 63 2000 Kenneth M. Keverian, Senior Vice President, Corporate Strategy 60 2014 Martin J. Schroeter, Senior Vice President and Chief Financial Officer 52 2014 * Member of the Board of Directors.

All executive officers are elected by the Board of Directors annually as provided in the By-laws. Each executive officer named above, with the exception of Kenneth M. Keverian, has been an executive of IBM or its subsidiaries during the past five years. Mr. Keverian was a Senior Partner at the Boston Consulting Group, a global management consulting firm, until joining IBM in 2014. He was with Boston Consulting Group for 26 years and he focused on serving technology companies in the computing and communications sectors. Item 1A. Risk Factors: Downturn in Economic Environment and Client Spending Budgets could impact the Company's Business: If overall demand for IBM's products and solutions decreases, whether due to general economic conditions or a shift in client buying patterns, the company's revenue and profit could be impacted. The Company may not meet its Growth and Productivity Objectives under its Internal Business Transformation and Global Integration Initiatives: On an ongoing basis, IBM seeks to drive greater agility, productivity, flexibility and cost savings by transforming and globally integrating its own business processes, functions and technologies to remain competitive and to enable scaling of resources and offerings in both emerging and more established markets. These various initiatives may not yield their intended gains in speed, quality, productivity and enablement of rapid scaling, which may impact the company's competitiveness and its ability to meet its growth and productivity objectives. Failure of Innovation Initiatives could impact the Long-Term Success of the Company: IBM has been moving away from certain segments of the IT industry and into areas in which it can differentiate itself through innovation, by leveraging its investments in R&D and attracting a successful developer ecosystem. If IBM is unable to continue its cutting-edge innovation in a highly competitive and rapidly evolving environment or is unable to commercialize such innovations, expand and scale them with sufficient speed and versatility, the company could fail in its ongoing efforts to maintain and increase its market share and its profit margins. In addition, IBM has one of the strongest brand names in the world, and its brand and overall reputation could be negatively impacted by many factors, including if the company does not continue to be recognized for its industry-leading technology and solutions and as a cognitive leader. If the company's brand image is tarnished by negative perceptions, its ability to attract and retain customers could be impacted. Risks from Investing in Growth Opportunities could impact the Company's Business: The company continues to invest significantly in its strategic imperatives to drive revenue growth and market share 12

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document gains. Client adoption rates and viable economic models are less certain in the high-value, highly competitive, and rapidly-growing segments, and new delivery models may unfavorably impact demand and profitability for our other products or services. In addition, as the company expands to capture emerging growth opportunities, it needs to rapidly secure the appropriate mix of trained, skilled and experienced personnel, and develop ecosystems and collaborative partnerships. In emerging growth countries, the developing nature presents potential political, social, legal and economic risks from evolving governmental policy, inadequate infrastructure, creditworthiness of customers and business partners, labor disruption and corruption, which could impact the company's ability to meet its growth objectives and to deliver to its clients around the world. IBM's Intellectual Property Portfolio may not prevent Competitive Offerings, and IBM may not be able to Obtain Necessary Licenses: The company's patents and other intellectual property may not prevent competitors from independently developing products and services similar to or duplicative to the company's, nor can there be any assurance that the resources invested by the company to protect its intellectual property will be sufficient or that the company's intellectual property portfolio will adequately deter misappropriation or improper use of the company's technology. In addition, the company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Also, there can be no assurances that IBM will be able to obtain from third parties the licenses it needs in the future. The company's ability to protect its intellectual property could also be impacted by changes to existing laws, legal principles and regulations governing intellectual property, including the ownership and protection of patents. Cybersecurity and Privacy Considerations could impact the Company's Business: The company's products, services, and systems may affect critical third party operations or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidential data, regulated data, and personal information of employees, customers and others. In the current environment there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance, and human or technological error. As a global enterprise, the regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly challenging and may have impacts on the company's business, including increased risk, costs, and expanded compliance obligations. As the company's business focus on data grows, the potential impact of these vulnerabilities and regulations on the company's business, risks, and reputation may grow accordingly. The General Data Protection Regulation that will come into force in the European Union in May 2018 will cause the company to incur additional compliance costs. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. The risk of such attacks to the company includes attempted breaches not only of our own products, services and systems, but also those of customers, contractors, business partners, vendors and other third parties. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware or other attacks; and business delays, service or system disruptions or denial of service. In the event of such actions, the company, its customers or other third parties could be exposed to potential liability, litigation, and regulatory or other government action, as well as the loss of existing or potential customers, damage to brand and reputation, and other financial loss. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant. The company experiences and responds to cybersecurity threats, although none has had a material adverse effect on the company to date. As the company's business and the cybersecurity 13

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document landscape evolve, the company may also find it necessary to make significant further investments to protect data and infrastructure. Cybersecurity risk to the company and its customers will also depend on factors such as actions, practices and investments of customers, contractors, business partners, vendors and other third parties. Cyber attacks or other catastrophic events resulting in disruptions to or failures in power, information technology, communication systems or other critical infrastructure could result in interruptions or delays to company, customer, or other third party operations or services, financial loss, injury to persons or property, potential liability, and damage to brand and reputation. The Company's Financial Results for Particular Periods are Difficult to Predict: IBM's revenues are affected by such factors as the introduction of new products and services, our ability to compete effectively in increasingly competitive marketplaces, the length of the sales cycles and the seasonality of technology purchases. Moreover, the company's strategic imperatives involve new products, new customers, new and evolving competitors, and new markets, all of which contribute to the difficulty of predicting the company's financial results. The company's financial results may also be impacted by the structure of products and services contracts and the nature of its customers' businesses; for example, certain of the company's services contracts with commercial customers in regulated industries are subject to periodic review by regulators with respect to controls and processes. As a result of the above-mentioned factors, the company's financial results are difficult to predict. Historically, the company has had lower revenue in the first quarter than in the immediately preceding fourth quarter. In addition, the high volume of products typically ordered at the end of each quarter, especially at the end of the fourth quarter, may affect IBM's ability to successfully ship all orders before the end of the quarter. Due to the Company's Global Presence, its Business and Operations could be impacted by Local Legal, Economic, Political and Health Conditions: The company is a globally integrated entity, operating in over 175 countries worldwide and deriving more than sixty percent of its revenues from sales outside the United States. Changes in the laws or policies of the countries in which the company operates, or inadequate enforcement of laws or policies, could affect the company's business and the company's overall results of operations. The company's results of operations also could be affected by economic and political changes in those countries and by macroeconomic changes, including recessions, inflation, currency fluctuations between the U.S. dollar and non-U.S. currencies and adverse changes in trade relationships amongst those countries. Further, as the company expands its customer base and the scope of its offerings, both within the U.S. and globally, it may be impacted by additional regulatory or other risks. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue or uncertain political climates, international hostilities, natural disasters, or any terrorist activities, could adversely affect customer demand and the company's operations and its ability to source and deliver products and services to its customers. The Company could incur Substantial Costs for Environmental Matters: The company is subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment or otherwise related to environmental protection, including the U.S. Superfund law. The company could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if it were to violate or become liable under environmental laws and regulations. Compliance with environmental laws and regulations is not expected to have a material adverse effect on the company's financial position, results of operations and competitive position. Tax Matters could impact the Company's Results of Operations and Financial Condition: The company is subject to income taxes in both the United States and numerous foreign jurisdictions. IBM's provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact the company's results of 14

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document operations and financial condition in future periods. The Organization for Economic Cooperation and Development (OECD) is issuing guidelines that are different, in some respects, than long-standing international tax principles. As countries unilaterally amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may adversely impact the company's income taxes. Local country, state, provincial or municipal taxation may also be subject to review and potential override by regional, federal, national or similar forms of government. In addition, IBM is subject to the continuous examination of its income tax returns by the United States Internal Revenue Service and other tax authorities around the world. The company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on the company's provision for income taxes and cash tax liability. The Company's Results of Operations and Financial Condition could be negatively impacted by its U.S. and non-U.S. Pension Plans: Adverse financial market conditions and volatility in the credit markets may have an unfavorable impact on the value of the company's pension trust assets and its future estimated pension liabilities. As a result, the company's financial results in any period could be negatively impacted. In addition, in a period of an extended financial market downturn, the company could be required to provide incremental pension plan funding with resulting liquidity risk which could negatively impact the company's financial flexibility. Further, the company's results could be negatively impacted by premiums for mandatory pension insolvency insurance coverage outside the United States. Premium increases could be significant due to the level of insolvencies of unrelated companies in the country at issue. IBM's 2016 Annual Report to Stockholders includes information about potential impacts from pension funding and the use of certain assumptions regarding pension matters. Ineffective Internal Controls could impact the Company's Business and Operating Results: The company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the company experiences difficulties in their implementation, the company's business and operating results could be harmed and the company could fail to meet its financial reporting obligations. The Company's Use of Accounting Estimates involves Judgment and could impact the Company's Financial Results: The application of generally accepted accounting principles requires the company to make estimates and assumptions about certain items and future events that directly affect its reported financial condition. The company's most critical accounting estimates are described in the Management Discussion in IBM's 2016 Annual Report to Stockholders, under "Critical Accounting Estimates." In addition, as discussed in note M, "Contingencies and Commitments," in IBM's 2016 Annual Report to Stockholders, the company makes certain estimates including decisions related to legal proceedings and reserves. These estimates and assumptions involve the use of judgment. As a result, actual financial results may differ. The Company Depends on Skilled Personnel and could be impacted by the loss of Critical Skills: Much of the future success of the company depends on the continued service, availability and integrity of skilled personnel, including technical, marketing and staff resources. Skilled and experienced personnel in the areas where the company competes are in high demand, and competition for their talents is intense. Changing demographics and labor work force trends may result in a loss of or insufficient knowledge and skills. In addition, as global opportunities and industry demand shifts, realignment, training and scaling of skilled resources may not be sufficiently rapid or successful. Further, many of IBM's key personnel receive a total compensation package that includes equity awards. Any new regulations, volatility in the stock market and other factors could diminish the 15

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document company's use, and the value, of the company's equity awards, putting the company at a competitive disadvantage or forcing the company to use more cash compensation. The Company's Business could be impacted by its Relationships with Critical Suppliers: IBM's business employs a wide variety of components, supplies, services and raw materials from a substantial number of suppliers around the world. Certain of the company's businesses rely on a single or a limited number of suppliers, and with the completion of GLOBALFOUNDRIES' acquisition of IBM's global commercial semiconductor business in 2015, it became IBM's exclusive server processor technology provider for certain semiconductors. Changes in the business condition (financial or otherwise) of these suppliers could subject the company to losses and affect its ability to bring products to market. Further, the failure of the company's suppliers to deliver components, supplies, services and raw materials in sufficient quantities, in a timely manner, and in compliance with all applicable laws and regulations could adversely affect the company's business. In addition, any defective components, supplies or materials, or inadequate services received from suppliers could reduce the reliability of the company's products and services and harm the company's reputation. Product Quality Issues could impact the Company's Business and Operating Results: The company has rigorous quality control standards and processes intended to prevent, detect and correct errors, malfunctions and other defects in its products and services. If errors, malfunctions, defects or disruptions in service are experienced by customers, there could be negative consequences that could impact customers' business operations and harm the company's business's operating results. The Company could be impacted by its Business with Government Clients: The company's customers include numerous governmental entities within and outside the U.S., including the U.S. Federal Government and state and local entities. Some of the company's agreements with these customers may be subject to periodic funding approval. Funding reductions or delays could adversely impact public sector demand for our products and services. Also, some agreements may contain provisions allowing the customer to terminate without cause and providing for higher liability limits for certain losses. In addition, the company could be suspended or debarred as a governmental contractor and could incur civil and criminal fines and penalties, which could negatively impact the company's results of operations and financial results. The Company is exposed to Currency and Financing Risks that could impact its Revenue and Business: The company derives a significant percentage of its revenues and costs from its affiliates operating in local currency environments, and those results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Further, inherent in the company's financing business are risks related to the concentration of credit, client creditworthiness, interest rate and currency fluctuations on the associated debt and liabilities, the determination of residual values and the financing of other than traditional IT assets. The company employs a number of strategies to manage these risks, including the use of derivative financial instruments, which involve the risk of non- performance by the counterparty. In addition, there can be no assurance that the company's efforts to manage its currency and financing risks will be successful. The Company's Financial Performance could be impacted by Changes in Market Liquidity Conditions and by Customer Credit Risk on Receivables: The company's financial performance is exposed to a wide variety of industry sector dynamics worldwide. The company's earnings and cash flows, as well as its access to funding, could be negatively impacted by changes in market liquidity conditions. IBM's 2016 Annual Report to Stockholders includes information about the company's liquidity position. The company's client base includes many worldwide enterprises, from small and medium businesses to the world's largest organizations and governments, with a significant portion of the company's revenue coming from global clients across many sectors. Most of the company's sales are on an open credit basis, and the company performs ongoing credit evaluations of its clients' financial conditions. If the company becomes aware of information related to the creditworthiness of a major customer, or, if 16

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document future actual default rates on receivables in general differ from those currently anticipated, the company may have to adjust its allowance for credit losses, which could affect the company's consolidated net income in the period the adjustments are made. The Company's Reliance on Third Party Distribution Channels and Ecosystems could impact its Business: The company offers its products directly and through a variety of third party distributors, resellers and ecosystem partners. Changes in the business condition (financial or otherwise) of these distributors, resellers and ecosystem partners could subject the company to losses and affect its ability to bring its products to market. As the company moves into new areas, distributors, resellers and ecosystem partners may be unable to keep up with changes in technology and offerings, and the company may be unable to recruit and enable appropriate partners to achieve growth objectives. In addition, the failure of third party distributors, resellers and ecosystem partners to comply with all applicable laws and regulations may prevent the company from working with them and could subject the company to losses and affect its ability to bring products to market. Risks to the Company from Acquisitions, Alliances and Dispositions include Integration Challenges, Failure to Achieve Objectives, and the Assumption of Liabilities: The company has made and expects to continue to make acquisitions, alliances and dispositions. Acquisitions and alliances present significant challenges and risks relating to the integration of the business into the company, and there can be no assurances that the company will manage acquisitions and alliances successfully or that strategic acquisition opportunities will be available to the company on acceptable terms or at all. The related risks include the company failing to achieve strategic objectives and anticipated revenue improvements and cost savings, as well as the failure to retain key personnel of the acquired business and the assumption of liabilities related to litigation or other legal proceedings involving the acquired business. From time to time, the company disposes or attempts to dispose of assets that are no longer central to its strategic objectives. Any such disposition or attempted disposition is subject to risks, including risks related to the terms and timing of such disposition, risks related to obtaining necessary governmental or regulatory approvals and risks related to retained liabilities not subject to the company's control. The Company is Subject to Legal Proceedings Risks: As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The risks associated with such legal proceedings are described in more detail in note M, "Contingencies and Commitments," in IBM's 2016 Annual Report to Stockholders. The company believes it has adopted appropriate risk management and compliance programs. Legal and compliance risks, however, will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, may arise from time to time. Risk Factors Related to IBM Securities: The company and its subsidiaries issue debt securities in the worldwide capital markets from time to time, with a variety of different maturities and in different currencies. The value of the company's debt securities fluctuates based on many factors, including the methods employed for calculating principal and interest, the maturity of the securities, the aggregate principal amount of securities outstanding, the redemption features for the securities, the level, direction and volatility of interest rates, changes in exchange rates, exchange controls, governmental and stock exchange regulations and other factors over which the company has little or no control. The company's ability to pay interest and repay the principal for its debt securities is dependent upon its ability to manage its business operations, as well as the other risks described under this Item 1A. entitled "Risk Factors." There can be no assurance that the company will be able to manage any of these risks successfully. The company also issues its common stock from time to time in connection with various compensation plans, contributions to its pension plan and certain acquisitions. The market price of 17

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document IBM common stock is subject to significant volatility, due to other factors described under this Item 1A. entitled "Risk Factors," as well as economic and geopolitical conditions generally, trading volumes, speculation by the press or investment community about the company's financial condition, and other factors, many of which are beyond the company's control. Since the market price of IBM's common stock fluctuates significantly, stockholders may not be able to sell the company's stock at attractive prices. In addition, changes by any rating agency to the company's outlook or credit ratings can negatively impact the value and liquidity of both the company's debt and equity securities. The company does not make a market in either its debt or equity securities and cannot provide any assurances with respect to the liquidity or value of such securities. Item 1B. Unresolved Staff Comments: Not applicable. Item 2. Properties: At December 31, 2016, IBM's manufacturing and development facilities in the United States had aggregate floor space of 8 million square feet, of which 7 million was owned and 1 million was leased. Similar facilities in 16 other countries totaled 6 million square feet, of which 2 million was owned and 4 million was leased. The company's facilities are utilized for current operations of all its segments. Although improved production techniques, productivity gains, divestitures and infrastructure reduction actions have resulted in reduced manufacturing floor space, continuous maintenance and upgrading of facilities is essential to maintain technological leadership, improve productivity and meet customer demand. Item 3. Legal Proceedings: Refer to note M, "Contingencies and Commitments," on pages 127 to 129 of IBM's 2016 Annual Report to Stockholders, which is incorporated herein by reference. Item 4. Mine Safety Disclosures: Not applicable. 18

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities: Refer to pages 156 and 159 of IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference solely as they relate to this item. IBM common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange. There were 425,272 common stockholders of record at February 10, 2017. The following table provides information relating to the company's repurchase of common stock for the fourth quarter of 2016. Approximate Total Number Dollar Value of Shares Total Number Average of Shares that Purchased of Shares Price Paid May Yet Be as Part of Publicly Purchased per Share Purchased Announced Under Program the Program(1) October 1, 2016— 2,099,548 $ 153.73 2,099,548 $ 5,661,310,700 October 31, 2016 November 1, 2016— 1,584,897 $ 160.79 1,584,897 $ 5,406,480,346 November 30, 2016 December 1, 2016— 1,805,114 $ 165.07 1,805,114 $ 5,108,501,284 December 31, 2016 Total 5,489,559 $ 159.50 5,489,559

(1) On October 27, 2015, the Board of Directors authorized $4.0 billion in funds for use in the company's common stock repurchase program. On October 25, 2016, the Board of Directors authorized an additional $3.0 billion in funds for use in such program. In each case, the company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

Item 6. Selected Financial Data: Refer to pages 155 and 156 of IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: Refer to pages 26 through 81 of IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk: Refer to the section titled "Market Risk" on pages 74 and 75 of IBM's 2016 Annual Report to Stockholders, which is incorporated herein by reference. 19

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Item 8. Financial Statements and Supplementary Data: Refer to pages 84 through 154 of IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference. Also refer to the Financial Statement Schedule on page S-1 of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: Not applicable. Item 9A. Controls and Procedures: The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report. Refer to "Report of Management" and "Report of Independent Registered Public Accounting Firm" on pages 82 and 83 of IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference. There has been no change in the company's internal control over financial reporting that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Item 9B. Other Information: Due to retirement, Joan E. Spero will not stand for re-election at the company's annual meeting of stockholders on April 25, 2017. As a result, Article III, Section 2 of the company's By-Laws was amended to decrease the number of directors to thirteen, effective April 25, 2017. The full text of IBM's By-Laws, as amended effective April 25, 2017, is included as Exhibit 3.2 to this report. 20

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PART III Item 10. Directors, Executive Officers and Corporate Governance: Refer to the information under the captions "Election of Directors for a Term of One Year," "General Information—Committees of the Board," "General Information—Audit Committee" and "2016 Director Compensation Narrative—Section 16(a) Beneficial Ownership Reporting Compliance" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, all of which information is incorporated herein by reference. Also refer to Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant (at February 28, 2017)" on page 12 for additional information on the company's executive officers. Item 11. Executive Compensation: Refer to the information under the captions "2016 Director Compensation Narrative," "2016 Director Compensation Narrative—2016 Director Compensation Table," "2016 Compensation Discussion and Analysis," "2016 Summary Compensation Table Narrative," "2016 Summary Compensation Table," "2016 Grants of Plan-Based Awards Table," "2016 Outstanding Equity Awards at Fiscal Year-End Narrative," "2016 Outstanding Equity Awards at Fiscal Year-End Table," "2016 Option Exercises and Stock Vested Table," "2016 Retention Plan Narrative," "2016 Retention Plan Table," "2016 Pension Benefits Narrative," "2016 Pension Benefits Table," "2016 Nonqualified Deferred Compensation Narrative," "2016 Nonqualified Deferred Compensation Table," "2016 Potential Payments Upon Termination Narrative," "2016 Potential Payments Upon Termination Table," "General Information—Compensation Committee Interlocks and Insider Participation" and "Executive Compensation—2016 Report of the Executive Compensation and Management Resources Committee of the Board of Directors" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, all of which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters: Refer to the information under the caption "Ownership of Securities—Security Ownership of Certain Beneficial Owners" and "Ownership of Securities—Common Stock and Stock-based Holdings of Directors and Executive Officers" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, all of which information is incorporated herein by reference. 21

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EQUITY COMPENSATION PLAN INFORMATION Number of Number of securities securities Weighted-average remaining available to be issued upon exercise price of for future issuance exercise of outstanding under equity Plan Category outstanding options, compensation plans options, warrants and (excluding warrants and rights(1) securities rights(1) (b) reflected in (a) column(a)) (c) Equity compensation plans approved by security holders Options 1,502,331 $ 139.78 — RSUs 8,245,950 N/A — PSUs 4,145,700(2) N/A — Subtotal 13,893,981 $ 139.78 90,914,867 Equity compensation plans not approved by security holders Options 111,592 $ 102.80 — RSUs 653,142 N/A — PSUs 166,437(2) N/A — DCEAP shares 184,240 N/A — Subtotal 1,115,411 $ 102.80 15,803,705 Total 15,009,392 $ 137.22 106,718,572 N/A is not applicable RSUs = Restricted Stock Units, including Retention Restricted Stock Units PSUs = Performance Share Units DCEAP Shares = Promised Fee Shares under the DCEAP (see plan description below) (1) In connection with 39 acquisition transactions, 604,784 additional share based awards, consisting of stock options, were outstanding at December 31, 2016 as a result of the Company's assumption of awards granted by the acquired entities. The weighted-average exercise price of these awards was $33.16. The Company has not made, and will not make, any further grants or awards of equity securities under the plans of these acquired companies.

(2) The numbers included for PSUs in column (a) above reflect the maximum number payout. Assuming target number payout, the number of securities to be issued upon exercise of PSUs for equity compensation plans approved by security holders is 2,763,800 and for equity compensation plans not approved by security holders is 110,958. For additional information about PSUs, including payout calculations, refer to the information under "2016 Summary Compensation Table Narrative," in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017.

The material features of each equity compensation plan under which equity securities are authorized for issuance that was adopted without stockholder approval are described below: 2001 Long-Term Performance PIan

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The 2001 Long-Term Performance Plan (the "2001 Plan") has been used to fund awards for employees other than senior executives of the Company. Awards for senior executives of the Company have been and will continue to be funded from the stockholder-approved 1999 Long-Term Performance Plan (the "1999 Plan"); the 1999 Plan is also used to fund awards for employees other than senior 22

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document executives, Otherwise, the provisions of the 2001 Plan are identical to the 1999 Plan, including the type of awards that may be granted under the plan (stock options, restricted stock and unit awards and long-term performance incentive awards). The 2001 Plan is administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the "Committee"), and that Committee may delegate to officers of the company certain of its duties, powers and authority. Payment of awards may be made in the form of cash, stock or combinations thereof and may be deferred with Committee approval. Awards are not transferable or assignable except (i) by law, will or the laws of descent and distribution, (ii) as a result of the disability of the recipient, or (iii) with the approval of the Committee. If the employment of a participant terminates, other than as a result of the death or disability of a participant, all unexercised, deferred and unpaid awards shall be canceled immediately, unless the award agreement provides otherwise. In the event of the death of a participant or in the event a participant is deemed by the company to be disabled and eligible for benefits under the terms of the IBM Long-Term Disability Plan (or any successor plan or similar plan of another employer), the participant's estate, beneficiaries or representative, as the case may be, shall have the rights and duties of the participant under the applicable award agreement. In addition, unless the award agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred award at any time if the participant is not in compliance with all applicable provisions of the awards agreement and the 2001 Plan. In addition, awards may be cancelled if the participant engages in any conduct or act determined to be injurious, detrimental or prejudicial to any interest of the company. PWCC Acquisition Long-Term Performance Plan The IBM PWCC Acquisition Long-Term Performance Plan (the "PWCC Plan") was adopted by the Board of Directors in connection with the company's acquisition of PricewaterhouseCoopers Consulting ("PwCC") from PricewaterhouseCoopers LLP, as announced on October 1, 2002. The PWCC Plan has been and will continue to be used solely to fund awards for employees of PwCC who have become employed by the company as a result of the acquisition. Awards for senior executives of the company will not be funded from the PWCC Plan. The terms and conditions of the PWCC Plan are substantively identical to the terms and conditions of the 2001 Plan, described above. IBM Deferred Compensation and Equity Award Plan The IBM Deferred Compensation and Equity Award Plan (the "DCEAP") was adopted in 1993 and amended and restated effective January 1, 2014. Under the Amended and Restated DCEAP, non-management directors receive Promised Fee Shares in connection with deferred annual retainer payments. Each Promised Fee Share is equal in value to one share of the company's common stock. Upon a director's retirement or other completion of service as a director, amounts deferred into Promised Fee Shares are payable in either cash and/or shares of the company's stock either as lump sum or installments pursuant to the director's distribution election. For additional information about the DCEAP, see "2016 Director Compensation Narrative" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017. Item 13. Certain Relationships and Related Transactions, and Director Independence: Refer to the information under the captions "General Information—IBM Board of Directors" and "General Information—Certain Transactions and Relationships" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, which information is incorporated herein by reference. 23

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Item 14. Principal Accounting Fees and Services: Refer to the information under the captions "Report of the Audit Committee of the Board of Directors" and "Audit and Non-Audit Fees" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, all of which information is incorporated herein by reference. 24

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PART IV Item 15. Exhibits, Financial Statement Schedules: (a) The following documents are filed as part of this report:

1. Financial statements from IBM's 2016 Annual Report to Stockholders, which are incorporated herein by reference:

Report of Independent Registered Public Accounting Firm (page 83). Consolidated Statement of Earnings for the years ended December 31, 2016, 2015 and 2014 (page 84). Consolidated Statement of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 (page 85). Consolidated Statement of Financial Position at December 31, 2016 and 2015 (page 86). Consolidated Statement of Cash Flows for the years ended December 31, 2016, 2015 and 2014 (page 87). Consolidated Statement of Changes in Equity at December 31, 2016, 2015 and 2014 (pages 88 and 89). Notes to Consolidated Financial Statements (pages 90 through 154). 2. Financial statement schedule required to be filed by Item 8 of this Form:

Schedule Page Number Report of Independent Registered Public Accounting Firm on Financial Statement 34 Schedule. S-1 II Valuation and Qualifying Accounts and Reserves. All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the Consolidated Financial Statements or the notes thereto. 3. Exhibits:

Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K Not (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. applicable

(3) Certificate of Incorporation and By-laws.

The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference.

The By-laws of IBM, as amended through April 26, 2016, is Exhibit 3.2(b) to Form 10-K for the year ended December 31, 2015, and is hereby incorporated by reference.

The By-laws of IBM, as amended effective April 25, 2017. 3.2

(4) Instruments defining the rights of security holders. 25

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K The instruments defining the rights of the holders of the 8.375% Debentures due 2019 are Exhibits 4(a)(b)(c) and (d), respectively, to Registration Statement No. 33-31732 on Form S-3, filed on October 24, 1989, and are hereby incorporated by reference.

The instruments defining the rights of the holders of the 7.00% Debentures due 2025 and the 7.00% Debentures due 2045 are Exhibits 2 and 3, respectively, to Form 8-K, filed on October 30, 1995, and are hereby incorporated by reference.

The instrument defining the rights of the holders of the 7.125% Debentures due 2096 is Exhibit 2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 6.22% Debentures due 2027 is Exhibit 3 to Form 8-K, filed on August 1, 1997, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 2.900% Notes due 2021 is Exhibit 3.1 to Form 8-K, filed October 31, 2011, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 1.875% Notes due 2019 is Exhibit 3.1 to Form 8-K, filed May 10, 2012, and is hereby incorporated by reference.

The instruments defining the rights of the holders of the 1.875% Notes due 2022 is Exhibit 2.1 to Form 8-K, filed July 27, 2012, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 1.375% Notes due 2019 is Exhibit 2.1 to Form 8-K, filed November 16, 2012, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 1.250% Notes due 2018 is Exhibits 2.1 to Form 8-K, filed February 7, 2013, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 1.625% Notes due 2020 is 3.1 to Form 8-K, filed May 6, 2013, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 3.375% Notes is Exhibit 2.1 to Form 8-K, filed July 31, 2013, and is hereby incorporated by reference.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The instruments defining the rights of the holders of the 1.875% Notes due 2020 and 2.875% Notes due 2025 are Exhibits 2.1 and 3.1 to Form 8-K, filed November 6, 2013, and are hereby incorporated by reference. 26

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K The instrument defining the rights of the holders of the 2.750% Notes due 2020 is Exhibit 2 to Form 8-K, filed November 20, 2013, and is hereby incorporated by reference.

The instruments defining the rights of the holders of the 1.950% Notes due 2019, Floating Rate Notes due 2019 and 3.625% due 2024 are Exhibits 3, 4 and 5 to Form 8-K, filed February 11, 2014, and are hereby incorporated by reference.

The instrument defining the rights of the holders of the Floating Rate Notes due 2021 is Exhibit 2 to Form 8-K, filed November 5, 2014, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 1.25% Notes due 2023 is Exhibit 2 to Form 8-K, filed November 25, 2014, and is hereby incorporated by reference.

The instruments defining the rights of the holders of the 1.125% Notes due 2018 and Floating Rate Notes due 2018 are Exhibits 2 and 3 to Form 8-K, filed February 5, 2015, and are hereby incorporated by reference.

The instrument defining the rights of the holders of the 2.625% Notes due 2022 is Exhibit 2 to Form 8-K, filed on August 4, 2015, and is hereby incorporated by reference.

The instrument defining the rights of the holders of the 2.875% Notes due 2022 is Exhibit 2 to Form 8-K, filed on November 6, 2015, and is hereby incorporated by reference.

The instruments defining the rights of the holders of the Floating Rate Notes due 2017, 1.800% Notes due 2019, 2.250% Notes due 2021, 3.450% Notes due 2026 and 4.700% Notes due 2046 are Exhibits 4.1, 4.2, 4.3, 4.4 and 4.5 to Form 8-K filed February 18, 2016, and are hereby incorporated by reference.

The instruments defining the rights of the holders of the 0.500% Notes due 2021, 1.125% Notes due 2024 and 1.750% Notes due 2028 are Exhibits 4.1, 4.2 and 4.3 to Form 8-K filed March 4, 2016 and are hereby incorporated by reference.

The instrument defining the rights of the holders of the 0.30 Notes due 2026 is Exhibit 4 to Form 8-K filed November 1, 2016 and is hereby incorporated by reference.

Not (9) Voting trust agreement applicable

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (10) Material contracts

The IBM 2001 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-87708 on Form S-8, as such amended plan was filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.* 27

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K The IBM PWCC Acquisition Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-102872 on Form S-8, as such amended plan was filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

The IBM 1999 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-30424 on Form S-8, as such amended plan was filed as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

The IBM 1997 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-31305 on Form S-8, as such amended plan was filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

Forms of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS and (ii) retention restricted stock unit awards. Such equity award agreement forms and the related terms and conditions document, effective June 9, 2014, were filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2014, are hereby incorporated by reference.*

Form of LTPP equity award agreement for performance share units was filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2015, and is hereby incorporated by reference.*

Terms and Conditions of LTPP equity award agreements was filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2016, and is hereby incorporated by reference.*

Board of Directors compensatory plans, as described under the caption "General Information—2016 Director Compensation" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 25, 2017, are hereby incorporated by reference.*

The IBM Non-Employee Directors Stock Option Plan, contained in Registration Statement 33-60227 on Form S-8, is hereby incorporated by reference.*

The IBM Board of Directors Deferred Compensation and Equity Award Plan, a compensatory plan, as amended and restated effective January 1, 2014, which was filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2013, and is hereby incorporated by reference.*

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The IBM Supplemental Executive Retention Plan, a compensatory plan, as amended and restated through December 31, 2008, which was filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 2008, is hereby incorporated by reference.* 28

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K Amendment No. 1 to the IBM Supplemental Executive Retention Plan, a compensatory plan, effective December 9, 2014, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2014, and is hereby incorporated by reference.*

The IBM Excess 401(k) Plus Plan, a compensatory plan (formerly the IBM Executive Deferred Compensation Plan), as amended and restated through January 1, 2010, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2009 contained in Registration Statement No. 333-171968 on Form S-8, is hereby incorporated by reference.*

Amendment No. 1 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2012, and is hereby incorporated by reference.*

Amendment No. 2 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2012, and is hereby incorporated by reference.*

Amendment No. 3 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2013, and is hereby incorporated by reference.*

Amendment No. 4 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of February 25, 2014, which was filed as Exhibit 10.1 to the Form 10-Q for the quarter ended March 31, 2014, and is hereby incorporated by reference.*

Amendment No. 5 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of December 9, 2014 , which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2014, and is hereby incorporated by reference.*

Amendment No. 6 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of December 18, 2015, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2015, and is hereby incorporated by reference.*

Amendment No. 7 to the IBM Excess 401 (k) Plus Plan, a compensatory plan, dated as of June 30, 2016, which was filed as Exhibit 10.2 to the Form 10-Q for the quarter ended June 30, 2016, and is hereby incorporated by reference.*

The IBM 2003 Employees Stock Purchase Plan, contained in Registration Statement 333-104806 on Form S-8, as amended through April 1, 2005, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2005, is hereby incorporated by reference.*

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Form of Noncompetition Agreement, filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2009, is hereby incorporated by reference.* 29

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K Form of Noncompetition Agreement, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012, is hereby incorporated by reference.*

Form of Noncompetition Agreement, filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2015, is hereby incorporated by reference.*

Form of Noncompetition Agreement, filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2016, is hereby incorporated by reference.*

Form of Noncompetition Agreement. 10.1

Letter dated December 4, 2008, signed by Erich Clementi and IBM, effective 10.2 January 1, 2009.

Letter dated January 28, 2015, signed by Martin Jetter and IBM, effective February 1, 10.3 2015.

The $10,000,000 5-Year Credit Agreement dated as of November 10, 2011, among International Business Machines Corporation, the Subsidiary Borrowers parties thereto, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Syndication and Documentation Agents named therein, which was filed as Exhibit 10.1 to Form 8-K dated November 14, 2011, the term of which was extended through November 10, 2020, is hereby incorporated by reference.

First Amendment, dated as of October 16, 2014, to the 5-Year Credit Agreement, among International Business Machines Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, the Subsidiary Borrowers parties thereto, the Lenders parties thereto and the Syndication Agents and Documentation Agents therein, which was filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2014, is hereby incorporated by reference.

Second Amendment, dated as of October 21, 2016, to the 5-Year Credit Agreement, among International Business Machines Corporation, JPMorgan Chase Bank, N.A., as 10.4 Administrative Agent, the Subsidiary Borrowers parties thereto, the Lenders parties thereto and the Syndication Agents and Documentation Agents therein.

Agent Letter dated October 21, 2016 from JPMorgan Chase Bank, N.A., as Administrative Agent to the Five-Year Credit Agreement (as amended), confirming the extension of the Termination Date of the Five-Year Credit Agreement to 10.5 November 10, 2021, with Schedule 1 reflecting Revolving Credit Commitments of $10,250,000,000.

(11) Statement re computation of per share earnings

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The statement re computation of per share earnings is note [P], "Earnings Per Share of Common Stock," on page 132 of IBM's 2016 Annual Report to Stockholders, and is hereby incorporated by reference. 30

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reference Exhibit Number per Number Item 601 of Description of Exhibits in this Regulation S- Form 10-K K (12) Statement re computation of ratios 12

(13) Annual report to security holders** 13

Not (18) Letter re: change in accounting principles applicable

Not (19) Previously unfiled documents applicable

(21) Subsidiaries of the registrant 21

Not (22) Published report regarding matters submitted to vote of security holders applicable

(23) Consent of experts 23.1

(24) Powers of attorney 24.1

Resolution of the IBM Board of Directors authorizing execution of this report by 24.2 Powers of Attorney

Not (28) Information from reports furnished to state insurance regulatory authorities applicable

Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities (31) Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 31.1 of 2002

Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 of 2002

Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to (32) 32.1 Section 906 of the Sarbanes-Oxley Act of 2002

Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 32.2 Section 906 of the Sarbanes-Oxley Act of 2002

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101 * Management contract or compensatory plan or arrangement.

** The Performance Graphs, set forth on page 157 of IBM's 2016 Annual Report to Stockholders, are deemed to be furnished but not filed.

Item 16. Form 10-K Summary: None. 31

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL BUSINESS MACHINES CORPORATION (Registrant)

/s/ VIRGINIA M. ROMETTY Virginia M. Rometty By: Chairman of the Board, President and Chief Executive Officer

Date: February 28, 2017 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date

Chairman of the Board, /s/ VIRGINIA M. ROMETTY President and Chief Executive February 28, 2017 Virginia M. Rometty Officer

/s/ MARTIN J. SCHROETER Senior Vice President and Chief February 28, 2017 Martin J. Schroeter Financial Officer

/s/ ROBERT F. DEL BENE Vice President and Controller February 28, 2017 Robert F. Del Bene (Chief Accounting Officer)

/s/ CHRISTINA M. MONTGOMERY Kenneth I. Chenault Director By: Christina M. Montgomery Attorney-in-fact Michael L. Eskew Director February 28, 2017 David N. Farr Director

Mark Fields Director

Alex Gorsky Director

Shirley Ann Jackson Director

Andrew N. Liveris Director

W. James McNerney, Jr. Director

Hutham S. Olayan Director

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document James W. Owens Director

Joan E. Spero Director

Sidney Taurel Director

Peter R. Voser Director 32

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE To the Stockholders and Board of Directors of International Business Machines Corporation: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 28, 2017 appearing in the 2016 Annual Report to Shareholders of International Business Machines Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP New York, New York February 28, 2017 33

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SCHEDULE II INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions) Balance at Balance at Description Beginning Additions* Write-offs** Other*** End of of Period Period Allowance For Credit Losses 2016 —Current $ 909 $ 87 $ (307)$ (13)$ 675

—Noncurrent $ 118 $ (2)$ (7)$ (8)$ 101

2015 —Current $ 829 $ 226 $ (92)$ (55)$ 909

—Noncurrent $ 126 $ 8 $ (1)$ (14)$ 118

2014 —Current $ 636 $ 276 $ (48)$ (35)$ 829

—Noncurrent $ 80 $ 57 $ (4)$ (7)$ 126

Allowance For Inventory Losses 2016 $ 483 $ 178 $ (150)$ 14 $ 525

2015 $ 564 $ 165 $ (230)$ (15)$ 483

2014 $ 623 $ 211 $ (232)$ (38)$ 564

Revenue Based Provisions 2016 $ 505 $ 1,377 $ (1,392)$ (9)$ 481

2015 $ 616 $ 1,658 $ (1,741)$ (28)$ 505

2014 $ 827 $ 2,519 $ (2,693)$ (37)$ 616

* Additions for Allowance for Credit Losses and Allowance for Inventory Losses are charged to expense and cost accounts, respectively, while Revenue Based Provisions are charged to revenue accounts.

** See Note A, "Significant Accounting Policies," on Exhibit 13 to Form 10-K, page 98 in the Notes to the Consolidated Financial Statements for additional information regarding allowance for credit loss write-offs.

*** Primarily comprises currency translation adjustments.

S-1

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks PART I Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary SIGNATURES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE SCHEDULE II INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 3.2

BY-LAWS

of

INTERNATIONAL BUSINESS MACHINES CORPORATION

Adopted April 29,1958

As Amended Through

April 25, 2017

TABLE OF CONTENTS

ARTICLE I — Definitions 1

ARTICLE II — MEETINGS OF STOCKHOLDERS

SECTION 1. Place of Meetings 1 SECTION 2. Annual Meetings 1 SECTION 3. Special Meetings 2 SECTION 4. Notice of Meetings 2 SECTION 5. Quorum 2 SECTION 6. Organization 3 SECTION 7. Items of Business 3 SECTION 8. Voting 5 SECTION 9. List of Stockholders 5 SECTION 10. Inspectors of Election 5

ARTICLE III — BOARD OF DIRECTORS

SECTION 1. General Powers 6 SECTION 2. Number; Qualifications; Election; Term of Office 6 SECTION 3. Place of Meetings 6 SECTION 4. First Meeting 6 SECTION 5. Regular Meetings 6 SECTION 6. Special Meetings 7 SECTION 7. Notice of Meetings 7 SECTION 8. Quorum and Manner of Acting 7 SECTION 9. Organization 7 SECTION 10. Resignations 7 SECTION 11. Vacancies 8 SECTION 12. Retirement of Directors 8

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ARTICLE IV — EXECUTIVE AND OTHER COMMITTEES

SECTION 1. Executive Committee 8 SECTION 2. Powers of the Executive Committee 9 SECTION 3. Meetings of the Executive Committee 9 SECTION 4. Quorum and Manner of Acting of the Executive Committee 9 SECTION 5. Other Committees 9 SECTION 6. Changes in Committees; Resignations; Removals; Vacancies 10

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ARTICLE V — OFFICERS

SECTION 1. Number and Qualifications 10 SECTION 2. Resignations 11 SECTION 3. Removal 11 SECTION 4. Vacancies 11 SECTION 5. Chairman of the Board 11 SECTION 6. Vice Chairman of the Board 11 SECTION 7. President 12 SECTION 8. Designated Officers 12 SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents 12 SECTION 10. Treasurer 12 SECTION 11. Secretary 13 SECTION 12. Controller 14 SECTION 13. Compensation 14

ARTICLE VI — CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

SECTION 1. Execution of Contracts 14 SECTION 2. Loans 14 SECTION 3. Checks, Drafts, etc 15 SECTION 4. Deposits 15 SECTION 5. General and Special Bank Accounts 15 SECTION 6. Indemnification 15

ARTICLE VII — SHARES

SECTION 1. Stock Certificates 16 SECTION 2. Books of Account and Record of Stockholders 16 SECTION 3. Transfers of Stock 16 SECTION 4. Regulations 17 SECTION 5. Fixing of Record Date 17 SECTION 6. Lost, Destroyed or Mutilated Certificates 17 SECTION 7. Inspection of Records 17 SECTION 8. Auditors 18

ARTICLE VIII — OFFICES

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 1. Principal Office 18 SECTION 2. Other Offices 18

ARTICLE IX — Waiver of Notice 18

ARTICLE X — Fiscal Year 18

ARTICLE XI — Seal 19

ARTICLE XII — Amendments 19

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BY-LAWS

OF

INTERNATIONAL BUSINESS MACHINES CORPORATION

ARTICLE I

DEFINITIONS

In these By-laws, and for all purposes hereof, unless there be something in the subject or context inconsistent therewith:

(a) ‘Corporation’ shall mean International Business Machines Corporation.

(b) ‘Certificate of Incorporation’ shall mean the restated Certificate of Incorporation as filed on May 27, 1992, together with any and all amendments and subsequent restatements thereto.

(c) ‘Board’ shall mean the Board of Directors of the Corporation.

(d) ‘stockholders’ shall mean the stockholders of the Corporation.

(e) ‘Chairman of the Board’, ‘Vice Chairman of the Board’, ‘Chairman of the Executive Committee’, ‘Chief Executive Officer,’ ‘Chief Financial Officer’, ‘Chief Accounting Officer’, ‘President’, ‘Executive Vice President’, ‘Senior Vice President’, ‘Vice President’, ‘Treasurer’, ‘Secretary’, or ‘Controller’, as the case may be, shall mean the person at any given time occupying the particular office with the Corporation.

ARTICLE II

MEETINGS OF STOCKHOLDERS

SECTION 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place either within or outside the State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 2. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the last Tuesday of April of each year, if not a legal holiday, or, if such day shall be a legal holiday, then on the next succeeding day not a legal holiday, or any other day as determined by the Board. If the directors to be elected at such annual meeting shall not have been elected thereat or at any adjournment thereof, the Board shall forthwith call a special meeting of the stockholders for the election of directors to be held as soon thereafter as convenient and give notice thereof as provided in these By-laws in respect of the notice of an

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annual meeting of the stockholders. At such special meeting the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held.

SECTION 3. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law, may be called at any time by the Chairman of the Board or by the Board, and shall be called by the Board upon written request delivered to the Secretary of the Corporation by the holder(s) with the power to vote and dispose of at least 25% of the outstanding shares of the Corporation. Such request shall be signed by each such holder, stating the number of shares owned by each holder, and shall indicate the purpose of the requested meeting. In addition, any stockholder(s) requesting a special meeting shall promptly provide any other information reasonably requested by the Corporation.

SECTION 4. Notice of Meetings. Notice of each meeting of the stockholders, annual or special, shall be given in the name of the Chairman of the Board, a Vice Chairman of the Board or the President or a Vice President or the Secretary. Such notice shall state the purpose or purposes for which the meeting is called and the date and hour when and the place where it is to be held. A copy thereof shall be duly delivered or transmitted to all stockholders of record entitled to vote at such meeting, and all stockholders of record who, by reason of any action proposed to be taken at such meeting, would be entitled to have their stock appraised if such action were taken, not less than ten or more than sixty days before the day on which the meeting is called to be held. If mailed, such copy shall be directed to each stockholder at the address listed on the record of stockholders of the Corporation, or if the stockholder shall have filed with the Secretary a written request that notices be mailed to some other address, it shall be mailed to the address designated in such request. Nevertheless, notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall waive notice thereof as hereinafter provided in Article IX of these By-laws. Except when expressly required by law, notice of any adjourned meeting of the stockholders need not be given nor shall publication of notice of any annual or special meeting thereof be required.

SECTION 5. Quorum. Except as otherwise provided by law, at all meetings of the stockholders, the presence of holders of record of a majority of the outstanding shares of stock of the Corporation having voting power, in person or represented by proxy and entitled to vote thereat, shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or represented by proxy and entitled to vote thereat, or, in the absence of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting, may adjourn such meeting from time to time without further notice, other than by announcement at the meeting at which such adjournment shall be taken, until a quorum shall be present thereat. At any adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called.

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SECTION 6. Organization. At each meeting of the stockholders, the Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice Chairman of the Board, or if the Chairman of the Board, the President, and all Vice Chairmen of the Board shall be absent therefrom, an Executive Vice President, or if the Chairman of the Board, the President, all Vice Chairmen of the Board and all Executive Vice Presidents shall be absent therefrom, a Senior Vice President shall act as chairman. The Secretary, or, if the Secretary shall be absent from such meeting or

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document unable to act, the person whom the Chairman of such meeting shall appoint secretary of such meeting shall act as secretary of such meeting and keep the minutes thereof.

SECTION 7. Items of Business. The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows:

· Call to order.

· Proof of notice of meeting or of waiver thereof.

· Appointment of inspectors of election, if necessary.

· A quorum being present.

· Reports.

· Election of directors proposed by the Corporation’s Board of Directors, as set forth in the Corporation’s proxy statement.

· Other business specified in the notice of the meeting.

· Voting.

· Adjournment.

Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine.

No other business shall be transacted at any annual meeting of stockholders, except business as may be: (i) specified in the notice of meeting (including stockholder proposals included in the Corporation’s proxy materials under Rule 14a-8 of Regulation 14A under the Securities Exchange Act of 1934), (ii) otherwise brought before the meeting by or at the direction of the Board of Directors, or (iii) a proper subject for the meeting which is timely submitted by a stockholder of the Corporation entitled to vote at such meeting who complies fully with the notice requirements set forth below.

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For business to be properly submitted by a stockholder before any annual meeting under subparagraph (iii) above, a stockholder must give timely notice in writing of such business to the Secretary of the Corporation. To be considered timely, a stockholder’s notice must be received by the Secretary at the principal executive offices of the Corporation not less than 120 calendar days nor more than 150 calendar days before the anniversary date of the Corporation’s proxy statement released to stockholders in connection with the prior year’s annual meeting.

However, if no annual meeting was held in the previous year, or if the date of the applicable annual meeting has been changed by more than 30 days from the anniversary date of the prior year’s annual meeting, a stockholder’s notice must be received by the Secretary not later than the 10th calendar day following the date on which the Corporation publicly announces the date of the applicable annual meeting.

A stockholder’s notice to the Secretary to submit business to an annual meeting of stockholders shall set forth: (i) the name and address of the stockholder, (ii) the number of shares of stock held of record and beneficially by such stockholder, (iii) the name in which all such shares of stock are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions intended to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (vi) any personal or other material interest of the stockholder in the business to be submitted, and (vii) all other information relating to the proposed business which may be required to be disclosed under applicable law. In addition, a stockholder seeking to submit such business at the meeting shall promptly provide any other information reasonably requested by the Corporation.

The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including, but not limited to, the items of business, as well as the maintenance of order and decorum. The chairman shall, if the facts warrant, determine and declare that any putative business was not properly brought before the meeting in accordance with the procedures prescribed by this Section 7, in which case such business shall not be transacted.

Notwithstanding the foregoing provisions of this Section 7, a stockholder who seeks to have any proposal included in the Corporation’s proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Securities Exchange Act of 1934, as amended.

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SECTION 8. Voting. Except as otherwise provided by law, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in the stockholder’s name on the record of stockholders of the Corporation:

(a) on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-laws as the record date for the determination of the stockholders who shall be entitled to vote at such meeting, or

(b) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting shall have been given, or

(c) if such record date shall not have been so fixed and if no notice of such meeting shall have been given, then at the time of the call to order of such meeting.

Any vote on stock of the Corporation at any meeting of the stockholders may be given by the stockholder of record entitled thereto in person or by proxy appointed by such stockholder or by the stockholder’s attorney thereunto duly authorized and delivered or transmitted to the secretary of such meeting at or prior to the time designated in the order of business for turning in proxies. At all meetings of the stockholders at which a quorum shall be present, all matters (except where otherwise provided by law, the Certificate of Incorporation or these By-laws) shall be decided by the vote of a majority in voting interest of the stockholders present in person or represented by proxy and entitled to vote thereat. Unless required by law, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by the stockholder’s proxy as such, if there be such proxy.

SECTION 9. List of Stockholders. A list, certified by the Secretary, of the stockholders of the Corporation entitled to vote shall be produced at any meeting of the stockholders upon the request of any stockholder of the Corporation pursuant to the provisions of applicable law, the Certificate of Incorporation or these By-laws.

SECTION 10. Inspectors of Election. Prior to the holding of each annual or special meeting of the stockholders, two inspectors of election to serve thereat shall be appointed by the Board, or, if the Board shall not have made such appointment, by the Chairman of the Board. If there shall be a failure to appoint inspectors, or if, at any such meeting, any inspector so appointed shall be absent or shall fail to act or the office shall become vacant, the chairman of the meeting may, and at the request of a stockholder present in person and entitled to vote at such meeting shall, appoint such inspector or inspectors of election, as the case may be, to act thereat.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The inspectors of election so appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting, with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors of election shall take charge of the

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polls, and, after the voting on any question, shall make a certificate of the results of the vote taken. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.

ARTICLE III

BOARD OF DIRECTORS

SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these By-laws, directed or required to be exercised or done by the stockholders.

SECTION 2. Number; Qualifications; Election; Term of Office. The number of directors of the Corporation shall be thirteen, but the number thereof may be increased to not more than twenty-five, or decreased to not less than nine, by amendment of these By- laws. The directors shall be elected at the annual meeting of the stockholders. At each meeting of the stockholders for the election of directors at which a quorum is present, the vote required for election of a director shall, except in a contested election, be the affirmative vote of a majority of the votes cast in favor of or against such nominee. In a contested election, a nominee receiving a plurality of the votes cast at such election shall be elected. An election shall be considered to be contested if, as of the record date for such meeting, there are more nominees for election than positions on the Board to be filled by election at the meeting. Each director shall hold office until the annual meeting of the stockholders which shall be held next after the election of such director and until a successor shall have been duly elected and qualified, or until death, or until the director shall have resigned as hereinafter provided in Section 10 of this Article III.

SECTION 3. Place of Meetings. Meetings of the Board shall be held at such place either within or outside State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.

SECTION 4. First Meeting. The Board shall meet for the purpose of organization, the election of officers and the transaction of other business, on the same day the annual meeting of stockholders is held. Notice of such meeting need not be given. Such meeting may be held at any other time or place which shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III.

SECTION 5. Regular Meetings. Regular meetings of the Board shall be held at times and dates fixed by the Board or at such other times and dates as the Chairman of the Board shall determine and as shall be specified in the notice of such meetings. Notice of regular meetings of the Board need not be given except as otherwise required by law or these By-laws.

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SECTION 6. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, provided, however, that if the Chairman of the Board is unavailable, a special meeting of the Board may be called by agreement of each of the remaining members of the Executive Committee.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 7. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time, place and, if required by law or these By-laws, the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall waive notice thereof as provided in Article IX of these By-laws. Any meeting of the Board shall be a legal meeting without notice thereof having been given, if all the directors of the Corporation then holding office shall be present thereat.

SECTION 8. Quorum and Manner of Acting. A majority of the Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting. Participation in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence in person at a meeting. Except as otherwise expressly required by law or the Certificate of Incorporation and except also as specified in Section 1, Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article XII of these By-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such.

SECTION 9. Organization. At each meeting of the Board, the Chairman of the Board, or in the case of the Chairman’s absence therefrom, the President, or in the case of the President’s absence therefrom, a Vice Chairman, or in the case of the absence of all such persons, another director chosen by a majority of directors present, shall act as chairman of the meeting and preside thereat. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.

SECTION 10. Resignations.

(a) Any director of the Corporation may resign at any time by giving written notice of resignation to the Board or the Chairman of the Board or the Secretary. Subject to Section 10(b), any such resignation shall take effect at the time specified therein, or if

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the time when it shall become effective shall not be specified therein, then it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

(b) In an uncontested election, any incumbent nominee for director who does not receive an affirmative vote of a majority of the votes cast in favor of or against such nominee shall promptly tender his or her resignation after such election. The independent directors of the Board, giving due consideration to the best interests of the Corporation and its stockholders, shall evaluate the relevant facts and circumstances, and shall make a decision, within 90 days after the election, on whether to accept the tendered resignation. Any director who tenders a resignation pursuant to this provision shall not participate in the Board’s decision. The Board will promptly disclose publicly its decision and, if applicable, the reasons for rejecting the tendered resignation.

SECTION 11. Vacancies. Any vacancy in the Board, whether arising from death, resignation, an increase in the number of directors or any other cause, may be filled by the Board.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 12. Retirement of Directors. The Board may prescribe a retirement policy for directors on or after reaching a certain age, provided, however, that such retirement shall not cut short the annual term for which any director shall have been elected by the stockholders.

ARTICLE IV

EXECUTIVE AND OTHER COMMITTEES

SECTION 1. Executive Committee. The Executive Committee shall be comprised of the Chairman of the Board, and each of the respective chairs of the (i) Audit Committee, (ii) Executive Compensation and Management Resources Committee, and (iii) Directors and Corporate Governance Committee, in each case including any successor committee. The Chairman of the Board shall serve as the Chairman of the Executive Committee to preside at all meetings of such Committee. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.

SECTION 2. Powers of the Executive Committee. To the extent permitted by law, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, to the extent permitted by law, the Executive Committee shall have, and may exercise, all the powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but excluding the power to appoint a member of the Executive Committee) in such manner as the Executive Committee shall deem to be in the best interests of the Corporation and not inconsistent with any prior specific action of the Board. An act of the Executive Committee taken within the scope of its authority shall be an act of the Board. The Executive Committee shall render in the form

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of minutes a report of its several acts at each regular meeting of the Board and at any other time when so directed by the Board.

SECTION 3. Meetings of the Executive Committee. Regular meetings of the Executive Committee shall be held at such times, on such dates and at such places as shall be fixed by resolution adopted by a majority of the Executive Committee, of which regular meetings notice need not be given, or as shall be fixed by the Chairman of the Executive Committee or in the absence of the Chairman of the Executive Committee the Chief Executive Officer and specified in the notice of such meeting. Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or by the Chief Executive Officer. Notice of each such special meeting of the Executive Committee (and of each regular meeting for which notice shall be required), stating the time and place thereof shall be mailed, postage prepaid, to each member of the Executive Committee, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held; but notice need not be given to a member of the Executive Committee who shall waive notice thereof as provided in Article IX of these By-laws, and any meeting of the Executive Committee shall be a legal meeting without any notice thereof having been given, if all the members of such Committee shall be present thereat.

SECTION 4. Quorum and Manner of Acting of the Executive Committee. Four members of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of the members of the Executive Committee present at a meeting at which a quorum shall be present shall be the act of the Executive Committee. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of the Executive Committee. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 5. Other Committees. The Board may, by resolution adopted by a majority of the Board, designate members of the Board to constitute other committees, which shall have, and may exercise, such powers as the Board may by resolution delegate to them, and shall in each case consist of such number of directors as the Board may determine; provided, however, that each such committee shall have at least three directors as members thereof. Such a committee may either be constituted for a specified term or may be constituted as a standing committee which does not require annual or periodic reconstitution. A majority of all the members of any such committee may determine its action and its quorum requirements and may fix the time and place of its meetings, unless the Board shall otherwise provide. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of such other committees.

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In addition to the foregoing, the Board may, by resolution adopted by a majority of the Board, create a committee of indeterminate membership and duration and not subject to the limitations as to the membership, quorum and manner of meeting and acting prescribed in these By-laws, which committee, in the event of a major disaster or catastrophe or national emergency which renders the Board incapable of action by reason of the death, physical incapacity or inability to meet of some or all of its members, shall have, and may exercise all the powers of the Board in the management of the business and affairs of the Corporation (including, without limitation, the power to authorize the seal of the Corporation to be affixed to all papers which may require it and the power to fill vacancies in the Board). An act of such committee taken within the scope of its authority shall be an act of the Board.

SECTION 6. Changes in Committees; Resignations; Removals; Vacancies. The Board shall have power, by resolution adopted by a majority of the Board, at any time to change or remove the members of, to fill vacancies in, and to discharge any committee created pursuant to these By-laws, either with or without cause. Any member of any such committee may resign at any time by giving written notice to the Board or the Chairman of the Board or the Secretary. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any vacancy in any committee, whether arising from death, resignation, an increase in the number of committee members or any other cause, shall be filled by the Board in the manner prescribed in these By-laws for the original appointment of the members of such committee.

ARTICLE V

OFFICERS

SECTION 1. Number and Qualifications. The officers of the Corporation shall include the Chairman of the Board, and may include one or more Vice Chairmen of the Board, the President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice Presidents or as Senior Vice Presidents or by other designations), the Treasurer, the Secretary and the Controller. Officers shall be elected from time to time by the Board, each to hold office until a successor shall have been duly elected and shall have qualified, or until death, or until resignation as hereinafter provided in Section 2 of this Article V, or until removed as hereinafter provided in Section 3 of this Article V.

SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall become effective upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by a resolution adopted by a majority of the Board at any meeting of the Board.

SECTION 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of office which shall be vacant, in the manner prescribed in these By-laws for the regular election or appointment to such office.

SECTION 5. Chairman of the Board. The Chairman of the Board shall, if present, preside at each meeting of the stockholders and of the Board and shall perform such other duties as may from time to time be assigned by the Board. The Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it. The Chairman of the Board, when there is no President or in the absence or incapacity of the President, shall perform all the duties and functions and exercise all the powers of the President.

SECTION 6. Vice Chairman of the Board. Each Vice Chairman of the Board shall assist the Chairman of the Board and have such other duties as may be assigned by the Board or the Chairman of the Board. The Vice Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it.

SECTION 7. President. The President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board. The President may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered, and affix the seal of the Corporation to any instrument which shall require it; and, in general, perform all duties incident to the office of President. The President shall in the absence or incapacity of the Chairman of the

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Board, perform all the duties and functions and exercise all the powers of the Chairman of the Board.

SECTION 8. Designated Officers. (a) Chief Executive Officer. Either the Chairman of the Board, or the President, as the Board of Directors may designate, shall be the Chief Executive Officer of the Corporation. The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in Section 5 or 7 of this Article V, general and active supervision over the business and affairs of the Corporation and over its several officers, agents, and employees, subject, however, to the control of the Board. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, be an ex officio member of all committees of the Board (except the Audit Committee, the Directors and Corporate Governance Committee, and committees specifically empowered to fix or approve the Chief Executive Officer’s compensation or to grant or administer bonus, option or other similar plans in which the Chief Executive Officer is eligible to participate), and, in general, shall perform all duties incident to the position of Chief Executive Officer and such other duties as may from time to time be assigned by the Board. (b) Other Designated Officers. The Board of Directors may designate officers to serve as Chief Financial Officer, Chief Accounting Officer and other such designated positions and to fulfill the responsibilities of such designated positions in addition to their duties as officers as set forth in this Article V.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Each Executive and Senior Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President. Each Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or a Senior Vice President. Any Vice President may sign certificates representing shares of stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws.

SECTION 10. Treasurer. The Treasurer shall:

(a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, and may invest the same in any securities, may open, maintain and close accounts for effecting any and all purchase, sale, investment and lending transactions in securities of any and all kinds for and on behalf of the Corporation or any employee pension or benefit plan fund or other fund established by the Corporation, as may be permitted by law;

(b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation;

(c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board or the Executive Committee;

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(d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever;

(e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor;

(f) render to the Board, whenever the Board may require, an account of all transactions as Treasurer; and

(g) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

SECTION 11. Secretary. The Secretary shall:

(a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the Executive Committee and other committees of the Board and the stockholders;

(b) see that all notices are duly given in accordance with the provisions of these By-laws and as required by law;

(c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal;

(d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and

(e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 12. Controller. The Controller shall:

(a) have control of all the books of account of the Corporation;

(b) keep a true and accurate record of all property owned by it, of its debts and of its revenues and expenses;

(c) keep all accounting records of the Corporation (other than the accounts of receipts and disbursements and those relating to the deposits of money and other valuables of the Corporation, which shall be kept by the Treasurer);

(d) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation; and

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(e) in general, perform all the duties incident to the office of Controller and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman of the Board or the President or an Executive or Senior Vice President.

SECTION 13. Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee the power to fix or approve the compensation of any officers. An officer of the Corporation shall not be prevented from receiving compensation by reason of being also a director of the Corporation; but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to such officer.

ARTICLE VI

CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

SECTION 1. Execution of Contracts. Except as otherwise required by law or these By-laws, any contract or other instrument may be executed and delivered in the name and on behalf of the Corporation by any officer (including any assistant officer) of the Corporation. The Board or the Executive Committee may authorize any agent or employee to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board or such Committee, as the case may be, may by resolution determine.

SECTION 2. Loans. Unless the Board shall otherwise determine, the Chairman of the Board or a Vice Chairman of the Board or the President or any Vice President, acting together with the Treasurer or the Secretary, may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board.

SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board or the Executive Committee or authorized by the Treasurer acting together with either the General Manager of an operating unit or a nonfinancial Vice President of the Corporation, which authorization may be general or confined to specific instances.

SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 14

companies or other depositaries as the Board or the Executive Committee may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer, employee or agent of the Corporation.

SECTION 5. General and Special Bank Accounts. The Board or the Executive Committee may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board or the Executive Committee may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. The Board or the Executive Committee may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient.

SECTION 6. Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as in effect at any time, indemnify any person made, or threatened to be made, a party to an action or proceeding whether civil or criminal (including an action or proceeding by or in the right of the Corporation) by reason of the fact that such person is (i) an officer or director of the Corporation or (ii) an officer or director of the Corporation who is asked to serve in any capacity at the request of the Corporation in any corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against, in each case, judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein. Such indemnification shall be a contract right that vests upon the occurrence or alleged occurrence of any act or omission to act that forms the basis for or is related to the claim for which indemnification is sought and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, and the right to be indemnified for expenses incurred by such person in connection with successfully establishing a right to indemnification, in each case consistent with the provisions of applicable law in effect at any time. Indemnification shall be deemed to be ‘permitted’ within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time. The indemnification rights hereunder shall continue as to any such person who has ceased to be an officer or director of the Corporation and shall inure to the benefit of the heirs, executors and administrators of any such person. If the right of indemnification provided for in this Section 6 is amended or repealed, such amendment or repeal will not limit the indemnification provided for herein with respect to any acts or omissions to act occurring prior to any such amendment or repeal.

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ARTICLE VII

SHARES

SECTION 1. Stock Certificates. The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares. Each owner of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board, certifying the number of shares of stock of the Corporation owned. To the extent that shares are represented by certificates, such certificates of stock shall be signed in the name of the Corporation by the Chairman of the Board or a Vice Chairman of the Board or the President or a Vice President and by the Secretary and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is signed by a registrar, other than the Corporation or its employee, the signatures of the Chairman of the Board, a Vice Chairman of the Board, the President, the Secretary, and transfer agent or a transfer clerk acting on behalf of the Corporation upon such certificates may be facsimiles, engraved or printed. In case any officer, transfer agent or transfer clerk acting on behalf of the Corporation ceases to be such officer, transfer agent, or transfer clerk before such certificates shall be issued, they may nevertheless be issued by the Corporation with the same effect as if they were still such officer, transfer agent or transfer clerk at the date of their issue.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 2. Books of Account and Record of Stockholders. There shall be kept at the office of the Corporation correct books of account of all its business and transactions, minutes of the proceedings of stockholders, Board, and Executive Committee, and a book to be known as the record of stockholders, containing the names and addresses of all persons who are stockholders, the number of shares of stock held, and the date when the stockholder became the owner of record thereof.

SECTION 3. Transfers of Stock. Transfers of shares of stock of the Corporation shall be made on the record of stockholders of the Corporation only upon authorization by the registered holder thereof, or by an attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed, provided such shares are represented by a certificate, or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose names shares of stock shall stand on the record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer.

SECTION 4. Regulations. The Board may make such additional rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificated or uncertificated shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more

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transfer agents or one or more transfer clerks and one or more registrars and may require all certificates of stock to bear the signature or signatures of any of them.

SECTION 5. Fixing of Record Date. The Board shall fix a time not exceeding sixty nor less than ten days prior to the date then fixed for the holding of any meeting of the stockholders or prior to the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose without a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were holders of record of voting stock at such time, and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The Board may fix a time not exceeding sixty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of capital stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests.

SECTION 6. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Corporation may, in its discretion, require such owner or the owner’s legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. Anything to the contrary notwithstanding, the Corporation, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of New York.

SECTION 7. Inspection of Records. The record of stockholders and minutes of the proceedings of stockholders shall be available for inspection, within the limits and subject to the conditions and restrictions prescribed by applicable law.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SECTION 8. Auditors. The Board shall employ an independent public or certified public accountant or firm of such accountants who shall act as auditors in making examinations of the consolidated financial statements of the Corporation and its subsidiaries in accordance with generally accepted auditing standards. The auditors shall certify that the annual financial statements are prepared in accordance with generally accepted accounting principles, and shall report on such financial statements

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to the stockholders and directors of the Corporation. The Board’s selection of auditors shall be presented for ratification by the stockholders at the annual meeting. Directors and officers, when acting in good faith, may rely upon financial statements of the Corporation represented to them to be correct by the officer of the Corporation having charge of its books of account, or stated in a written report by the auditors fairly to reflect the financial condition of the Corporation.

ARTICLE VIII

OFFICES

SECTION 1. Principal Office. The principal office of the Corporation shall be at such place in the Town of North Castle, County of Westchester and State of New York as the Board shall from time to time determine.

SECTION 2. Other Offices. The Corporation may also have an office or offices other than said principal office at such place or places as the Board shall from time to time determine or the business of the Corporation may require.

ARTICLE IX

WAIVER OF NOTICE

Whenever under the provisions of any law of the State of New York, the Certificate of Incorporation or these By-laws or any resolution of the Board or any committee thereof, the Corporation or the Board or any committee thereof is authorized to take any action after notice to the stockholders, directors or members of any such committee, or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of any period of time, if, at any time before or after such action shall be completed, such notice or lapse of time shall be waived by the person or persons entitled to said notice or entitled to participate in the action to be taken, or, in the case of a stockholder, by an attorney thereunto authorized. Attendance at a meeting requiring notice by any person or, in the case of a stockholder, by the stockholder’s attorney, agent or proxy, shall constitute a waiver of such notice on the part of the person so attending, or by such stockholder, as the case may be.

ARTICLE X

FISCAL YEAR

The fiscal year of the Corporation shall end on the thirty-first day of December in each year.

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ARTICLE XI

SEAL

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The Seal of the Corporation shall consist of two concentric circles with the IBM logotype appearing in bold face type within the inner circle and the words ‘International Business Machines Corporation’ appearing within the outer circle.

ARTICLE XII

AMENDMENTS

These By-laws may be amended or repealed or new By-laws may be adopted by the stockholders at any annual or special meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting. These By-laws, subject to the laws of the State of New York, may also be amended or repealed or new By-laws may be adopted by the affirmative vote of a majority of the Board given at any meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EXHIBIT 10.1

NONCOMPETITION AGREEMENT

In recognition of the critical role that you will play as a senior executive with International Business Machines Corporation (“IBM”) and in recognition of your access to IBM Confidential Information by virtue of your position, and/or your membership on the Growth & Transformation Team, and/or your appointment as an IBM Fellow, and/or as consideration for your promotion or hiring as a senior executive, along with any awards to be granted to you under an IBM Long-Term Performance Plan (“LTPP”), and/or for other good and valuable consideration, you (“Employee” or “you”) agree to the terms and conditions herein of this Noncompetition Agreement (the “Agreement”). Capitalized terms not otherwise defined shall have the meaning ascribed to them in Paragraph 2.

1. Covenants.

You acknowledge and agree that:

a) the compensation that you will receive in connection with this Agreement, including any equity awards, cash and other compensation, your position as a senior executive, and/or your appointment to or continued membership on the Growth & Transformation Team or any successor team or group (“G&TT”), if applicable, and/or your appointment as an IBM Fellow, if applicable, is consideration both for your work at IBM and for your compliance with the post-employment restrictive covenants included in this Agreement.

b) (i) the business in which IBM and its affiliates (collectively, the “Company”) are engaged is intensely competitive and that your employment by IBM and/or your membership on the G&TT, if applicable, and/or your role as an IBM Fellow, if applicable, requires that you have access to, and knowledge of, IBM Confidential Information, including IBM Confidential Information that pertains not only to your business or unit, but also to the Company’s global operations; (ii) you are given access to, and develop relationships with, customers of the Company at the time and expense of the Company; and (iii) by your training, experience and expertise, your services to the Company are, and will continue to be, extraordinary, special and unique.

c) (i) the disclosure of IBM Confidential Information would place the Company at a serious competitive disadvantage and would do serious damage, financial and

otherwise, to the business of the Company; and (ii) you will keep in strict confidence, and will not, directly or indirectly, at any time during or after your employment with IBM, disclose, furnish, disseminate, make available or use, except in the course of performing your duties of employment, any IBM Confidential Information or any other trade secrets or confidential business and technical information of the Company’s customers or vendors, without limitation as to when or how you may have acquired such information.

d) (i) that IBM Confidential Information, whether reduced to writing, maintained on any form of electronic media, or maintained in your mind or memory and whether compiled by the Company and/or you, is owned by the Company, derives independent economic value from not being generally known to or readily ascertainable through proper means by others who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy of such information; (ii) that IBM Confidential Information therefore constitutes a trade secret of the Company; and (iii) that any retention and use of such information by you during or after your employment with IBM (except in the course of performing your duties and obligations to IBM) shall constitute a misappropriation of the Company’s trade secrets.

e) during your employment with IBM and for twelve (12) months following the termination of your employment either by you or by IBM, that: (i) you will not directly or indirectly within the “Restricted Area” “Engage in or Associate with” (a) any “Business Enterprise” or (b) any competitor of the Company, if performing the duties and responsibilities of such engagement or association could result in you intentionally or unintentionally using, disclosing, or relying upon IBM Confidential Information to which you had access by virtue of your job duties or other responsibilities with IBM; however, in the event that your

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document employment with IBM is terminated by IBM for a reason other than Cause, including but not limited to as a direct result of a resource action or similar restructuring action, the postemployment restriction in this clause will not apply; and (ii) you will not directly or indirectly solicit, for competitive business purposes, any customer of the Company with which you were directly or indirectly involved as part of your job responsibilities during the last twelve (12) months of your employment with IBM.

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f) during your employment with IBM and for two (2) years following the termination of your employment by either you or by IBM for any reason, you will not directly or indirectly within the “Restricted Area” hire, solicit or make an offer to, or attempt to or participate or assist in any effort to hire, solicit, or make an offer to, any employee of the Company to be employed or to perform services outside of the Company. As used herein, “employee of the Company” means any employee of the Company who worked within the Restricted Area at any time in the twelve (12) month period immediately preceding any actual or attempted hiring, solicitation or making of an offer.

2. Definitions.

The following terms have the meanings provided below.

a) “Business Enterprise” means any entity that engages in, or owns or controls an interest in any entity that engages in, competition with any business unit or division of the Company in which you worked at any time during the three (3) year period prior to the termination of your employment.

b) “Cause” means, as reasonably determined by IBM, the occurrence of any of the following: (i) embezzlement, misappropriation of corporate funds or other material acts of dishonesty; (ii) commission or conviction of any felony or of any misdemeanor involving moral turpitude, or entry of a plea of guilty or nolo contendere to any felony or misdemeanor (other than a minor traffic violation or other minor infraction); (iii) engagement in any activity that you know or should know could harm the business or reputation of the Company; (iv) failure to adhere to the Company’s corporate codes, policies or procedures; (v) a breach of any covenant in any employment agreement or any intellectual property agreement, or a breach of any other provision of your employment agreement, in either case if the breach is not cured to the Company’s satisfaction within a reasonable period after you are provided with notice of the breach (no notice and cure period is required if the breach cannot be cured), provided, however, that the mere failure to achieve performance objectives shall not constitute Cause; (vi) failure by you to perform your duties or follow management direction, which failure is not cured to the Company’s satisfaction within a reasonable period of time after a written demand for substantial performance is delivered to you (no notice or cure period is required if the failure to perform

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cannot be cured); or (vii) violation of any statutory, contractual or common law duty or obligation to the Company, including, without limitation, the duty of loyalty.

c) “Engage in or Associate with” includes, without limitation, engagement or association as a sole proprietor, owner, employer, director, partner, principal, joint venture, associate, employee, member, consultant, or contractor. The phrase also includes engagement or association as a shareholder or investor during the course of your employment with IBM, and includes beneficial ownership of five percent (5%) or more of any class of outstanding stock of a Business Enterprise or competitor of the Company following the termination of your employment with IBM.

d) “IBM Confidential Information” includes, without limitation, the Company’s formulae, patterns, compilations, programs, devices, methods, techniques, software, tools, systems, and processes, the Company’s selling, manufacturing, servicing methods and business techniques, implementation strategies, and information about any of the foregoing, the Company’s training, service, and business manuals, promotional materials, training courses and other training and instructional materials, vendor and product information, customer and prospective customer lists, other customer and prospective customer information, client data, global strategic plans, marketing plans, information about the Company’s management techniques and management strategies, information regarding long-term business opportunities, information regarding the development status of specific Company products, assessments of the global competitive landscape of the industries in which the Company competes, plans for acquisition or disposition

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document of products or companies or business units, expansion plans, financial status and plans, compensation information, and personnel information.

e) “Restricted Area” means any geographic area in the world in which you worked or for which you had job responsibilities, including supervisory responsibilities, during the last twelve (12) months of your employment with IBM. You acknowledge that IBM is a global company and that the responsibilities of certain IBM employees, including, without limitation, G&TT members, are global in scope.

3. Acknowledgements.

You acknowledge that a mere agreement not to disclose, use, or rely on IBM Confidential Information after your employment by IBM ends would be inadequate, standing

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alone, to protect IBM’s legitimate business interests. You acknowledge that disclosure of, use of, or reliance on IBM Confidential Information, whether or not intentional, is often difficult or impossible for the Company to detect until it is too late to obtain any effective remedy. You acknowledge that the Company would suffer irreparable harm if you fail to comply with Paragraph 1 or otherwise improperly disclose, use, or rely on IBM Confidential Information. You acknowledge that the restrictions set forth in Paragraph 1 are reasonable as to geography, scope and duration.

4. Injunctive Relief.

You agree that the Company would suffer irreparable harm if you were to breach, or threaten to breach, any provision of this Agreement and that the Company would by reason of such breach, or threatened breach, be entitled to injunctive relief in a court of appropriate jurisdiction, without the need to post any bond, and you further consent and stipulate to the entry of such injunctive relief in such a court prohibiting you from breaching this Agreement. This Paragraph shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief.

5. Severability.

In the event that any one or more of the provisions of this Agreement shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law. Furthermore, a determination in any jurisdiction that this Agreement, in whole or in part, is invalid or unenforceable shall not in any way affect or impair the validity or enforceability of this Agreement in any other jurisdiction.

6. Headings.

The headings in this Agreement are inserted for convenience and reference only and shall in no way affect, define, limit or describe the scope, intent or construction of any provision hereof.

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7. Waiver.

The failure of IBM to enforce any terms, provisions or covenants of this Agreement shall not be construed as a waiver of the same or of the right of IBM to enforce the same. Waiver by IBM of any breach or default by you (or by any other employee or

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document former employee of IBM) of any term or provision of this Agreement (or any similar agreement between IBM and you or any other employee or former employee of IBM) shall not operate as a waiver of any other breach or default.

8. Successors and Assigns.

This Agreement shall inure to the benefit of and be binding upon IBM, any successor organization which shall succeed to IBM by acquisition, merger, consolidation or operation of law, or by acquisition of assets of IBM and any assigns. You may not assign your obligations under this Agreement.

9. Disclosure of Existence of Covenants.

You agree that while employed by IBM and for two (2) years thereafter, you will communicate the contents of this Agreement to any person, firm, association, partnership, corporation or other entity which you intend to be employed by, associated with or represent, prior to or at the time of accepting such employment, association or representation.

10. Notice to IBM of Prospective Position.

You agree that if, at any time during your employment or within twelve (12) months following the termination of your employment with IBM, you are offered and intend to accept a position with any person, firm, association, partnership, corporation or other entity other than the Company, you will provide the Senior Vice President of Human Resources for IBM Corporation with two (2) week written notice prior to accepting any such position. This two (2) week written notice is separate from any other notice obligations you may have under agreements with IBM. If for any reason you cannot, despite using your best efforts, provide the two (2) week written notice prior to accepting any such position, you agree that you will provide two (2) week written notice prior to commencing that new position. You acknowledge and agree that a two (2) week written notice period is appropriate and necessary to permit IBM to determine whether, in its view, your proposed new position could lead to a violation of this

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Agreement, and you agree that you will provide IBM with such information as IBM may request to allow IBM to complete its assessment (except that you need not provide any information that would constitute confidential or trade secret information of any entity other than the Company). During the notice period required by this Paragraph, IBM may choose, in its sole discretion, to limit your duties in your position with IBM and to restrict your access to IBM’s premises, systems, products, information, and employees. IBM is committed to protect its trade secrets and other confidential and proprietary information, and will take all necessary and appropriate steps to do so. Upon giving notice, you agree to cooperate with IBM in good faith to ensure that its trade secrets and other confidential and proprietary information are not disclosed, either intentionally or inadvertently.

11. No Oral Modification.

This Agreement may not be changed orally, but may be changed only in a writing signed by the Employee and a duly authorized representative of IBM.

12. Entire Agreement.

Although this Agreement sets forth the entire understanding between the Employee and IBM concerning the restrictive covenants herein, this Agreement does not impair, diminish, restrict or waive any other restrictive covenant, nondisclosure obligation or confidentiality obligation of the Employee to the Company under any other agreement, policy, plan or program of the Company. Nothing herein affects your rights, immunities, or obligations under any federal, state, or local law, including under the Defend Trade Secrets Act of 2016, as described in the Company’s Business Conduct Guidelines, or prohibits you from reporting possible violations of law or regulation to a government agency, as protected by law. The Employee and IBM represent that, in

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document executing this Agreement, the Employee and IBM have not relied upon any representations or statements made, other than those set forth herein, with regard to the subject matter, basis or effect of this Agreement.

13. Governing Law and Choice of Forum.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of law rules. The parties agree that any action or proceeding with respect to this Agreement shall be brought exclusively in the state and

7

federal courts sitting in New York County or Westchester County, New York. The parties agree to the personal jurisdiction thereof, and irrevocably waive any objection to the venue of such action, including any objection that the action has been brought in an inconvenient forum.

[INSERT EMPLOYEE NAME HERE] INTERNATIONAL BUSINESS MACHINES CORPORATION

By: By: (Employee Signature) Diane J. Gherson Senior Vice President, Human Resources

Employee Serial No. Date

8

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 10.2

December 4, 2008

Erich Clementi 93 Greenhaven Rd Rye, NY 10580

This letter confirms our offer of IBM employment to you as General Manager, Enterprise Initiatives, Systems and Technology Group, reporting to Samuel J. Palmisano, Chairman, President, and Chief Executive Officer.

The elements of your employment offer are:

Effective on your first day of employment, your total target annualized compensation will be $1,100,000.00. It will be comprised of $564,000.00 annual base salary (paid to you in equal semi-monthly payments) and $536,000.00 target incentive, plus the opportunity to participate in IBM benefits.

The incentive payout amount will be determined based on IBM’s business performance and the attainment of your individual annual business objectives. You must be an active employee on December 31, 2009 in order to be eligible for a payout. You will receive a letter detailing the objectives and structure of your incentive compensation shortly after you begin your IBM employment. You will find it helpful to read the IBM Annual Incentive Program description for a detailed explanation of how the program works and how it relates to the rest of your compensation package after you join IBM.

All outstanding Long Term Incentive awards will be reinstated under your US serial number with the original terms and conditions of the award retained.

If you remain employed with IBM for 5 years following January 1, 2009, you will be eligible to receive a payment equal to $500,000.00. For each year you work beyond the 5 year anniversary date, the amount payable to you will be increased by 10%, for a maximum period of 5 years (the amount payable shall be referred to herein as the “Amount”). The payment of the Amount shall be made no later than the end of the year after your year of separation from service with IBM, which includes any company that is at least 80% owned, directly or indirectly, by IBM Corp. The payment of the Amount shall be made in a lump sum.

If at the time you separate employment with IBM, you are a key employee, as defined under Internal Revenue Code Section 409A for the year that you leave IBM, the payment of the amount must be delayed for six months from the date of your separation from service with IBM.

This payment will be subject to all applicable withholding for taxes and will not be considered compensation for any purposes under any IBM employee benefit plan or program.

Erich Clementi

December 4, 2008

Page 2

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document You will be eligible for tax filing assistance from IBM in any tax year following the year of your localization during which you incur a tax impact as a result of trailing income (income relating back to the period of your assignment) such as, for example, excess tax or IBM equity awards held prior to your localization. Tax equalization as per the terms and conditions of your assignment will continue to apply. The equalization will be calculated on the basis that you remained in your pre-localization home country until the date of localization, and took up residence for the first time in the United States from the date of localization.

In order to assist you in the move from Italy to the Armonk, NY area, we are pleased to offer you benefits under the IBM US Mobility Plan for the Permanent Work Location. Part of the eligibility for relocation is that your new residence must be within 50 miles of your new work location. For detailed information on plan features, please work with the counselor who will be assigned to you by the relocation firm. As part of the IBM US Mobility Plan, you will also receive a one-time, net, lump sum payment of $3,000.00, which is a tax assisted gross payment of $4,800.00. The $3,000.00 payment is intended to assist you with miscellaneous costs. At year end, tax assistance will be provided, and an employee W-2 form will be issued.

By accepting this offer, you are required to complete and sign the Repayment Agreement Form that was provided to you. Since receipt of this form is necessary to initiate the relocation process, please return it by fax or mail as directed on the form at your earliest convenience.

During your employment, you will be eligible to participate in the various benefit plans which IBM generally makes available to its regular employees, including medical and dental coverage, accident, disability and life insurance. For detailed information on IBM Health Care benefits, visit the Health Care Benefits at IBM site http://www.ibm.com/employment/us/benefits/.

In addition, you will be eligible to participate in the IBM 401(k) Plus Plan. This Plan offers a 100% Company match, up to 5% of pay, plus a 1% automatic contribution after you complete one year of IBM service. If you meet certain eligibility requirements, you may also be eligible to participate in the IBM Excess 401(k) Plus Plan (Excess Plan) that provides benefits in excess of the IRS limits. Additional details on these programs are being sent to you under separate cover.

IBM employees are required to comply with IBM’s Business Conduct Guidelines. As an IBM US employee, you will need to read these documents, and will be required to acknowledge receipt and compliance with the Business Conduct Guidelines.

Your employment is also contingent upon your compliance with the U.S. immigration law. The law requires you to complete the U.S. Government Employment Eligibility Verification form (I-9) and to provide on your first day of employment documents that verify your identity and employment eligibility. By accepting this offer, you will be required to comply with this law.

Erich Clementi

December 4, 2008

Page 3

Further, your employment is contingent upon your obtaining and maintaining employment authorization from the United States Immigration Service. As we have done in the past, IBM will continue to assist you, if required, in obtaining/maintaining this authorization and will sponsor your application for permanent residency.

On your first day of employment you will be required to sign IBM’s form regarding confidential information and intellectual property.

U.S. Laws and regulations prohibit the unauthorized release of restricted technology to certain persons. IBM, in order to comply with these legal requirements, must ascertain whether someone who may be given access to restricted technology is a “Foreign Person”

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document subject to these export control restrictions. If someone is a Foreign Person for export control purposes, then he/she may need to be granted an export license or other government authorization before starting in a position with access to restricted technology.

Because you indicated that you are a Foreign Person on your employment application (by answering “no” to the question, “Are you a U.S. Citizen or national, a permanent resident, a refugee, an asylee or authorized to work under the amnesty provisions of U.S. immigration law?”), you will be contacted by a member of IBM’s Staffing organization who will ask for your country(s) of citizenship and permanent residence. Your country(s) of citizenship and permanent residence will enable IBM to determine the type of export license which would be required, should you be placed in a position with access to restricted technology.

Accepted: /s/ Erich Clementi

Date: 12-16-08

Projected Start Date: 1-1-09

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 10.3

January 28, 2015

Mr. Martin Jetter

This letter confirms our offer of IBM employment to you as Senior Vice President IBM Global Technology Services reporting to Ginni Rometty, Chairman, President and CEO.

The elements of your employment offer are:

Total Target Cash:

Effective on your first day of IBM US employment, your total target annualized compensation will be $1,469,000. It will be comprised of $625,000 annual base salary and $844,000 target incentive, plus the opportunity to participate in the IBM US benefits. You will receive a paycheck on a semi-monthly basis, on or around the 15th and 31st of each month.

The incentive payout amount will be determined based on IBM’s business performance and the attainment of your individual annual business objectives. You must be an active employee on December 31, 2015 in order to be eligible for a payout.

Benefits:

During your IBM US employment, you will be eligible to participate in the various benefit plans which IBM US generally makes available to its regular employees, including medical and dental coverage, accident, disability and life insurance, as well as the IBM 401(k) Plus Plan. Specific to the IBM 401(k) Plus Plan, this plan offers a 100% Company match, up to 5% of pay, plus a 1% automatic contribution. In addition, if you meet certain eligibility requirements during the annual enrollment period held each fall, you may also be eligible to participate in the IBM Excess 401(k) Plus Plan that provides the same benefits as the 401(k) Plus Plan on pay in excess of the IRS limits. Additional details on these programs will be provided separately.

Special Payment:

Upon your Separation from Service (as defined in the IBM Excess 401(k) Plus Plan), you will be eligible for a one-time special payment (“Special Payment”) equal to the difference between (i) the amount of the benefit you would have accumulated, but have not yet earned under the IBM Vorsorgeplan (IVP) had you remained an employee of IBM Germany, and (ii) the maximum amount of IBM matching and automatic contributions you are eligible to receive under the IBM 401(k) Plus Plan and the IBM Excess 401(k) Plus Plan (US Plans) regardless of whether you participate, each amount in clauses (i) and (ii) shall be measured from February 1, 2015, your IBM US date of hire, through the

January 28, 2015

Mr. Martin Jetter

Page 2 date of your Separation from Service from IBM. The Special Payment shall be calculated in accordance with the terms and conditions of the IVP and the US Plans respectively, as such plans may be amended from time to time. The Special Payment shall be made in a

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document lump sum payment in the February following the year in which your Separation from Service occurs. If on the date of your Separation from Service you are a Key Employee (“409A Key Employee” as defined in the IBM Excess 401(k) Plus Plan), the payment date for the Special Payment shall be the later of (a) the first business day that is six months after the date of your Separation from Service, or (b) the otherwise applicable payment date noted above.

If your employment terminates due to death, the Special Payment shall be paid to your estate within 90 days from your death in a lump sum payment (even if you are a 409A Key Employee). If you Separate from Service as a result of disability (determined in accordance with the IBM Long-Term Disability Plan), the Special Payment shall be paid within 90 days from your separation in a lump sum payment.

The Special Payment is subject to applicable tax withholdings, and will not be considered compensation for purposes of any IBM employee benefit plan or program.

Additional Information:

As is customary at IBM, this offer is contingent upon the following:

· Compliance with the U.S. immigration law. The law requires you to complete the U.S. Government Employment Eligibility Verification form (I-9) and to provide on your first day of employment documents that verify your identity and employment eligibility. By accepting this offer, you will be required to comply with this law.

· Maintaining employment authorization from the United States Immigration Service. As we have done in the past, IBM will continue to assist you, if required, in maintaining this authorization and will sponsor your application for permanent residency.

· As you know, IBM employees are required to comply with IBM’s Business Conduct Guidelines. As an IBM US employee, need to read these documents, and will be required to acknowledge receipt and compliance with the Business Conduct Guidelines.

· For your awareness, the terms of this offer letter do not create a contract of employment and do not entitle you to employment for any specific period of time. Rather, your employment at IBM is at-will, which means that either party may terminate your employment at any time, for any reason, and without prior notice.

January 28, 2015

Mr. Martin Jetter

Page 3

Please note that on your first day of IBM US employment you will be required to sign IBM’s form regarding confidential information and intellectual property. If you would like to review or discuss this document in advance, please feel free to contact me.

Response requested on or before January 29, 2015.

Accepted: /s/ Martin Jetter

Date: January 29, 2015

Start Date: February 1, 2015

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 10.4

SECOND AMENDMENT dated as of October 21, 2016 (this “Amendment”) to the 5-Year Credit Agreement dated as of November 10, 2011 (the “Credit Agreement”), among INTERNATIONAL BUSINESS MACHINES CORPORATION (“IBM”), JPMORGAN CHASE BANK, N.A., as Administrative Agent, the Subsidiary Borrowers parties thereto (the “Subsidiary Borrowers”), the Lenders parties thereto, and the Syndication Agents and Documentation Agents named therein. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement.

RECITALS

WHEREAS, IBM has requested that the Credit Agreement be amended as set forth herein.

WHEREAS, pursuant to, and in compliance with the requirements of, Section 11.1 of the Credit Agreement, the Required Lenders are willing to agree to this Amendment on the terms set forth herein.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto agree as follows:

SECTION 1. Amendments to Credit Agreement. As of the Second Amendment Effective Date (as defined below), the Credit Agreement is hereby amended as follows:

(a) By adding the following defined terms to Section 1.1 thereof in the appropriate alphabetical order:

“Bail-In Action”: the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

“Bail-In Legislation”: with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.

“EEA Financial Institution”: (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

“EEA Member Country”: any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

“EEA Resolution Authority”: any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

“EU Bail-In Legislation Schedule”: the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document “Write-Down and Conversion Powers”: with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.

(b) By amending the definition of “Defaulting Lender” to add the following words immediately after the words “the subject of a Bankruptcy Event”:

“or a Bail-In Action”

(c) By amending the definition of “Eurodollar Rate” to replace the words “the rate of interest determined on the basis of the rate for deposits in Dollars” with the following words:

“the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate for Dollars)”

(d) By amending the definition of “Eurodollar Rate” to add the following sentence to the end thereof:

“Notwithstanding the foregoing, if the Eurodollar Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.”

(e) By amending the penultimate paragraph of Section 2.22 to add the following words immediately after the words “Bankruptcy Event”:

“or a Bail-In Action”; and

(f) By adding the following new Section 11.26:

11.26 EU Bail-In.

Notwithstanding anything to the contrary in this Agreement or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Lender deemed to be an EEA Financial Institution arising under this Agreement may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:

(a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and

(b) the effects of any Bail-In Action on any such liability, including, if applicable:

(i) a reduction in full or in part or cancellation of any such liability;

(ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent entity, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership

2

will be accepted by it in lieu of any rights with respect to any such liability under this Agreement; or

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (iii) the variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of any EEA Resolution Authority.

SECTION 2. Conditions to Effectiveness of Second Amendment. This Amendment shall become effective on the first date (the “Second Amendment Effective Date”) on which the Administrative Agent (or its counsel) shall have received duly executed counterparts hereof that, when taken together, bear the signatures of IBM, the Subsidiary Borrowers and Lenders representing the Required Lenders.

SECTION 3. Effects on Credit Agreement. Except as specifically amended herein, all provisions of the Credit Agreement shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Except as otherwise expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under the Credit Agreement or constitute a waiver of or consent to any departure from any term or provision of the Credit Agreement or to any further or future action on the part of IBM or the Subsidiary Borrowers that would require a waiver or consent of the Required Lenders or the Administrative Agent.

SECTION 4. Expenses. IBM shall reimburse the Administrative Agent for all reasonable and documented out-of- pocket costs and expenses, including, reasonable and documented attorneys’ fees, in connection with or relating to this Amendment.

SECTION 5. Integration. This Amendment represents the agreement of IBM, the Subsidiary Borrowers, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein.

SECTION 6. GOVERNING LAW; WAIVER OF JURY TRIAL. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. EACH OF THE BORROWERS, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND FOR ANY COUNTERCLAIM THEREIN.

SECTION 7. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by email or facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Amendment signed by all the parties shall be lodged with IBM and the Administrative Agent.

3

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.

INTERNATIONAL BUSINESS MACHINES CORPORATION

By: /s/ Simon Beaumont Title: Vice President and Treasurer

JPMORGAN CHASE BANK, N.A., as Administrative Agent and Lender,

By: /s/ Donatus O. Anusionwu Title: Vice President

BNP PARIBAS

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document By: /s/ Mathew Harvey Title: Managing Director and By: /s/ Todd Rogers Title: Director

CITIBANK, N.A.

By: /s/ James Walsh Title: Vice President and Managing Director

ROYAL BANK OF CANADA

By: /s/ Mark Gronich Title: Authorized Signatory

MIZUHO BANK, LTD.

By: /s/ Daniel Guevara Title: Authorized Signatory

BANK OF AMERICA, N.A.

By: /s/ Mukesh Singh Title: Vice President

BARCLAYS BANK PLC

By: /s/ Christopher M. Aitkin Title: Assistant Vice President

[Signature Page to Second Amendment]

DEUTSCHE BANK AG NEW YORK BRANCH By: /s/ Ming K. Chu Title: Director and By: /s/ Virginia Cosenza Title: Vice President

HSBC Bank USA N.A.

By: /s/ Jonathan Yip Title: Vice President

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Wells Fargo Bank, N.A.

By: /s/ Sid Khanolkar Title: Director

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

By: /s/ Lillian Kim Title: Director

BANCO SANTANDER, S.A.

By: /s/ Federico Robin Title: Executive Director and By: /s/ Paloma Garca Castro Title: Associate

COMMERZBANK AG, NEW YORK BRANCH

By: /s/ Tom H.S. Kang Title: Director and By: /s/ Justin Hull Title: Associate

Credit Suisse AG, Cayman Islands Branch

By: /s/ Christopher Day Title: Authorized Signatory and By: /s/ Karim Rahimtoola Title: Authorized Signatory

Goldman Sachs Bank USA

By: /s/ Mehmet Barlas Title: Authorized Signatory

5

ING Bank N.V., Dublin Branch

By: /s/ Barry Fehily Title: Managing Director and By: Sean Hassett

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Title: Director

SOCIETE GENERALE

By: /s/ Kimberly Metzger Title: Director

U.S. Bank National Association

By: /s/ Patrick McGraw Title: Senior Vice President

UniCredit Bank AG, New York Branch

By: /s/ Filippo Pappalardo Title: Managing Director and By: /s/ Bryon Korutz Title: Associate Director

Bank of China, New York

By: /s/ Haifeng Xu Title: Executive Vice President

Mitsubishi UFJ Trust and Banking Corporation

By: /s/ Kota Goto Title: Senior Vice President

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

By: /s/ Robert Grillo Title: Director

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Michael Richards Title: Senior Vice President

Standard Chartered Bank

By: /s/ Steven Aloupis Title: Managing Director

6

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Sumitomo Mitsui Banking Corporation

By: /s/ David W. Kee Title: Managing Director

Toronto Dominion (New York) LLC By: /s/ Annie Dorval Title: Authorized Signatory

BANCO BILBAO VIZCAYA ARGENTARIA, S.A. NEW YORK BRANCH

By: /s/ Brian Crowley Title: Managing Director and By: /s/ Cara Younger Title: Director

Banco Bradesco S.A., New York Branch

By: /s/ Mauro Lopes Title: Manager and By: /s/ Adrian de A. da Graca e Costa Title: Manager

Canadian Imperial Bank of Commerce, New York Branch

By: /s/ Robert Robin Title: Authorized Signatory and By: /s/ Zhen Ma Title: Authorized Signatory

Danske Bank A/S

By: /s/ Merete Ryvald-Christensen Title: Chief Loan Officer and Name: /s/ Gert Carstens Title: Senior Loan Manager

Industrial and Commercial Bank of China Limited New York Branch

By: /s/ Yuanyuan Peng Title: Vice President

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document and By: /s/ Dayi Liu Title: Director

7

Lloyds Bank plc

By: /s/ Erin Walsh Title: Assistant Vice President, Transaction Execution and By: /s/ Joel Slomko Title: Assistant Vice President, Transaction Execution

Raiffeisen Bank International AG

By: /s/ Martina Soudek Title: Director and By: /s/ Christina de Cicillia Title: Director

State Street Bank and Trust Company

By: /s/ Andrei Bourdine Title: Vice President

THE BANK OF NEW YORK MELLON

By: /s/ Thomas J. Tarasovich, Jr. Title: Vice President

THE NORTHERN TRUST COMPANY

By: /s/ Sophia E. Love Title: Senior Vice President

8

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 10.5

JPMORGAN CHASE BANK, N.A. 383 Madison Avenue New York, New York 10179

October 21, 2016

International Business Machines Corporation One New Orchard Road Armonk, New York 10504

Attention: Heather Wilson

Ladies and Gentlemen:

Reference is made to (i) the Credit Agreement, dated as of November 10, 2011 (as amended or modified from time to time, the “Credit Agreement”) among International Business Machines Corporation., a New York corporation (“IBM”), each Subsidiary Borrower (as defined in the Credit Agreement), the Lenders (as defined in the Credit Agreement), JPMorgan Chase Bank, N.A., as administrative agent for the Lenders and the other agents named therein and (ii) the Extension Request, dated as of September 21, 2016 (the “Extension Request”), delivered by IBM to the Administrative Agent pursuant to Section 2.21(a) of the Credit Agreement. Capitalized terms used but not defined herein are used with the meanings assigned to them in the Credit Agreement.

We hereby confirm that, prior to the Extension Request Deadline specified in the Extension Request, we have received executed consents to the extension of the Termination Date requested in the Extension Request from each of the Lenders listed on Schedule 1 hereto extending the Termination Date with respect to the Revolving Credit Commitments of such consenting Lenders to November 10, 2021. Also listed on Schedule 1 are each Lender’s respective Revolving Credit Commitment under the Credit Agreement as of the date hereof.

Very truly yours,

JPMORGAN CHASE BANK, N.A., as Administrative Agent

By: /s/ Donatus Anusionwu Name: Donatus Anusionwu Title:Vice President

Schedule 1

Lender Revolving Credit Commitment JPMorgan Chase Bank, N.A. $ 575,000,000 BNP Paribas $ 575,000,000 Citibank, N.A. $ 575,000,000 Royal Bank of Canada $ 575,000,000

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Mizuho Bank, Ltd. $ 525,000,000 Bank of America, N.A. $ 450,000,000 Barclays Bank PLC $ 450,000,000 Deutsche Bank AG New York Branch $ 450,000,000 HSBC Bank USA N.A. $ 450,000,000 Wells Fargo Bank, N.A. $ 450,000,000 The Bank of Tokyo-Mitsubishi UFJ, Ltd. $ 315,000,000 Banco Santander, S.A. $ 300,000,000 Commerzbank AG, New York Branch $ 300,000,000 Credit Suisse, Cayman Islands Branch $ 300,000,000 Goldman Sachs Bank USA $ 300,000,000 ING Bank N.V., Dublin Branch $ 300,000,000 Societe Generale $ 300,000,000 U.S. Bank National Association $ 300,000,000 UniCredit Bank AG, New York Branch $ 300,000,000 Bank of China, New York Branch $ 250,000,000 Mitsubishi UFJ Trust and Banking Corporation $ 210,000,000 Australia and New Zealand Banking Group Limited $ 200,000,000 PNC Bank, National Association $ 200,000,000 Standard Chartered Bank $ 200,000,000 Sumitomo Mitsui Banking Corporation $ 200,000,000 Toronto Dominion (New York) LLC $ 200,000,000 Banco Bilbao Vizcaya Argentaria, S.A., New York Branch $ 100,000,000 Banco Bradesco S.A., New York Branch $ 100,000,000 Canadian Imperial Bank of Commerce, New York Branch $ 100,000,000 Danske Bank A/S $ 100,000,000 Industrial and Commercial Bank of China Limited New York Branch $ 100,000,000 Lloyds Bank plc $ 100,000,000 Raiffeisen Bank International AG $ 100,000,000 State Street Bank and Trust Company $ 100,000,000 The Bank of New York Mellon $ 100,000,000 The Northern Trust Company $ 100,000,000 Total: $ 10,250,000,000

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks -- Click here to rapidly navigate through this document

EXHIBIT 12 COMPUTATION OF RATIO OF INCOME FROM CONTINUING OPERATIONS TO FIXED CHARGES (Unaudited) Years Ended December 31: (Dollars in millions) 2016 2015 2014 2013 2012 Income from continuing operations before income taxes(1) $ 12,332 $ 15,953 $ 19,993 $ 20,252 $ 22,544 Add: Fixed charges, excluding capitalized interest 1,709 1,500 1,556 1,575 1,593 Income as adjusted before income taxes $ 14,041 $ 17,453 $ 21,549 $ 21,827 $ 24,137

Fixed charges: Interest expense 1,206 $ 1,009 $ 1,025 $ 989 $ 1,004 Capitalized interest 2 0 4 22 18 Portion of rental expense representative of interest 503 491 531 586 589 Total fixed charges $ 1,711 $ 1,500 $ 1,560 $ 1,597 $ 1,611

Ratio of income from continuing operations to fixed charges 8.2 11.6 13.8 13.7 15.0 (1) Income from continuing operations before income taxes excludes (a) amortization of capitalized interest and (b) the company's share in the income and losses of less-than-fifty percent owned affiliates.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks EXHIBIT 12 COMPUTATION OF RATIO OF INCOME FROM CONTINUING OPERATIONS TO FIXED CHARGES (Unaudited)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 13

Report of Financials International Business Machines Corporation and Subsidiary Companies

MANAGEMENT DISCUSSION Overview 26 Forward-Looking and Cautionary Statements 27 Management Discussion Snapshot 27 Description of Business 30 Year in Review 36 Prior Year in Review 56 Other Information 67 Looking Forward 67 Liquidity and Capital Resources 68 Critical Accounting Estimates 71 Currency Rate Fluctuations 74 Market Risk 74 Cybersecurity 75 Employees and Related Workforce 76 Global Financing 76

Report of Management 82

Report of Independent Registered Public Accounting Firm 83

CONSOLIDATED FINANCIAL STATEMENTS Earnings 84 Comprehensive Income 85 Financial Position 86 Cash Flows 87 Changes in Equity 88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A Significant Accounting Policies 90 B Accounting Changes 99 C Acquisitions/Divestitures 101 D Financial Instruments 107 E Inventories 114 F Financing Receivables 114 G Property, Plant and Equipment 118 H Investments and Sundry Assets 119 I Intangible Assets Including Goodwill 119 J Borrowings 120 K Other Liabilities 123 L Equity Activity 123 M Contingencies and Commitments 127 N Taxes 129

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document O Research, Development and Engineering 132 P Earnings Per Share of Common Stock 132 Q Rental Expense and Lease Commitments 133 R Stock-Based Compensation 133 S Retirement-Related Benefits 136 T Segment Information 150 U Subsequent Events 154

Five-Year Comparison of Selected Financial Data 155

Selected Quarterly Data 156

Performance Graph 157

Board of Directors and Senior Leadership 158

Stockholder Information 159

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Management Discussion International Business Machines Corporation and Subsidiary Companies

OVERVIEW

The financial section of the International Business Machines Corporation (IBM or the company) 2016 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 27, presents an overview of the key performance drivers in 2016.

· Beginning with the “Year in Review” on page 36, 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 67, and “Liquidity and Capital Resources” on page 68, which includes a description of management’s definition and use of free cash flow.

· 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 76.

· The Consolidated Financial Statements are presented on pages 84 through 89. These statements provide an overview of the company’s income and cash flow performance and its financial position.

· Subsequent to the company’s press release and Form 8-K filing on January 19, 2017, announcing 2016 fourth-quarter and full-year financial results, the company revised the classification of certain financing receivables on a full-year basis increasing net cash provided by operating activities and net cash used in investing activities in the amount of $441 million. As adjusted, net cash provided by operating activities for the three months and twelve months ended December 31, 2016 is $3,968 million and $16,958

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document million, respectively, and, net cash used in investing activities is $3,687 million and $10,976 million for the same periods. There was no impact to total GAAP cash flows or free cash flow.

· The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain the company’s accounting policies (pages 90 to 99), acquisitions and divestitures (pages 101 to 106), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 127 to 129) and retirement-related plans information (pages 136 to 150).

· 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 were reported as held for sale at December 31, 2014 and the operating results of the Microelectronics business have been reported as discontinued operations. The transaction closed on July 1, 2015.

· In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments, but did not impact the company’s Consolidated Financial Statements. Refer to Note T, “Segment Information,” on pages 150 to 154 for additional information on the changes in reportable segments. The company’s reportable segments are: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems, and Global Financing. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes.

· 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. When the company refers to growth rates at constant currency or adjusts such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. See “Currency Rate Fluctuations” on page 74 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 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. These charges are excluded as they may be inconsistent in amount and timing from period to period and are dependent on the size, type and

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Management Discussion International Business Machines Corporation and Subsidiary Companies frequency of the company’s acquisitions. 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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 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 of 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 2016 Form 10-K filed on February 28, 2017.

MANAGEMENT DISCUSSION SNAPSHOT

($ and shares in millions except per share amounts)

Yr.- to -Yr. Percent/ Margin For the year ended December 31: 2016 2015 Change Revenue $ 79,919 $ 81,741 (2.2)%* Gross profit margin 47.9% 49.8% (1.9)pts. Total expense and other (income) $ 25,964 $ 24,740 4.9% Total expense and other (income)-to-revenue ratio 32.5% 30.3% 2.2pts. Income from continuing operations before income taxes $ 12,330 $ 15,945 (22.7)% Provision for income taxes from continuing operations $ 449 $ 2,581 (82.6)% Income from continuing operations $ 11,881 $ 13,364 (11.1)% Income from continuing operations margin 14.9% 16.3% (1.5)pts. Loss from discontinued operations, net of tax $ (9) $ (174) (95.1)% Net income $ 11,872 $ 13,190 (10.0)% Earnings per share from continuing operations: Assuming dilution $ 12.39 $ 13.60 (8.9)% Consolidated earnings per share—assuming dilution $ 12.38 $ 13.42 (7.7)% Weighted-average shares outstanding Assuming dilution 958.7 982.7 (2.4)% Assets** $ 117,470 $ 110,495 6.3% Liabilities** $ 99,078 $ 96,071 3.1% Equity** $ 18,392 $ 14,424 27.5%

* (1.6) percent adjusted for currency

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ** At December 31

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Management Discussion International Business Machines Corporation and Subsidiary Companies

The following table provides the company’s (non-GAAP) operating earnings for 2016 and 2015

($ in millions except per share amounts)

Yr.-to -Yr. Percent For the year ended December 31: 2016 2015 Change Net income as reported $ 11,872 $ 13,190 (10.0)% Loss from discontinued operations, net of tax (9) (174) (95.1) Income from continuing operations $ 11,881 $ 13,364 (11.1)% Non-operating adjustments (net of tax) Acquisition-related charges 735 562 30.9 Non-operating retirement-related costs/(income) 415 734 (43.5) Operating (non-GAAP) earnings* $ 13,031 $ 14,659 (11.1)% Diluted operating (non-GAAP) earnings per share $ 13.59 $ 14.92 (8.9)%

* See pages 48 and 49 for a more detailed reconciliation of net income to operating earnings.

In 2016, the company reported $79.9 billion in revenue, $11.9 billion in income from continuing operations and $13.0 billion in operating (non-GAAP) earnings, resulting in diluted earnings per share from continuing operations of $12.39 as reported and $13.59 on an operating (non-GAAP) basis. The results of continuing operations exclude a net loss from discontinued operations of $9 million in 2016 and $174 million in 2015 related to the divestiture of the Microelectronics business. On a consolidated basis, net income in 2016 was $11.9 billion, with diluted earnings per share of $12.38. The company generated $17.0 billion in cash from operations and $11.6 billion in free cash flow and shareholder returns of $8.8 billion in gross common stock repurchases and dividends.

There are significant opportunities and shifts occurring in the IT industry, and the company believes that to be successful with enterprise clients, it needs to bring together cognitive technologies on cloud platforms that create industry-based solutions to solve real-world problems. In 2016, the company continued to:

· Deliver strong results in the strategic imperatives;

· Make progress in building new businesses and creating new markets;

· Deliver innovation in the more traditional businesses and monetize core technologies; and

· Return capital to shareholders.

Total consolidated revenue in 2016 decreased 2.2 percent as reported and 1.6 percent year to year adjusted for currency. Annuity revenue increased as reported and adjusted for currency while transactional revenue declined year to year. In addition, acquisitions completed in the past 12 months contributed to revenue growth.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The 2016 results reflect the success the company is having in its strategic imperatives and the investments made to drive that shift. The company had continued strong revenue growth in cloud, analytics and engagement, which together grew 13 percent year to year as reported and 14 percent adjusted for currency. In 2016, the strategic imperatives generated $32.8 billion in revenue, which represented 41 percent of the company’s revenue, an increase of 6 points from 2015. Total Cloud revenue of $13.7 billion increased 35 percent both as reported and adjusted for currency, with cloud as-a-Service revenue up 55 percent as reported and 57 percent adjusted for currency. The company exited 2016 with an annual run rate for cloud as-a-Service revenue of $8.6 billion, up from $5.3 billion at the end of 2015. Analytics revenue of $19.5 billion increased 9 percent as reported and adjusted for currency. Mobile revenue increased 34 percent year to year as reported (35 percent adjusted for currency) and Security revenue increased 13 percent as reported (14 percent adjusted for currency).

From a segment perspective, Cognitive Solutions revenue increased 1.9 percent as reported and 3 percent adjusted for currency with growth in Solutions Software, led by an increase in Analytics and Security revenue; partially offset by a decline in Transaction Processing Software. Global Business Services (GBS) revenue decreased 2.7 percent as reported and 3 percent adjusted for currency primarily driven by a decline in Consulting revenue. Revenue performance continued to be impacted by the company’s shift away from traditional businesses, such as ERP implementations. GBS strategic imperatives revenue had double-digit growth year to year as reported and adjusted for currency. Technology Services & Cloud Platforms revenue increased 0.6 percent as reported and 1 percent adjusted for currency led by growth in Infrastructure Services as the company assists clients in modernizing and transforming their infrastructures. Technology Services & Cloud Platforms strategic imperatives revenue was up 39 percent (40 percent adjusted for currency) year to year. Systems revenue decreased 19.2 percent (19 percent adjusted for currency) with z Systems down 27.1 percent (27 percent adjusted for currency) and Power Systems down 27.1 percent (27 percent adjusted for currency).

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Management Discussion International Business Machines Corporation and Subsidiary Companies

From a geographic perspective, Americas revenue decreased 2.5 percent as reported (1 percent adjusted for currency) with the U.S. down 0.9 percent. Europe/Middle East/Africa (EMEA) revenue decreased 5.0 percent as reported (2 percent adjusted for currency). Asia Pacific revenue increased 2.6 percent as reported, but decreased 1 percent adjusted for currency with Japan up 10.5 percent as reported, but down 1 percent adjusted for currency.

The consolidated gross profit margin of 47.9 percent decreased 1.9 points year to year and reflects the impact of the company’s investments, including acquisitions, and mix in as-a-Service which is not yet at scale. The operating (non-GAAP) gross margin of 48.9 percent decreased 1.9 points compared to 2015 driven primarily by the same factors.

Total expense and other (income) increased 4.9 percent in 2016 compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 5.6 percent compared to 2015. The key year-to-year drivers were:

Total Operating Consolidated (non-GAAP) · Currency* 2 points 2 points · Acquisitions** 5 points 4 points · Base (2) points 0 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.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The increase in expense was driven primarily by the impact of acquisitions completed in the prior 12 months and an impact from currency. Base expense performance reflects a higher level of intellectual property (IP) income ($950 million) year to year driven primarily by the company’s software licensing arrangements. Base expense also includes charges in 2016 for actions taken to accelerate the transformation of the company’s workforce and shift its skill base, as well as increased investments in the strategic areas of cognitive, security and cloud. This included a higher level of workforce rebalancing charges ($451 million) year to year and real estate capacity charges ($291 million) related to the workforce transformation. The company continued to invest at a high level in 2016 and remixed skills in support of the strategic imperatives.

Pre-tax income from continuing operations of $12.3 billion decreased 22.7 percent year to year and the pre-tax margin was 15.4 percent, a decrease of 4.1 points versus 2015. The continuing operations effective tax rate for 2016 was 3.6 percent, a decrease of 12.5 points versus 2015. The tax rate in 2016 was primarily the result of a refund ($1.0 billion) of previously paid non-U.S. taxes plus interest in the first quarter of 2016. Income from continuing operations of $11.9 billion decreased 11.1 percent and the net income margin was 14.9 percent, a decrease of 1.5 points versus 2015. Losses from discontinued operations, net of tax, were $9 million in 2016 compared to $174 million in 2015. Net income of $11.9 billion decreased 10.0 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $13.9 billion decreased 21.3 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 4.2 points to 17.4 percent. Operating (non-GAAP) income from continuing operations of $13.0 billion decreased 11.1 percent and the operating (non-GAAP) income margin from continuing operations of 16.3 percent decreased 1.6 points. The operating (non-GAAP) effective tax rate from continuing operations in 2016 was 6.5 percent versus 17.2 percent in 2015.

Diluted earnings per share from continuing operations of $12.39 in 2016 decreased 8.9 percent year to year. In 2016, the company repurchased 23.3 million shares of its common stock at a cost of $3.5 billion and had $5.1 billion remaining in the share repurchase authorization at December 31, 2016. Operating (non-GAAP) diluted earnings per share of $13.59 decreased 8.9 percent versus 2015. Diluted earnings per share from discontinued operations was ($0.01) in 2016 compared to ($0.18) in 2015.

At December 31, 2016, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at December 31, 2016 were $8.5 billion, an increase of $0.3 billion from December 31, 2015. Key drivers in the balance sheet and total cash flows were:

Total assets increased $7.0 billion ($7.7 billion adjusted for currency) from December 31, 2015 driven by:

· Increases in goodwill ($4.2 billion), retirement plan assets ($1.3 billion), net intangible assets ($1.2 billion), deferred taxes ($0.4 billion) and cash and marketable securities ($0.3 billion).

Total liabilities increased $3.0 billion ($3.9 billion adjusted for currency) from December 31, 2015 driven by:

· Increases in total debt ($2.3 billion), retirement-related liabilities ($0.6 billion) and taxes ($0.4 billion).

Total equity of $18.4 billion increased $4.0 billion from December 31, 2015 as a result of:

· Increases from net income ($11.9 billion) and stock-based compensation ($0.5 billion); partially offset by

· Decreases from dividends ($5.3 billion) and share repurchases ($3.5 billion).

The company generated $17.0 billion in cash flow provided by operating activities, essentially flat compared to 2015, driven primarily by operational performance; offset by lower income tax payments. Net cash used in investing activities of $11.0 billion was $2.8 billion higher than 2015, primarily driven by an increase in cash used related to acquisitions ($2.3 billion). Net cash used in financing activities of $5.8 billion decreased $3.4 billion compared to the prior year, driven primarily by higher net debt issuances ($2.7 billion) and a decline in cash used for common share repurchases ($1.1 billion).

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

In January 2017, the company disclosed that it is expecting GAAP earnings per share from continuing operations of at least $11.95 and operating (non-GAAP) earnings of at least $13.80 per diluted share for 2017. The company expects 2017 free cash flow realization to be in excess of 90 percent of GAAP net income and free cash flow to be essentially flat year to year. Refer to page 69 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. Refer to the Looking Forward section on pages 67 and 68 for additional information on the company’s expectations.

DESCRIPTION OF BUSINESS

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 28, 2017 for 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

IBM has a history of continuous re-invention, transforming itself throughout its 100-plus year history. In the past five decades alone, IBM has ushered in the eras of the mainframe, the personal computer, IT services and enterprise software. In its current transformation, IBM is once again leading the reordering of the technology industry.

A number of years ago, the company declared its focus on the strategic forces behind the “digital” revolution; data, cloud and engagement, driven by mobile and social, and underpinned by security. Since 2010, IBM has invested approximately $40 billion in these areas, built out the IBM Cloud on a global scale and extended cognitive systems to numerous enterprises and industries. The company made 55 acquisitions and has formed partnerships with organizations that are leading players in key industries.

Because of this transformation, IBM today is much more than a hardware, software and services company; IBM is a cognitive solutions and cloud platform company, with a focus on industry capabilities and expertise:

Cognitive Solutions: With the highest level of intelligence that exists in technology systems, these solutions tackle challenges ranging from answering client inquiries to helping physicians fight cancer.

Cloud Platform: IBM Cloud is the leading cloud platform for the enterprise, providing what enterprises need for speed, agility and, combined with Watson, for cognitive capability.

Industry Focus: As IBM brings higher levels of value to its clients, as its offerings are being built for the needs of individual industries. Healthcare and Financial Services are two examples of the company’s initial cognitive focus.

Cognitive Solutions

Since IBM’s Watson was introduced in 2011, the company has been developing a new generation of cognitive systems that can see and analyze the massive amounts of data that have previously been invisible to computers and enterprises. IBM’s cognitive systems have the capability to inject a kind of thinking ability into every digitized object, process and service, and learn from interactions. IBM is on the forefront of deploying these systems and helping clients to embrace the cognitive era.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cognitive systems are not programmed; like humans, they learn from experts and from every interaction, and they are uniquely able to find patterns in big data. They learn by using advanced algorithms to sense, predict and infer. Doing so, they augment human intelligence, allowing individuals to make faster and more informed decisions.

Since Watson’s debut, many technologies have entered the market under the banner of artificial intelligence. However, IBM’s approach to cognitive systems is quite unique:

· Highly adaptable intelligence systems: Watson has broad applicability and can help clients tackle challenges ranging from oncology to customer support.

· Protect and respect client data: Watson learns through data, both public data as well as clients’ private data. Clients choose whether their data or insights are shared. IBM respects the clients’ ownership and control of their own data.

· Easy entry points: Watson’s open APIs offer easy on-ramps to experiment with speech, vision and other data.

· Trained in domain depth: Watson is trained to be an expert in industries and functional specialties. It augments the knowledge of professionals, giving them access to the insights of their best colleagues and the world’s leading experts.

· Transformational services: IBM’s Cognitive Solutions and Watson Internet of Things (IoT) practices help clients build their cognitive strategies. GBS provides outcome-focused methodologies, domain skills and deep industry expertise.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Cloud Platform

Cloud represents more than a new architecture for delivering infrastructure and applications as services; it is also a catalyst for innovation, speed and agility. Cloud enables companies to focus on differentiating their strategies, capabilities and business models rather than on the underlying technology.

The IBM Cloud brings a unique set of characteristics to clients:

· It is a world-class cloud platform designed for enterprises, where security, reliability, scalability and performance are critical.

· It is the industry-leading hybrid cloud, enabling clients to extend their existing IT investments, connecting valuable data and applications across public and private clouds.

· It is a world-class cognitive cloud platform with IBM Watson services that developers can embed into their applications to create differentiating customer experiences and powerful insights.

The IBM Cloud has a strong global presence, with more than 50 cloud data centers around the world giving clients the flexibility to optimize the deployment of data and application, for performance, security and compliance.

The IBM Cloud is also continually expanding its base of advanced capabilities including cloud data services, cloud object storage, cloud video services, as well as Internet of Things, blockchain and analytics services. In 2016, IBM brought new cognitive solutions to professionals in marketing, commerce, supply chain and human resources, extending industry clouds to further differentiate its cloud offerings.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Industry Focus

To bring higher value to clients, IBM is providing solutions that are specific and tailored to challenges clients face in their industry, using the power of IBM’s advanced cognitive computing capabilities built on the IBM Cloud. In 2016, IBM deepened its commitment to delivering higher value in several key ways:

· In the healthcare industry, IBM Watson Health combines the power of cloud and cognitive with value-based solutions to optimize performance, engage consumers, enable effective care and manage population health. Significant investment in the healthcare space, including the acquisition of Merge and Truven, has enabled the company to expand the scope of solutions aimed at solving some of the most pressing health challenges.

· IBM continues to partner with financial services clients to build a robust infrastructure addressing increasingly complex and fast- changing demands. From preventing fraud to supporting cyber security efforts, IBM is becoming ever-more essential to the financial industry.

· IBM offers analytics to help clients assess their risk and compliance against industry guidelines, and uses a cognitive approach to provide deeper and faster findings. In late 2016, the company acquired Promontory Financial Group, LLC (Promontory), one of the world’s leading regulatory consulting firms. Promontory is training Watson to be a market-leading expert in the regulatory field, which will allow the company to deliver services at new levels of efficiency and transparency.

· IBM is committed to blockchain to provide a highly secure method of facilitating multi-step transactions, reducing the number of disputes and points of friction, including its participation in the Hyperledger Project. This cross-industry consortium is working to build the blockchain network in the cloud, doing for trusted transactions what the Internet did for information, and setting industry standards for years to come. Blockchain will enable financial institutions to settle securities in minutes instead of days; manufacturers to reduce product recalls by sharing production logs along their supply chain; and businesses of all types to more closely manage the flow of goods and payments. IBM is working with companies ranging from retailers, banks and shippers to apply this technology to transform their ecosystems through open standards and open platforms.

· IBM’s Global Business Services consulting business, with broad expertise across industries and a strong global footprint and scale, provides a unique combination of technologies and services to help clients achieve their business outcomes.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Transforming Core Businesses

While the company is focused on cognitive solutions, cloud platform and industry, it is important to note cognitive, cloud and industry are being embedded across IBM’s offerings. These core businesses continue to run clients’ most critical business processes. IBM’s hardware systems are being designed from the ground up to power the cloud and cognitive systems of the future. The company’s technology services help clients move to the cloud, embedding cognitive capabilities tailored for their industry. The company’s software offerings are simultaneously being made available for the cloud as well as being connected to the cloud where our clients choose to keep them on premises. Additionally, cognitive capabilities are being added to these offerings to provide new levels of innovation. In short, all of IBM is transforming to support the way its clients are transforming.

Summary

Each transformation of IBM ushers in a new capability to the world. More than 50 years ago, IBM introduced the programmable era and transformed the world’s transactions through the mainframe. In the decades that followed, IBM commercialized the personal computer,

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document created an industry around IT services and a software market around middleware. Each of these innovations remains essential to business and the world today.

The company’s current chapter is ushering in an entirely new era of human-computer interaction, embodied in cognitive solutions and the cloud platform for the needs of industries. The company is embarking on an era where it will create new capabilities at speeds and depth never previously witnessed.

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

The business model is dynamic, adapting to the continuously changing industry and economic environment, including the company’s transformation into cloud and as-a-Service delivery models. The company continues to strengthen its position through strategic organic investments and acquisitions in higher-value areas, strengthening its industry expertise and applying advanced analytics across virtually all its offerings. In addition, the company is transforming into a more agile enterprise to drive innovation and speed, as well as helping to drive productivity, which supports investments for 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 consist of five business segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems and Global Financing.

Cognitive Solutions comprises a broad portfolio of capabilities that help IBM’s clients to identify actionable new insights and inform decision-making for competitive advantage. Leveraging IBM’s research, technology and industry expertise, this business delivers a full spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, the first commercially available cognitive computing platform that has the ability to interact in natural language, process vast amounts of big data, and learn from interactions with people and computers. These solutions are provided through the most contemporary delivery methods including through cloud environments and “as-a-Service” models. Cognitive Solutions consists of Solutions Software and Transaction Processing Software.

Cognitive Solutions Capabilities

Solutions Software: provides the basis for many of the company’s strategic areas including analytics, security and social. IBM has established the world’s deepest portfolio of data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry. Watson Platform, Watson Health and Watson Internet of Things capabilities are included in Solutions Software. IBM’s world-class security platform delivers integrated security intelligence across clients’ entire operations, including their cloud, applications, networks and data, helping them to prevent, detect and remediate potential threats.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

Transaction Processing Software: includes software that primarily runs mission-critical systems in industries such as banking, airlines and retail. Most of this software is on-premise and annuity in nature.

Global Business Services (GBS) provides clients with consulting, application management services and global process services. These professional services deliver business value and innovation to clients through solutions which leverage industry, technology and business process expertise. GBS is the digital reinvention partner for IBM clients, combining industry knowledge, functional expertise, and applications with the power of design, cognitive and cloud. The full portfolio of GBS services is backed by its globally integrated delivery network and integration with IBM solutions and services including Watson, cloud, blockchain, and Technology Services. To deepen its capabilities, in 2016 IBM acquired four consulting and design firms to enhance the GBS global network of 35 digital experience design studios. IBM also announced Watson IoT Consulting Solutions, a new practice that brings together IBM’s industry and technical expertise to help clients introduce IoT innovation into their businesses.

GBS Capabilities

Consulting: provides business consulting services focused on bringing to market solutions that help clients shape their digital blueprints and customer experiences, define their cognitive operating models, set their next-generation talent strategies and create new technology visions and architectures in a cloud-centric world.

Application Management: delivers system integration, 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 security and privacy, application testing and modernization, cloud application migration and automation.

Global Process Services: GBS’ business process outsourcing service line, delivers finance, procurement, HR, and industry-specific business processes. These services deliver improved business results to clients through the strategic change and/or operation of the client’s business processes, applications and infrastructure. GBS is redefining the efficiency and cost profiles of clients’ core processes through the application of the power of Watson, cognitive and deep analytics.

Technology Services & Cloud Platforms provides comprehensive IT infrastructure services creating business value for clients through integrated services that incorporate unique intellectual property 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.

Technology Services & Cloud Platforms Capabilities

Infrastructure Services: delivers a portfolio of cloud, project-based, outsourcing and other managed services focused on clients’ enterprise IT infrastructure environments to enable digital transformation and deliver improved quality, flexibility, risk management and financial value. The portfolio includes a comprehensive set of hybrid cloud services and solutions to assist clients in building and running enterprise IT environments that utilize public and private clouds and traditional IT. The IBM Cloud Platform offers leading edge services to developers and IBM’s Cloud Infrastructure-as-a-Service covers a wide variety of workloads with unprecedented performance. These offerings integrate long-standing expertise in service management and technology with the ability to utilize the power of new technologies, including those from other IBM business segments. The portfolio is built around a key set of predictive and proactive solutions addressing systems, mobility, resiliency, networking, cloud and security. The company’s capabilities, including IBM Cloud, cognitive computing and hybrid cloud implementation, can help to deliver high-performance, end-to-end innovation and an improved ability to achieve business objectives.

Technical Support Services: delivers a comprehensive line of support services to maintain and improve the availability of clients’ IT infrastructures. These offerings include maintenance for IBM products and other technology platforms, as well as software and solution support.

Integration Software: delivers industry-leading hybrid cloud solutions that empower clients to achieve rapid innovation, hybrid integration, and process transformation with choice and consistency across public, dedicated and local cloud environments, leveraging

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document IBM’s Bluemix Platform-as-a-Service solution. Integration Software offerings and capabilities help clients address the digital imperatives to create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses.

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Systems provides clients with innovative infrastructure technologies to help meet the new requirements of hybrid cloud and cognitive workloads—from deploying advanced analytics, to moving to digital service delivery with the cloud, and securing mobile transaction processing. Approximately half of Systems Hardware’s server and storage sales transactions are through the company’s business partners, with the balance direct to end-user clients. IBM Systems also designs advanced semiconductor and systems technology in collaboration with IBM Research, primarily for use in the company’s systems.

Systems Capabilities

Servers: a range of high-performance systems designed to address computing capacity, security and performance needs of businesses, hyperscale cloud service providers and scientific computing organizations. The portfolio includes z Systems, a trusted enterprise platform for integrating data, transactions and insight, and Power Systems, a system designed from the ground up for big data and analytics, optimized for scale-out cloud and Linux, and delivering open innovation with OpenPOWER.

The company is a founding member of the OpenPOWER foundation, a group of industry-leading companies developing high- performance compute technologies and 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 and to fuel data-centric cognitive applications. 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, flash storage, disk and tape storage solutions.

Operating Systems Software: The company’s z/OS is a security-rich, scalable, high-performance enterprise operating system for z Systems. Power Systems offers a choice of AIX or Linux operating systems. These operating systems leverage POWER architecture to deliver secure, reliable and high- performing enterprise-class workloads across a breadth of server offerings.

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, installment payment plan and loan financing to end users and internal clients for terms up to seven years. Assets financed are primarily new and used IT hardware, software and services where the company has expertise. Internal financing is predominantly in support of Technology Services & Cloud Platforms’ long-term client service contracts. 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 suppliers, distributors and remarketers of IBM and OEM products. This includes internal activity where Global Financing factors a selected portion of the company’s accounts receivable primarily for cash management purposes, at arm’s-length rates.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Remanufacturing and Remarketing: assets include used equipment returned from lease transactions, or used and surplus equipment acquired internally or externally. 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 Services & Cloud Platforms. Systems may also sell the equipment that it purchases from Global Financing to external clients.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

IBM Worldwide Organizations

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

· Global Markets (formerly Sales and Distribution)

· Research, Development and Intellectual Property

· Integrated Supply Chain

Global Markets

IBM has a global presence, operating in more than 175 countries with a broad-based geographic distribution of revenue. The company’s Global Markets organization manages IBM’s global footprint, working closely with dedicated country-based operating units to serve clients locally. These country teams have client relationship managers who lead integrated teams of consultants, solution specialists and delivery professionals to enable clients’ growth and innovation. These local teams develop deep relationships with their clients to bring together capabilities from IBM and its network of Business Partners to develop and implement solutions.

By complementing local expertise with global experience and digital capabilities, IBM builds broad-based client relationships. This local management focus fosters speed in addressing new markets and making investments in emerging opportunities. The Global Markets organization serves clients with expertise in their industry as well as through the products and services that IBM and partners supply. IBM is also expanding its reach to smaller clients through digital marketing, digital marketplaces, inside sales and local Business Partner resources.

IBM continues to invest to capture opportunities in key growth markets around the world—India, China and Southeast Asia; Eastern Europe; the Middle East and Africa; and Latin America. Major IBM markets include the G7 countries of Canada, France, Germany, Italy, Japan, the United States (U.S.) and the United Kingdom (U.K.), as well as Austria, the Bahamas, Belgium, the Caribbean, 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 6 to 7 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 midterm innovations. It contributes many new technologies to IBM’s portfolio every year and helps clients address their most difficult challenges. IBM Research scientists are conducting pioneering work in artificial intelligence, analytics, security, nanotechnology, cloud computing, blockchain, quantum computing, silicon and post-silicon computing

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document architectures, data-centric systems and more—applying these technologies across industries including healthcare, Internet of Things, education and financial services.

In 2016, IBM was awarded more U.S. patents than any other company for the 24th consecutive year. IBM’s 8,088 patents awarded in 2016 represent a diverse range of inventions in artificial intelligence and cognitive computing, cognitive health, cloud, cybersecurity and other strategic growth areas for the company.

The company continues to actively seek intellectual property (IP) protection for its innovations, while increasing emphasis on other initiatives designed to leverage its IP leadership. Some of IBM’s technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in IBM products and/or the products of the licensee. As part of its business model, the company licenses certain of its intellectual property, which is high-value technology, but may be in more mature markets. The licensee drives the future development of the IP and ultimately expands the customer base. This generates IP income for the company both upon licensing, and with ongoing royalty arrangements between it and the licensee. While the company’s various proprietary IP rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products.

Integrated Supply Chain

IBM has an extensive integrated supply chain, procuring materials and services globally. Additionally, growth in client spend managed by IBM’s procurement organization continues to demonstrate clients’ faith that IBM can reduce clients’ cost through the transformation of source-to-pay operations. The supply, manufacturing and logistics operations are seamlessly integrated and have optimized inventories over time. Simplifying and streamlining internal processes has improved sales force productivity and operational effectiveness and efficiency. Supply chain resiliency enables IBM to reduce its risk during marketplace changes.

The company continues to derive business value from its own globally integrated supply chain providing a strategic advantage for the company to create value for clients. IBM leverages its supply chain expertise for clients through its supply chain business transformation outsourcing service to optimize and help operate clients’ end-to-end supply chain processes, from procurement to logistics. Utilizing analytics, mobile, cloud and social—with numerous projects, has allowed the integrated supply chain to drive positive business outcomes for the company and its clients.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

YEAR IN REVIEW

Results of Continuing Operations

Segment Details

The following is an analysis of the 2016 versus 2015 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.

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. Yr.-to-Yr. Percent Percent/ Change Margin Adjusted for For the year ended December 31: 2016 2015 Change Currency Revenue Cognitive Solutions $ 18,187 $ 17,841 1.9% 2.7% Gross margin 81.9% 85.1% (3.3)pts. Global Business Services 16,700 17,166 (2.7)% (2.5)% Gross margin 27.0% 28.2% (1.2)pts. Technology Services & Cloud Platforms 35,337 35,142 0.6% 1.4% Gross margin 41.9% 42.7% (0.8)pts. Systems 7,714 9,547 (19.2)% (18.9)% Gross margin 55.7% 55.8% (0.1)pts. Global Financing 1,692 1,840 (8.0)% (6.9)% Gross margin 38.7% 45.6% (6.9)pts. Other 289 206 40.4% 41.3% Gross margin (293.9)% (253.0)% (41.0)pts. Total consolidated revenue $ 79,919 $ 81,741 (2.2)% (1.6)%

Total consolidated gross profit $ 38,294 $ 40,684 (5.9)% Total consolidated gross margin 47.9% 49.8% (1.9)pts. Non-operating adjustments Amortization of acquired intangible assets 494 373 32.6% Retirement-related costs/(income) 316 469 (32.7)% Operating (non-GAAP) gross profit $ 39,104 $ 41,526 (5.8)% Operating (non-GAAP) gross margin 48.9% 50.8% (1.9)pts.

Cognitive Solutions

($ in millions)

Yr.-to-Yr. Percent Yr.- to -Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Cognitive Solutions external revenue $ 18,187 $ 17,841 1.9% 2.7% Solutions Software $ 12,589 $ 12,021 4.7% 5.5% Transaction Processing Software 5,598 5,819 (3.8) (3.1)

Cognitive Solutions revenue of $18,187 million grew 1.9 percent as reported and 3 percent adjusted for currency in 2016 compared to the prior year. On an as reported and constant currency basis, growth in Solutions Software, which addresses many of the company’s strategic areas, was partially offset by declines in Transaction Processing Software.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Solutions Software revenue of $12,589 million grew 4.7 percent as reported (6 percent adjusted for currency) compared to the prior year. This growth was led by analytics and security offerings. Analytics, which is the largest portion of the Solutions Software portfolio, continued to grow in key areas including Watson offerings such as Watson Health. Security also contributed to year-to-year growth, as the company continues to invest to build its security platform. There was strong Software-as-a-Service (SaaS) performance during the year with double-digit growth in revenue as reported and adjusted for currency. In 2016, five acquisitions, including The Weather Company and Truven, added substantial new capabilities to the Solutions Software portfolio.

Throughout the year, the Watson platform, which underpins the company’s cognitive strategy, continued to gain momentum, as the company expanded cognitive capabilities in the IBM Cloud.

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The company broadened the reach of Watson, with new capabilities, partnerships and engagement to accelerate adoption. Focus continues on scaling Watson Health and bringing real world benefits to researchers and clinicians. Watson IoT is growing and clients are using the power of Watson across the immense data pool created by the Internet of Things. The company is expanding its industry differentiation and focus on building industry verticals including the acquisition of Promontory in the fourth quarter.

Transaction Processing Software revenue of $5,598 million declined 3.8 percent as reported (3 percent adjusted for currency) compared to the prior year. Most of this software is on-premise and annuity in nature which is not a growing part of the software opportunity.

Within Cognitive Solutions, total 2016 strategic imperatives revenue of $11.7 billion grew 7 percent as reported (8 percent adjusted for currency) year to year. Cloud revenue of $2.1 billion grew 53 percent as reported (54 percent adjusted for currency), with an as-a- Service exit run rate of $1.8 billion.

($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2016 2015 Change Cognitive Solutions External gross profit $ 14,890 $ 15,189 (2.0)% External gross profit margin 81.9% 85.1% (3.3)pts. Pre-tax income $ 6,352 $ 7,245 (12.3)% Pre-tax margin 30.5% 36.1% (5.6)pts.

Cognitive Solutions gross profit margin decreased 3.3 points to 81.9 percent in 2016. Pre-tax income of $6,352 million decreased 12.3 percent compared to the prior year with a pre-tax margin decline of 5.6 points to 30.5 percent. This overall margin performance for the year reflects impacts of the company’s continued investment into strategic areas, including acquisition content, and the mix toward the SaaS business which is not yet at scale, partially offset by the impact of IP partnership agreements entered into during the year.

Global Business Services

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. Percent Yr.-to-Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Global Business Services external revenue $ 16,700 $ 17,166 (2.7)% (2.5)% Consulting $ 7,332 $ 7,678 (4.5)% (4.8)% Global Process Services 1,388 1,435 (3.3) (2.0) Application Management 7,980 8,053 (0.9) (0.5)

Global Business Services revenue of $16,700 million decreased 2.7 percent as reported and 3 percent adjusted for currency in 2016 compared to the prior year. Digital practices, which made up more than half of GBS revenue in 2016, grew strong double digits as reported and adjusted for currency including double-digit growth in cloud, analytics and mobile. This growth was more than offset by declines in the more traditional areas that the company is shifting away from, such as large ERP implementations.

Consulting revenue of $7,332 million declined 4.5 percent as reported (5 percent adjusted for currency). Global Process Services (GPS) revenue of $1,388 million decreased 3.3 percent as reported (2 percent adjusted for currency) compared to the prior year. Application Management revenue of $7,980 million decreased 0.9 percent as reported (flat adjusted for currency).

Within GBS, total 2016 strategic imperatives revenue of $8.9 billion grew 16 percent as reported and adjusted for currency year to year. Cloud revenue of $3.0 billion grew 68 percent as reported (66 percent adjusted for currency), with an as-a-Service exit run rate of $1.1 billion.

The company continues to aggressively shift the business to the strategic imperatives, or digital practices in GBS. The IBM Interactive Experience, the largest global digital agency, now has more than 30 studios worldwide. The company continues to respond to clients looking to create new business models with cognitive technologies. There was continued revenue growth in 2016, both as reported and adjusted for currency, in enterprise mobility solutions that are helping clients redesign workflows with specific industry content. The company’s growing collection of MobileFirst for iOS applications can now be integrated with a broad set of Watson technologies to increase productivity. The company is scaling the industry’s first cognitive consulting practice which draws on the expertise of consulting professionals spanning machine learning, advanced analytics, data science and development. During 2016, six acquisitions added substantial new capabilities in digital design, cloud consulting and other skill areas.

($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2016 2015 Change Global Business Services External gross profit $ 4,501 $ 4,837 (6.9)% External gross profit margin 27.0% 28.2% (1.2)pts. Pre-tax income $ 1,732 $ 2,602 (33.4)% Pre-tax margin 10.1% 14.7% (4.6)pts.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document GBS gross profit margin decreased 1.2 points to 27.0 percent compared to the prior year, with declines in Consulting and GPS. Overall, this reflects the company’s investments to grow the digital practices, additional spending in certain accounts to deliver on client commitments, and price and profit pressure in more traditional engagements. These dynamics are also reflected in the pre-tax margin for the year. In 2016, pre-tax income of $1,732 million decreased 33.4 percent and the pre-tax margin declined 4.6 points to 10.1 percent.

The company continues to invest and shift resources to higher value services around digital and cognitive. The company is investing in enablement, hiring top talent and bringing in new skills through acquisitions and focusing on integrating and scaling these new skills. While this impacts near-term profit, this investment has added important capabilities as the company continues to expand the digital practices.

Technology Services & Cloud Platforms

($ in millions)

Yr.-to-Yr. Percent Yr.-to-Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Technology Services & Cloud Platforms external revenue $ 35,337 $ 35,142 0.6% 1.4% Infrastructure Services $ 23,543 $ 23,075 2.0% 2.7% Technical Support Services 7,272 7,426 (2.1) (1.0) Integration Software 4,521 4,641 (2.6) (1.5)

Technology Services & Cloud Platforms revenue of $35,337 million grew 0.6 percent as reported and 1 percent adjusted for currency in 2016 compared to the prior year. As the business shifts from systems integration to services integration, there is continuing momentum in new offerings. Infrastructure Services revenue grew as reported and adjusted for currency, partially offset by declines in Technical Support Services and Integration Software. In 2016, four acquisitions have expanded capabilities and strengthened the company’s portfolio.

Infrastructure Services revenue of $23,543 million grew 2.0 percent as reported (3 percent adjusted for currency) compared to the prior year. Technical Support Services revenue of $7,272 million decreased 2.1 percent as reported (1 percent adjusted for currency). Integration Software revenue of $4,521 million decreased 2.6 percent as reported (1 percent adjusted for currency) in 2016 compared to the prior year.

In Infrastructure Services, clients continue to turn to the company as the trusted partner to modernize and transform their most critical IT systems and navigate the complexities of the hybrid cloud environment. The company’s hybrid cloud strategy is resonating with clients as they move to enterprise-grade cloud solutions that are secure, agile and leverage the data and investments in their core systems. Enterprise workloads on the company’s public cloud continue to scale, contributing to growth in as-a-Service content. The company continues to expand its cloud infrastructure and now has 50 cloud centers around the world, enabling low latency connectivity to cloud infrastructure.

Although revenue declined year to year, Technical Support Services continues to generate substantial revenue and profit. There was year-to-year revenue growth as reported and adjusted for currency in multi-vendor services, which is leveraging the company’s global scale and deep technical skills.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In Integration Software, there was revenue growth in Connect products that integrate applications, data and processes for on-premise and cloud environments. There was also a continued shift of the portfolio to an as-a-Service model through IBM’s Bluemix cloud platform which continues to scale across a broad catalog of high value services.

Within Technology Services & Cloud Platforms, total 2016 strategic imperatives revenue of $8.7 billion grew 39 percent as reported (40 percent adjusted for currency) year to year. Cloud revenue of $5.9 billion grew 49 percent as reported (50 percent adjusted for currency), with an as-a-Service exit run rate of $5.8 billion.

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($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2016 2015* Change Technology Services & Cloud Platforms External Technology Services gross profit $ 10,969 $ 11,008 (0.4)% External Technology Services gross profit margin 35.6% 36.1% (0.5)pts. External Integration Software gross profit $ 3,830 $ 4,005 (4.4)% External Integration Software gross profit margin 84.7% 86.3% (1.6)pts. External total gross profit $ 14,800 $ 15,014 (1.4)% External total gross profit margin 41.9% 42.7% (0.8)pts. Pre-tax income $ 4,707 $ 5,669 (17.0)% Pre-tax margin 13.1% 15.8% (2.8)pts.

* Recast to conform with 2016 presentation

Technology Services & Cloud Platforms gross profit margin decreased 0.8 points to 41.9 percent in 2016 compared to the prior year. While partially due to mix within the segment, there was improvement in the Infrastructure Services margin offset by declines in Technical Support Services and Integration Software. The margin improvement in Infrastructure Services reflects the benefits from delivery transformation and ongoing productivity actions related to automation, process optimization and leveraging the company’s scale, technology and talent. The company is investing in cognitive capabilities to further improve its delivery model and drive efficiencies. The Technical Support Services margin decline reflects the mix to multi-vendor support offerings. The Integration Software margin declined as the shift of the portfolio to an as-a-Service model continues.

Pre-tax income of $4,707 million decreased 17.0 percent and pre-tax margin declined 2.8 points year to year to 13.1 percent. The pre-tax margin reflects the dynamics impacting gross profit and the continued investments to build out the cloud platform, partially offset by the impact of IP partnership agreements entered into during the year.

Services Backlog and Signings

($ in billions)

Yr.-to-Yr.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Percent Yr.-to-Yr. Change Percent Adjusted for At December 31: 2016 2015 Change Currency Total backlog $ 118.7 $ 122.6 (3.2)% (1.8)%

The estimated total services backlog at December 31, 2016 was $119 billion, a decrease of 3.2 percent as reported, and 2 percent adjusted for currency, with an increase in GTS more than offset by a decline in GBS as reported and adjusted for currency, compared to the December 31, 2015 balance.

Total services backlog includes Infrastructure Services, Consulting, Global Process Services, Application Management and Technical Support Services. Total backlog is intended to be a statement of overall work under contract for these businesses and therefore includes Technical Support Services. It does not include as-a-Service offerings that have flexibility in contractual commitment terms. 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.

Services signings are management’s initial estimate of the value of a client’s commitment under a 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 Infrastructure Services, Consulting, Global Process Services and Application Management contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Technical Support Services is not included in signings as the 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. Percent Yr.-to-Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Total signings $ 44,645 $ 46,432 (3.8)% (2.7)%

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Systems

($ in millions)

Yr.-to-Yr.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Percent Yr.-to-Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Systems external revenue $ 7,714 $ 9,547 (19.2)% (18.9)% Systems Hardware $ 5,926 $ 7,574 (21.8)% (21.6)% z Systems (27.1) (26.8) Power Systems (27.1) (26.8) Storage Systems (10.0) (10.0) Operating Systems Software 1,788 1,973 (9.4) (8.7)

Systems revenue of $7,714 million decreased 19.2 percent as reported (19 percent adjusted for currency) in 2016 compared to the prior year reflecting market shifts and product cycle dynamics. Systems Hardware revenue of $5,926 million decreased 21.8 percent as reported (22 percent adjusted for currency) year to year. Operating Systems Software revenue of $1,788 million decreased 9.4 percent as reported (9 percent adjusted for currency) compared to the prior year.

Within Systems Hardware, z Systems revenue decreased 27.1 percent as reported (27 percent adjusted for currency) year to year reflecting product cycle dynamics. However, eight quarters into the z13 cycle at the end of 2016, the company continues to add new clients to the platform, drive innovation and introduce new technologies. During 2016, 29 new clients were added, with a total of 80 since introduction of the z13, validating its value and ongoing commitment to the company’s platform. Throughout the year, the company continued to optimize z Systems to drive new workloads such as blockchain and instant payments. The acquisition of EZSource, which helps clients modify applications for their digital transformation while supporting agility and hybrid cloud, also drove innovation in the z Systems platform.

Power Systems revenue decreased 27.1 percent as reported (27 percent adjusted for currency) year to year reflecting the underlying dynamics of a declining market for UNIX, where IBM continues to be the market leader, partially offset by growth in the expanding Linux market. During the year, there was success with HANA where the company is bringing in new clients. The UNIX market remains a high-value space for clients, and in 2016 new midrange and high-end systems were introduced. These systems are designed for hybrid cloud computing and flexible consumption models to transform on-premise IT to the cloud. In Power, the company is shifting to Linux while continuing to serve the UNIX space, but this is a long transition.

Storage Systems revenue decreased by 10.0 percent as reported and adjusted for currency year to year reflecting the weakness in the traditional disk storage market. In 2016, the company introduced new products and transitioned to a full suite of flash array offerings to improve its competitive position, and this portfolio grew revenue in the fourth quarter of the year as reported and adjusted for currency. While not reported within the Systems segment, Software-Defined Storage had revenue growth as reported and adjusted for currency in 2016.

Within Systems, total 2016 strategic imperatives revenue of $3.4 billion decreased 15 percent as reported and adjusted for currency year to year. Cloud revenue of $2.7 billion decreased 11 percent as reported and adjusted for currency as a result of a strong 2015 with the mainframe cycle.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2016 2015* Change Systems External Systems Hardware gross Profit $ 2,720 $ 3,536 (23.1)% External Systems Hardware gross profit margin 45.9% 46.7% (0.8)pts. External Operating Systems Software gross profit $ 1,577 $ 1,790 (11.9)% External Operating Systems Software gross profit margin 88.2% 90.7% (2.5)pts. External total gross Profit $ 4,298 $ 5,326 (19.3)% External total gross Profit margin 55.7% 55.8% (0.1)pts. Pre-tax income $ 933 $ 1,722 (45.8)% Pre-tax margin 11.0% 16.7% (5.7)pts.

* Recast to conform with 2016 presentation

The Systems gross profit margin decreased 0.1 points to 55.7 percent in 2016 compared to the prior year with declines in Power and Storage partially offset by expansion in z Systems margins. Pre-tax income of $933 million decreased 45.8 percent and the pre-tax margin declined 5.7 points year to year to 11.0 percent, consistent with the product cycle and portfolio transition dynamics impacting revenue and profit.

The company has reinvented its core systems for work in a new era of computing. It has optimized systems to drive new types of workloads and is expanding its footprint, building new capabilities and solving new types of problems for its clients. While facing some shifting market dynamics and product transitions, the Systems portfolio remains optimized to address the demands of the cognitive era and cloud computing.

Global Financing

See pages 76 through 81 for an analysis of Global Financing’s segment results.

Total Software

Under the company’s new segment structure, total software no longer exists as a segment. Given the focus on IBM’s software revenue performance, the company continued to report total software revenue performance through 2016. The company’s software revenue is reported discretely within the Cognitive Solutions, Technology Services & Cloud Platforms and Systems segments and can be added together to calculate total software. The company has a broad software portfolio, from solutions that provide cognitive, analytics and security solutions, to core transaction processing, to connecting on-premises data and processes to private and public cloud environments. This software is open, running on IBM and non-IBM environments.

Total software revenue, which includes Cognitive Solutions, Integration Software and Operating Systems Software, of $24,496 million increased 0.2 percent as reported and 1 percent adjusted for currency in 2016 compared to 2015. From a business area perspective, there was growth in Cognitive Solutions as reported and adjusted for currency, while Integration Software and Operating Systems Software were down year to year as reported and adjusted for currency. Across software, annuity revenue grew year to year as reported and adjusted for currency led by SaaS offerings. Transactional revenue declined as reported and adjusted for currency.

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.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions)

Yr.-to-Yr. Percent Yr.-to -Yr. Change Percent Adjusted for For the year ended December 31: 2016 2015 Change Currency Total revenue $ 79,919 $ 81,741 (2.2)% (1.6)% Geographies $ 79,594 $ 81,430 (2.3)% (1.6)% Americas 37,513 38,486 (2.5) (1.4) Europe/Middle East/Africa 24,769 26,073 (5.0) (2.1) Asia Pacific 17,313 16,871 2.6 (1.2)

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Total geographic revenue of $79,594 million in 2016 decreased 2.3 percent as reported and 2 percent adjusted for currency compared to the prior year.

Americas revenue of $37,513 million decreased 2.5 percent as reported and 1 percent adjusted for currency with declines in North America and Latin America as reported and adjusted for currency. Within North America, the U.S. decreased 0.9 percent and Canada decreased 6.2 percent (3 percent adjusted for currency). In Latin America, Brazil decreased 10.5 percent (7 percent adjusted for currency) and Mexico decreased 14.5 percent (7 percent adjusted for currency).

EMEA revenue of $24,769 million decreased 5.0 percent as reported and 2 percent adjusted for currency. Within EMEA, revenue declined in the UK, Germany and France, as reported and adjusted for currency, while revenue grew in Italy as reported and adjusted for currency. The UK decreased 12.8 percent (1 percent adjusted for currency). Germany decreased 5.1 percent (5 percent adjusted for currency). Revenue declined in France 3.4 percent (3 percent adjusted for currency). Italy increased 4.0 percent (4 percent adjusted for currency) year to year. The Middle East and Africa region grew 0.6 percent (3 percent adjusted for currency), while there was a decline in the Central and Eastern European region as reported and adjusted for currency including a year-to-year decline in Russia of 27.1 percent.

Asia Pacific revenue of $17,313 million grew 2.6 percent as reported, but declined 1 percent adjusted for currency. Japan grew 10.5 percent as reported, but declined 1 percent adjusted for currency. India grew 5.2 percent as reported and 10 percent adjusted for currency. China decreased 2.4 percent as reported, but was flat on an adjusted for currency basis. Australia decreased 9.7 percent (8 percent adjusted for currency).

Total Expense and Other (Income)

($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2016 2015 Change

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total consolidated expense and other (income) $ 25,964 $ 24,740 4.9% Non-operating adjustments Amortization of acquired intangible assets (503) (304) 65.7 Acquisition-related charges (5) (26) (81.0) Non-operating retirement-related (costs)/income (282) (581) (51.4) Operating (non-GAAP) expense and other (income) $ 25,174 $ 23,830 5.6% Total consolidated expense-to-revenue ratio 32.5% 30.3% 2.2pts. Operating (non-GAAP) expense-to-revenue ratio 31.5% 29.2% 2.3pts.

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

Total Operating Consolidated (non-GAAP) ·Currency* 2 points 2 points ·Acquisitions** 5 points 4 points ·Base (2) points 0 points

* Reflects impacts of translation and hedging programs ** Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related charges.

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

42

Management Discussion International Business Machines Corporation and Subsidiary Companies

Selling, General and Administrative

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2016 2015 Change Selling, general and administrative expense Selling, general and administrative—other $ 16,971 $ 16,643 2.0% Advertising and promotional expense 1,327 1,290 2.8 Workforce rebalancing charges 1,038 587 76.7 Retirement-related costs 742 1,052 (29.5) Amortization of acquired intangible assets 503 304 65.7 Stock-based compensation 401 322 24.3 Bad debt expense 87 231 (62.3) Total consolidated selling, general and administrative expense $ 21,069 $ 20,430 3.1% Non-operating adjustments Amortization of acquired intangible assets (503) (304) 65.7 Acquisition-related charges 2 (21) NM Non-operating retirement- related (costs)/income (253) (533) (52.6)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Operating (non-GAAP) selling, general and administrative expense $ 20,315 $ 19,573 3.8%

NM—Not meaningful

Total selling, general and administrative (SG&A) expense increased 3.1 percent in 2016 versus 2015, driven primarily by the following factors:

· Acquisition-related spending (4 points); and

· Higher workforce rebalancing charges (2 points); partially offset by

· The effects of currency (1 point); and

· A year-to-year decrease in charges for pension obligations related to litigation in Spain (1 point).

Operating (non-GAAP) expense increased 3.8 percent year to year driven primarily by the same factors excluding the year-to-year decrease in charges for pension obligations related to litigation which is not reflected in operating (non-GAAP) expense.

Bad debt expense decreased $144 million in 2016 compared to 2015. The receivables provision coverage was 2.0 percent at December 31, 2016, a decrease of 60 basis points from December 31, 2015 due to write-offs of previously reserved receivables in 2016.

Research, Development and Engineering

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2016 2015 Change Total consolidated research, development and engineering $ 5,751 $ 5,247 9.6 % Non-operating adjustment Non-operating retirement-related (costs)/income (29) (48) (38.6) Operating (non-GAAP) research, development and engineering $ 5,722 $ 5,200 10.1%

Research, development and engineering (RD&E) expense was 7.2 percent of revenue in 2016 and 6.4 percent of revenue in 2015.

RD&E expense increased 9.6 percent in 2016 versus 2015 primarily driven by:

· Higher expense due to acquisitions (7 points); and

· Increased base spending (4 points); partially offset by

· The effects of currency (1 point).

Operating (non-GAAP) RD&E expense increased 10.1 percent in 2016 compared to the prior year, driven primarily by the same factors.

Intellectual Property and Custom Development Income

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. For the year ended Percent December 31: 2016 2015* Change Licensing of intellectual property including royalty-based fees $ 1,390 $ 407 241.8% Custom development income 214 262 (18.4) Sales/other transfers of intellectual property 27 13 113.4 Total $ 1,631 $ 682 139.3%

* Reclassified to conform to 2016 presentation

Licensing of intellectual property including royalty-based fees increased in 2016 compared to the prior year period, primarily due to licensing of certain intellectual property in 2016 within the company’s Integration Software and Cognitive Solutions software portfolio, which included four transactions each with period income greater than $100 million. The company is licensing IP to partners who are allocating their skills to extend the value of assets that are high value, but may be in mature markets. There were no significant individual IP transactions in 2015. The

43

Management Discussion International Business Machines Corporation and Subsidiary Companies timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

Other (Income) and Expense

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2016 2015 Change Other (income) and expense Foreign currency transaction losses/(gains) $ (116) $ 414 NM (Gains)/losses on derivative instruments 260 (853) NM Interest income (108) (72) 49.1% Net (gains)/losses from securities and investment assets 23 47 (50.5) Other 85 (260) NM Total consolidated other (income) and expense $ 145 $ (724) NM Non-operating adjustment Acquisition-related charges (7) (5) 35.2 Operating (non-GAAP) other (income) and expense $ 138 $ (729) NM

NM—Not meaningful

Total consolidated other (income) and expense was expense of $145 million in 2016 compared to income of $724 million in 2015. The decrease in income of $869 million year over year was primarily driven by:

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document · Lower net exchange gains ($593 million); and

· Real estate capacity charges related to the first-quarter 2016 workforce transformation ($291 million).

Interest Expense

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2016 2015 Change Interest expense Total $ 630 $ 468 34.4%

The increase in interest expense in 2016 versus 2015 was primarily driven by higher average debt levels and higher 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 2016 was $1,206 million, an increase of $197 million year to year.

Stock-Based Compensation

Pre-tax stock-based compensation cost of $544 million increased $76 million compared to 2015. This was due primarily to increases related to performance share units ($72 million) and the conversion of stock-based awards previously issued by acquired entities ($15 million); partially offset by decreases related to restricted stock units ($15 million). Stock-based compensation cost, and the year-to-year change, was reflected in the following categories: Cost: $88 million, down $13 million; SG&A expense: $401 million, up $78 million and RD&E expense: $55 million, up $5 million.

Retirement-Related Plans

The following table provides the total pre-tax cost for all retire-ment-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. For the year ended Percent December 31: 2016 2015 Change Retirement-related plans—cost Service cost $ 443 $ 484 (8.6)% Amortization of prior service costs/ (credits) (107) (100) 7.0 Cost of defined contribution plans 1,070 1,138 (6.0) Total operating costs/ (income) $ 1,405 $ 1,522 (7.7)% Interest cost $ 3,300 $ 3,316 (0.5)% Expected return on plan assets (5,563) (5,879) (5.4) Recognized actuarial losses 2,751 3,283 (16.2) Curtailments/ settlements (16) 36 NM Multi-employer plan/ other costs 126 293 (57.0) Total non-operating costs/(income) $ 598 $ 1,050 (43.0)%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total retirement-related plans—cost $ 2,003 $ 2,572 (22.1)%

NM—Not meaningful

44

Management Discussion International Business Machines Corporation and Subsidiary Companies

In 2016, total pre-tax retirement-related plan cost decreased by $569 million compared to 2015, primarily driven by a decrease in recognized actuarial losses ($532 million), a decrease in pension obligations related to litigation in Spain ($177 million) and lower defined contribution plans cost ($68 million); partially offset by lower expected return on plan assets ($316 million).

As discussed in the “Operating (non-GAAP) Earnings” section on pages 26 and 27, the company characterizes certain retirement- related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in 2016 were $1,405 million, a decrease of $117 million compared to 2015, primarily driven by lower defined contribution plans cost ($68 million) and lower service cost ($42 million). Non-operating costs of $598 million decreased $452 million in 2016 compared to the prior year, driven primarily by a decrease in recognized actuarial losses ($532 million) and a decrease in pension obligations related to litigation in Spain ($177 million); partially offset by lower expected return on plan assets ($316 million).

Income Taxes

The continuing operations effective tax rate for 2016 was 3.6 percent, a decrease of 12.5 points versus the prior year. The benefit resulting from the favorable resolution of a long standing tax matter related to the determination of certain foreign tax losses incurred by the company in Japan drove a 9.5 point reduction in the rate. Without that discrete item, the continuing operations effective tax rate for 2016 would have been 13.1 percent, with the remaining change in the rate year to year driven by the following factors:

· The benefit resulting from the favorable resolution of a long-standing tax matter related to the utilization of certain foreign tax losses in Japan of 9.5 points; and

· A benefit due to the year-to-year decrease in tax charges related to intercompany payments made by foreign subsidiaries and the intercompany licensing of certain IP of 5.7 points; and

· A benefit due to the geographic mix of pre-tax earnings in 2016 of 0.3 points; partially offset by

· A reduced benefit year to year related to audit settlements of 2.3 points; and

· The decreased benefit year to year in the utilization of foreign tax credits of 0.6 points.

The continuing operations operating (non-GAAP) effective tax rate was 6.5 percent, a decrease of 10.7 points versus 2015 principally driven by the same factors described above. Without the Japan benefits, the continuing operations (non-GAAP) effective tax rate would have been 14.9 percent.

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.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. For the year ended Percent December 31: 2016 2015 Change Earnings per share of common stock from continuing operations Assuming dilution $ 12.39 $ 13.60 (8.9)% Basic $ 12.44 $ 13.66 (8.9)% Diluted operating (non-GAAP) $ 13.59 $ 14.92 (8.9)% Weighted-average shares outstanding (in millions) Assuming dilution 958.7 982.7 (2.4)% Basic 955.4 978.7 (2.4)%

Actual shares outstanding at December 31, 2016 and 2015 were 945.9 million and 965.7 million, respectively. The average number of common shares outstanding assuming dilution was 24.0 million shares lower in 2016 versus 2015. 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 $9 million in 2016 and $174 million in 2015. The discontinued operations effective tax rate in 2016 was 21.7 percent compared to 40.3 percent in 2015.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Financial Position

Dynamics

At December 31, 2016, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end were $8,527 million. During the year, the company continued to manage the investment portfolio to meet its capital preservation and liquidity objectives.

Total debt of $42,169 million increased $2,279 million from prior year-end levels. The commercial paper balance at December 31, 2016, was $899 million, an increase of $299 million from the prior year end. Within total debt, $27,859 million was in support of the Global Financing business which is leveraged at a 7.3 to 1 ratio. The company continues to have substantial flexibility in the debt markets. During 2016, the company completed bond issuances totaling $7,873 million, with terms ranging from 1.5 to 30 years, and interest rates ranging from 0.50 to 4.70 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 $10.25 billion global credit facility, with 100 percent of the facility available on a same day basis.

Consistent with accounting standards, the company remeasured the funded status of its retirement and postretirement plans at December 31. At December 31, 2016, the overall net underfunded position was $14,840 million, a decrease of $674 million from December 31, 2015 driven by asset returns partially offset by a decrease in discount rates. 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 $500 million per year through 2020. In 2016, the return on the U.S. Personal Pension Plan assets was 6.2 percent and the plan was 102 percent funded at December 31. Overall, global asset returns were 8.5 percent and the qualified defined benefit plans worldwide were 98 percent funded at December 31, 2016.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document During 2016, the company generated $16,958 million in cash from operations, a decrease of $49 million compared to 2015. In addition, the company generated $11,574 million in free cash flow, a decrease of $1,501 million versus the prior year. See page 69 for additional information on free cash flow. The company returned $8,758 million to shareholders in 2016, with $5,256 million in dividends and $3,502 million in gross share repurchases. In 2016, the company repurchased 23.3 million shares and had $5.1 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 86 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 77, are supplementary data presented to facilitate an understanding of the Global Financing business.

Working Capital

($ in millions)

At December 31: 2016 2015 Current assets $ 43,888 $ 42,504 Current liabilities 36,275 34,269 Working capital $ 7,613 $ 8,235 Current ratio 1.21:1 1.24:1

Working capital decreased $622 million from the year-end 2015 position. The key changes are described below:

Current assets increased $1,383 million ($1,920 million adjusted for currency), as a result of:

· An increase of $690 million ($1,013 million adjusted for currency) in receivables driven by trade receivables; and

· An increase of $359 million ($457 million adjusted for currency) in prepaid expenses and other current assets; and

· An increase of $332 million ($427 million adjusted for currency) in cash and marketable securities.

Current liabilities increased $2,006 million ($2,471 million adjusted for currency), as a result of:

· An increase in short-term debt of $1,052 million ($1,033 million adjusted for currency); and

· An increase in taxes of $388 million ($442 million adjusted for currency) primarily driven by the reclass from non-current liabilities based on the anticipated settlement of various U.S. and non U.S. tax audits; and

· An increase in other accrued expenses and liabilities of $352 million ($571 million adjusted for currency); and

· An increase in accounts payable of $181 million ($244 million adjusted for currency).

46

Management Discussion International Business Machines Corporation and Subsidiary Companies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cash Flow

The company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 87 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: 2016 2015 Net cash provided by/(used in) continuing operations Operating activities $ 16,958 $ 17,008 Investing activities (10,976) (8,159) Financing activities (5,791) (9,166) Effect of exchange rate changes on cash and cash equivalents (51) (473) Net change in cash and cash equivalents $ 140 $ (790)

Net cash provided by operating activities decreased by $49 million in 2016 driven by the following key factors:

· Performance-related declines within net income; offset by

· A decline in cash income tax payments ($1,579 million).

Net cash used in investing activities increased $2,817 million driven by:

· An increase in cash used related to acquisitions of $2,330 million.

Net cash used in financing activities decreased $3,375 million as compared to the prior year driven by the following factors:

· An increase in net cash sourced from debt transactions of $2,744 million driven by a higher level of issuances in the current year; and

· A decrease of $1,107 million of cash used for gross share repurchases; partially offset by

· An increase in dividend payments of $358 million.

Noncurrent Assets and Liabilities

($ in millions)

At December 31: 2016 2015 Noncurrent assets $ 73,582 $ 67,991 Long-term debt $ 34,655 $ 33,428 Noncurrent liabilities (excluding debt) $ 28,147 $ 28,374

The increase in noncurrent assets of $5,591 million ($5,788 million adjusted for currency) was driven by:

· An increase in intangible assets and goodwill of $5,379 million ($5,420 million adjusted for currency) resulting from acquisitions during the year; and

· An increase in prepaid pension assets of $1,301 million ($1,427 million adjusted for currency) primarily driven by the expected returns on plan assets partially offset by interest costs and plan remeasurements; partially offset by

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document · A decrease of $993 million ($1,054 million adjusted for currency) in long-term financing receivables primarily due to lower volumes.

Long-term debt increased $1,227 million ($1,595 million adjusted for currency) driven by:

· Bond issuances of $7,873 million; partially offset by

· Reclassification of $6,239 million to short-term debt to reflect upcoming maturities.

Other noncurrent liabilities, excluding debt, decreased $227 million ($195 million adjusted for currency) primarily driven by:

· A decrease of $622 million ($769 million adjusted for currency) in other liabilities driven by the reclass to current taxes based on the anticipated settlement of various U.S. and non U.S. tax audits; partially offset by

· An increase in retirement and nonpension postretirement liabilities of $567 million ($706 million adjusted for currency) driven by plan remeasurements.

47

Management Discussion International Business Machines Corporation and Subsidiary Companies

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: 2016 2015 Total company debt $ 42,169 $ 39,890 Total Global Financing segment debt $ 27,859 $ 27,205 Debt to support external clients 24,034 23,934 Debt to support internal clients 3,825 3,271 Non-Global Financing debt 14,309 12,684

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 Technology Services & Cloud Platforms, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their attributes, these Technology Services & Cloud Platforms 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 page 80.

Consolidated debt-to-capitalization ratio at December 31, 2016 was 69.6 percent versus 73.4 percent at December 31, 2015.

Given the significant leverage, the company also 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 49.5 percent at December 31, 2016 compared to 54.3 percent at December 31, 2015.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Equity

Total equity increased by $3,968 million from December 31, 2015 as a result of an increase in retained earnings of $6,634 million, an increase in common stock of $673 million and lower accumulated other comprehensive losses of $209 million; partially offset by an increase in treasury stock of $3,532 million mainly due to gross common stock repurchases.

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 pages 26 and 27 for the company’s rationale for presenting operating earnings information.

($ in millions except per share amount)

Acquisition- Retirement- Related Related Operating For the year ended December 31, 2016: GAAP Adjustments Adjustments (non-GAAP) Gross profit $ 38,294 $ 494 $ 316 $ 39,104 Gross profit margin 47.9% 0.6pts. 0.4 48.9% SG&A $ 21,069 $ (501) $ (253) $ 20,315 RD&E 5,751 — (29) 5,722 Other (income) and expense 145 (7) — 138 Total expense and other (income) 25,964 (508) (282) 25,174 Pre-tax income from continuing operations 12,330 1,003 598 13,931 Pre-tax margin from continuing operations 15.4% 1.3pts. 0.7pts. 17.4% Provision for income taxes* $ 449 $ 268 $ 183 $ 900 Effective tax rate 3.6% 1.7pts. 1.2pts. 6.5% Income from continuing operations $ 11,881 $ 735 $ 415 $ 13,031 Income margin from continuing operations 14.9% 0.9pts. 0.5pts. 16.3% Diluted earnings per share from continuing operations $ 12.39 $ 0.77 $ 0.43 $ 13.59

* 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.

48

Management Discussion International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amount)

Acquisition- Retirement- Related Related Operating For the year ended December 31, 2015: GAAP Adjustments Adjustments (non-GAAP) Gross profit $ 40,684 $ 373 $ 469 $ 41,526

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gross profit margin 49.8% 0.5Pts. 0.6pts. 50.8% SG&A $ 20,430 $ (324) $ (533) $ 19,573 RD&E 5,247 — (48) 5,200 Other (income) and expense (724) (5) — (729) Total expense and other (income) 24,740 (330) (581) 23,830 Pre-tax income from continuing operations 15,945 703 1,050 17,697 Pre-tax margin from continuing operations 19.5% 0.9pts. 1.3.pts. 21.6% Provision for income taxes* $ 2,581 $ 141 $ 316 $ 3,037 Effective tax rate 16.2% 0.2pts. 0.9pts. 17.2% Income from continuing operations $ 13,364 $ 562 $ 734 $ 14,659 Income margin from continuing operations 16.3% 0.7pts. 0.9pts. 17.9% Diluted earnings per share from continuing operations $ 13.60 $ 0.57 $ 0.75 $ 14.92

* 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.

Consolidated Fourth-Quarter Results

($ and shares in millions except per share amounts)

Yr.- to -Yr. Percent/ Margin For the fourth quarter: 2016 2015 Change Revenue $ 21,770 $ 22,059 (1.3)%* Gross profit margin 50.0% 51.7% (1.7)pts. Total expense and other (income) $ 5,907 $ 6,308 (6.4)% Total expense and other (income)-to-revenue ratio 27.1% 28.6% (1.5)pts. Income from continuing operations before income taxes $ 4,986 $ 5,098 (2.2)% Provision for income taxes from continuing operations $ 480 $ 638 (24.7)% Income from continuing operations $ 4,505 $ 4,460 1.0% Income from continuing operations margin 20.7% 20.2% 0.5pts. Income/(loss) from discontinued operations, net of tax $ (4) $ 3 NM Net income $ 4,501 $ 4,463 0.9% Earnings per share from continuing operations: Assuming dilution $ 4.73 $ 4.59 3.1% Consolidated earnings per share—assuming dilution $ 4.72 $ 4.59 2.8% Weighted-average shares outstanding Assuming dilution 952.7 972.8 (2.1)%

* (0.7) percent adjusted for currency

NM—Not meaningful

49

Management Discussion International Business Machines Corporation and Subsidiary Companies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The following table provides the company’s operating (non-GAAP) earnings for the fourth quarter of 2016 and 2015.

($ in millions except per share amounts)

Yr.-to-Yr. Percent For the fourth quarter: 2016 2015 Change Net income as reported $ 4,501 $ 4,463 0.9% Income/(loss) from discontinued operations, net of tax (4) 3 NM Income from continuing operations 4,505 4,460 1.0 Non-operating adjustments (net of tax) Acquisition-related charges 193 110 75.8 Non-operating retirement-related costs/(income) 77 137 (43.8) Operating (non-GAAP) earnings* $ 4,776 $ 4,707 1.5% Diluted operating (non-GAAP) earnings per share $ 5.01 $ 4.84 3.5%

* See page 55 for a more detailed reconciliation of net income to operating (non-GAAP) earnings.

NM—Not meaningful

Snapshot

In the fourth quarter of 2016, the company delivered $21.8 billion in revenue, $4.5 billion in income from continuing operations and $4.8 billion in operating (non-GAAP) earnings, resulting in diluted earnings per share from continuing operations of $4.73 as reported and $5.01 on an operating (non-GAAP) basis. The company generated $4.0 billion in cash from operations and $4.7 billion in free cash flow in the fourth quarter of 2016 with shareholder returns of $2.2 billion in gross common stock repurchases and dividends. In the quarter, the company continued to deliver strong revenue growth in the strategic imperatives.

Total consolidated revenue decreased 1.3 percent as reported and 1 percent year to year adjusted for currency in the fourth quarter of 2016, with a sequential decline of 1.0 point as reported but flat adjusted for currency from the third quarter growth rates. Clients are focused on becoming cloud-based, cognitive and digital businesses which is reflected in the company’s strong revenue growth in the strategic imperatives across cloud, mobile, analytics and security in the fourth quarter 2016 versus 2015. Cloud as-a-Service continues to deliver strong revenue growth across software and services. Annuity revenue grew in the fourth quarter of 2016 compared to 2015. In addition, acquisitions completed over the past 12 months continued to contribute to revenue performance in the quarter.

The fourth quarter results reflect the success the company is having in the strategic areas and the investments it has been making to drive that shift. In the fourth quarter, the strategic imperatives—cloud, analytics and engagement, grew 11.4 percent year to year as reported and 12 percent adjusted for currency. Total Cloud revenue of $4.2 billion increased 33 percent as reported and adjusted for currency in the fourth quarter, with cloud as-a-Service revenue up 61 percent (63 percent adjusted for currency). The company exited the fourth quarter of 2016 with an annual run rate for cloud as-a-Service revenue of $8.6 billion, up from $7.5 billion in the third quarter of 2016. Analytics revenue of $5.6 billion in the fourth quarter increased 9 percent as reported and adjusted for currency with contribution from the core analytics platform as well as the cognitive offerings including Watson Health, Watson Platform and Watson IoT. Mobile revenue increased 16 percent as reported (17 percent adjusted for currency) compared to the prior year. Security revenue increased 7 percent as reported (8 percent adjusted for currency).

From a segment perspective, Cognitive Solutions revenue increased 1.4 percent as reported and 2 percent adjusted for currency led by growth in Solutions Software. Technology Services & Cloud Platforms revenue increased 1.7 percent as reported and 2 percent adjusted for currency with growth in Infrastructure Services as clients focus on enabling their digital businesses and building their hybrid cloud

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document environments. Global Business Services revenue decreased 4.1 percent as reported and 4 percent adjusted for currency and continues to reflect a shift in the segment’s business away from large ERP implementations towards digital practices. Systems revenue decreased 12.5 percent (12 percent adjusted for currency) reflecting declines in Power Systems and Storage Systems partially offset by growth in z Systems.

From a geographic perspective, Americas revenue was flat year to year as reported and adjusted for currency. There was sequential improvement compared with the third quarter of 2016 on both an as reported and adjusted for currency basis. EMEA revenue decreased 8.0 percent as reported and 3 percent adjusted for currency in the fourth quarter of 2016 compared to 2015. Asia Pacific revenue increased 5.1 percent as reported and 1 percent adjusted for currency.

The consolidated gross profit margin of 50.0 percent decreased 1.7 points year to year. The decline was driven primarily by continued investment in strategic areas, including acquisitions, and the shift toward an as-a-Service business which is not yet at scale. The operating (non-GAAP) gross margin of 51.0 percent decreased 1.8 points compared to the prior year driven primarily by the same factors.

Total expense and other (income) decreased 6.4 percent in the fourth quarter of 2016 compared to the prior year. Total operating (non- GAAP) expense and other (income) decreased 6.8 percent year to year.

50

Management Discussion International Business Machines Corporation and Subsidiary Companies

The key year-to-year drivers were approximately:

Total Operating Consolidation (non-GAAP) · Currency* 1 point 1 point · Acquisitions** 5 points 4 points · Base (12) points (12) 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 performance reflects a higher level of IP income (5 points) in the fourth quarter year to year consistent with the company’s revitalized efforts in this area. The base expense decline also reflected the yield from workforce rebalancing actions occurring earlier in the year. The business continued to invest in areas such as cognitive and cloud through acquisitions. The decrease in operating (non-GAAP) expense was driven primarily by the same factors.

Pre-tax income from continuing operations of $5.0 billion in the fourth quarter of 2016 decreased 2.2 percent year to year and the pre- tax margin was 22.9 percent, a decrease of 0.2 points. The continuing operations effective tax rate for the fourth quarter of 2016 was 9.6 percent compared to an effective tax rate of 12.5 percent in the fourth quarter of 2015, down 2.9 points year to year. While the underlying effective tax rate was approximately 16 percent, the fourth-quarter 2016 rate reflected benefits from the year-to-year decrease in tax charges related to intercompany payments and the intercompany licensing of certain IP. Income from continuing operations of $4.5 billion increased 1.0 percent and the net income margin was 20.7 percent, an increase of 0.5 points versus the fourth quarter of 2015. Losses from discontinued operations, net of tax, were $4 million in the fourth quarter of 2016 compared to $3 million of income in the fourth quarter of 2015. Net income of $4.5 billion increased 0.9 percent year to year. Operating (non-GAAP) pre-tax

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document income from continuing operations of $5.4 billion decreased 2.1 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations of 24.8 percent was essentially flat year-to-year. Operating (non-GAAP) income from continuing operations of $4.8 billion increased 1.5 percent. The operating (non-GAAP) income margin from continuing operations of 21.9 percent increased 0.6 points. The operating (non-GAAP) effective tax rate from continuing operations in the fourth quarter of 2016 was 11.5 percent versus 14.7 percent in the prior year.

In the fourth quarter of 2016, the company repurchased 5.5 million shares of its common stock at a cost of $0.9 billion. Diluted earnings per share from continuing operations of $4.73 in the fourth quarter of 2016 increased 3.1 percent year to year. Operating (non-GAAP) diluted earnings per share of $5.01 increased 3.5 percent versus the fourth quarter of 2015.

Results of Continuing Operations

Segment Details

The following is an analysis of the fourth quarter of 2016 versus the fourth quarter of 2015 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

($ in millions)

Yr.-to-Yr. Yr.-to-Yr. Percent Percent/ Change Margin Adjusted for For the fourth quarter: 2016 2015 Change Currency Revenue Cognitive Solutions $ 5,297 $ 5,225 1.4% 2.2% Gross margin 82.7% 85.7% (3.0)pts. Global Business Services 4,121 4,297 (4.1)% (3.6)% Gross margin 26.9% 28.2% (1.3)pts. Technology Services & Cloud Platforms 9,308 9,149 1.7% 2.4% Gross margin 42.9% 44.3% (1.4)pts. Systems 2,530 2,892 (12.5)% (12.1)% Gross margin 56.9% 55.8% 1.1pts. Global Financing 447 454 (1.5)% (2.1)% Gross margin 36.2% 39.9% (3.6)pts. Other 66 43 51.3% 52.0% Gross margin (289.7)% (312.7)% 23.0pts. Total consolidated revenue $ 21,770 $ 22,059 (1.3)% (0.7)% Total consolidated gross profit $ 10,893 $ 11,407 (4.5)% Total consolidated gross margin 50.0% 51.7% (1.7)pts. Non-operating adjustments Amortization of acquired intangible assets 124 105 18.3% Retirement-related costs/(income) 78 119 (34.6)% Operating (non-GAAP) gross profit $ 11,095 $ 11,630 (4.6)% Operating (non-GAAP) gross margin 51.0% 52.7% (1.8)pts.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

Cognitive Solutions

In the fourth quarter of 2016, Cognitive Solutions revenue of $5,297 million grew 1.4 percent as reported and 2 percent year to year adjusted for currency. On an as reported and constant currency basis, Solutions Software revenue grew, partially offset by declines in Transaction Processing Software.

In the fourth quarter, Solutions Software revenue of $3,747 million grew 4.0 percent (5 percent adjusted for currency), while Transaction Processing Software revenue of $1,550 million declined 4.3 percent (4 percent adjusted for currency). Within Solutions Software, growth was driven by Analytics and Security, which both grew as reported and on a constant currency basis. Within the Analytics portfolio, the company continued to innovate the Watson platform and extend cognitive across the solution offerings. The Watson platform, which underpins the company’s cognitive strategy, continues to gain momentum in the marketplace. There was strong Software-as-a-Service performance in the quarter with double-digit growth in revenue as reported and adjusted for currency.

Within Cognitive Solutions, total fourth quarter 2016 strategic imperatives revenue of $3.5 billion grew 6 percent (7 percent adjusted for currency) year to year. Cloud revenue of $0.6 billion grew 52 percent (53 percent adjusted for currency), with an as-a-Service exit run rate of $1.8 billion.

The Cognitive Solutions gross profit margin decreased 3.0 points to 82.7 percent in the fourth quarter 2016 versus 2015 primarily due to investments in strategic areas, such as SaaS, and acquisition content. In the fourth quarter, pre-tax income of $2,313 million increased 0.8 percent year to year, however pretax margin declined 1.4 points to 38.6 percent. Performance continued to reflect the company’s higher level of investment in the strategic growth areas, including Watson.

Global Business Services

In the fourth quarter of 2016, Global Business Services revenue of $4,121 million decreased 4.1 percent as reported and 4 percent adjusted for currency. Digital practices continued to grow at double digits year to year as reported and adjusted for currency, including strong growth in cloud, mobile and analytics. This growth was more than offset by declines in the traditional areas.

In the fourth quarter of 2016, Application Management revenue of $1,969 million decreased 2.8 percent (2 percent adjusted for currency), compared to the prior year. Consulting revenue of $1,813 million declined 5.3 percent (5 percent adjusted for currency) and GPS revenue of $340 million decreased 4.8 percent (4 percent adjusted for currency). Revenue declines across the businesses reflect the shift away from the traditional large enterprise implementations and the continued investment in digital practices. The company continues to focus on providing the solutions enterprises are demanding to create new business models with cognitive technologies. During the fourth quarter, a new global Watson IoT consulting practice was announced which will help clients introduce IoT innovation into their businesses by leveraging IBM’s deep domain and industry expertise.

Within GBS, total fourth quarter strategic imperatives revenue of $2.4 billion grew 18 percent as reported (19 percent adjusted for currency) year to year. Cloud revenue of $0.9 billion grew 78 percent as reported (77 percent adjusted for currency), with an as-a- Service exit run rate of $1.1 billion.

In the fourth quarter, the GBS gross profit margin decreased 1.3 points to 26.9 percent compared to the prior year, with declines in Consulting, Application Management and GPS. Margins declined in Consulting and Application Management as the business shifts to digital platforms and continues to add highly skilled enablement resources, impacting productivity in the near term. In addition, the company continues to incur additional spending to improve delivery efficiency and meet commitments in the more traditional

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document engagements. These dynamics are also reflected in the pre-tax margin for the quarter. In the fourth quarter, pre-tax income of $522 million decreased 26.1 percent and the pre-tax margin declined 3.6 points to 12.4 percent.

Technology Services & Cloud Platforms

In the fourth quarter of 2016, Technology Services & Cloud Platforms revenue of $9,308 million grew 1.7 percent as reported and 2 percent adjusted for currency compared to the prior year. The business continues to invest in hybrid cloud capabilities across services and software to help clients build their cloud infrastructures.

Infrastructure Services revenue of $6,085 million grew 2.6 percent (3 percent adjusted for currency) in the fourth quarter. The company’s enterprise workloads on the public cloud continue to scale, which enables clients to grow their new digital businesses. As a services integrator, the company is a premier partner in hybrid cloud services integration and delivers end-to-end infrastructure services solutions that continue to resonate with clients. Technical Support Services revenue of $1,827 million increased 0.2 percent (flat adjusted for currency). Integration Software revenue of $1,396 million declined 0.1 percent as reported, but grew 1 percent adjusted for currency compared to the fourth quarter of 2015. In Integration Software, there was continued strength in WebSphere Application Server and hybrid cloud integration capabilities and Bluemix is now one of the largest open public cloud deployments globally.

Within Technology Services & Cloud Platforms, total fourth quarter strategic imperatives revenue of $2.6 billion grew 36 percent (37 percent adjusted for currency) year to year. Cloud revenue of $1.8 billion grew 48 percent as reported (50 percent adjusted for currency), with an as-a-Service exit run rate of $5.8 billion.

The Technology Services & Cloud Platforms gross profit margin decreased 1.4 points to 42.9 percent in the fourth quarter with declines in Technical Support Services and Integration Software. The margin decline in Technical Support Services was driven by the global investment in technical skills within multi-vendor services. The decline in margin in Integration Software reflects the dynamics of the shift in capabilities to Software-as-a-Service and royalty cost from the growth in intellectual property partnerships.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Fourth-quarter pre-tax income of $1,882 million increased 4.1 percent and pre-tax margin improved 0.4 points to 19.8 percent. The pre- tax margin reflects licensing income from the intellectual property partnerships offset by the continued investment in strategic areas and innovation to drive productivity in the more traditional business.

Systems

In the fourth quarter of 2016, Systems revenue of $2,530 million decreased 12.5 percent as reported (12 percent adjusted for currency) compared to the prior year reflecting shifting market dynamics and product cycle transitions.

Systems Hardware revenue of $2,074 million decreased 12.5 percent (12 percent adjusted for currency) in the fourth quarter. Operating Systems Software revenue of $456 million decreased 12.6 percent (12 percent adjusted for currency) compared to the prior year.

Across Systems, product cycle transitions in Power Systems and Storage Systems contributed to the decline in revenue, while the overall portfolio remains optimized to meet client demands in the era of cognitive and cloud computing.

Within Systems Hardware, z Systems revenue increased 3.8 percent as reported (4 percent adjusted for currency) year to year reflecting continued success in driving innovation in the company’s core systems. The mainframe continues to deliver a high-value, secure and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document scalable platform that is constantly being redesigned for new workloads, such as blockchain and instant payment, and is optimized for mobile and security.

Power Systems revenue decreased 34.5 percent (34 percent adjusted for currency) year to year reflecting the company’s ongoing shift to a growing Linux market while continuing to serve a high-value, but declining, UNIX market. Workload on the Linux platform continued double-digit growth while the traditional UNIX base declined. The company continued the expansion of new Linux offerings, with Power on Linux now representing over 15 percent of the Power portfolio.

Storage Systems revenue decreased 10.6 percent (10 percent adjusted for currency) year to year, reflecting the continued market shift toward software-defined environments. The year-to-year decline was primarily driven by midrange and high-end disk storage, both of which declined as reported and on an adjusted currency basis. The company benefited from the performance of its full suite of all flash array offerings which contributed double-digit revenue growth in the fourth quarter. While not within the Systems segment, Software- Defined Storage had continued double-digit revenue growth as reported and adjusted for currency in the fourth quarter.

Within Systems, total fourth quarter strategic imperatives revenue of $1.1 billion decreased 19 percent (18 percent adjusted for currency) year to year. Cloud revenue of $0.9 billion decreased 15 percent (15 percent adjusted for currency).

The Systems gross profit margin increased 1.1 points to 56.9 percent in the fourth quarter of 2016 compared to the prior year. This increase was due to mix to z Systems (0.6 points) and margin expansion (0.4 points) driven by improvements in z Systems margin; partially offset by declining margins in Power Systems and Storage Systems. Pre-tax income of $579 million decreased 14.1 percent and the pre-tax margin declined 0.2 points to 21.6 percent, consistent with the product cycle and portfolio transition dynamics impacting revenue and gross profit.

Global Financing

Global Financing revenue of $447 million was down 1.5 percent as reported and 2 percent adjusted for currency due primarily to decreases in financing revenue partially offset by increases in used equipment sales revenue. The Global Financing fourth quarter pre- tax income decreased 33.5 percent to $448 million and the pre-tax margin decreased 6.1 points to 49.3 percent. The decrease in pre-tax income was driven by a decrease in gross profit ($250 million) and an increase in SG&A expenses ($19 million); partially offset by decreases in financing receivable provisions ($42 million).

Total Software

Total software revenue, which includes Cognitive Solutions, Integration Software and Operating Systems Software, of $7,149 million was flat as reported and increased 1 percent adjusted for currency in the fourth quarter of 2016 compared to the prior year period. From a business area perspective, there was growth in Cognitive Solutions as reported and adjusted for currency and Integration Software revenue was flat as reported, but grew adjusted for currency. Operating Systems Software revenue declined year to year as reported and adjusted for currency, in line with the longer term secular trend. Across software, annuity revenue grew low-single digits year to year as reported and adjusted for currency. This growth was led by the SaaS offerings which grew both on an organic basis and from acquisitions. Transactional revenue declined mid-single digits as reported and adjusted for currency year to year.

Geographic Revenue

Total geographic revenue of $21,662 million decreased 1.5 percent as reported and 1 percent adjusted for currency in the fourth quarter of 2016 compared to the prior year. Americas revenue of $10,283 million was flat as reported and adjusted for currency compared to the prior year. EMEA fourth quarter revenue of $6,737 million decreased 8.0 percent as reported and 3 percent adjusted for currency. Asia Pacific revenue of $4,641 million grew 5.1 percent as reported and 1 percent adjusted for currency. Americas and Asia Pacific revenue growth rates improved sequentially, as reported and adjusted for currency, compared to the third quarter.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Within Americas, U.S. revenue increased 2.1 percent compared to the prior year. Canada was down 5.8 percent as reported (6 percent adjusted for currency). Latin America decreased 5.1 percent (5 percent adjusted for currency) in the fourth quarter compared to the prior year. Within Latin America, Brazil was flat year to year as reported, but declined 10 percent adjusted for currency. Fourth quarter revenue in Mexico decreased 10.7 percent (3 percent adjusted for currency).

In the fourth quarter, within EMEA, revenue in the UK decreased 24.2 percent (7 percent adjusted for currency). Germany decreased 7.4 percent (6 percent adjusted for currency). France decreased 3.2 percent (1 percent adjusted for currency).

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Partially offsetting these declines, Italy increased 9.9 percent (12 percent adjusted for currency). Fourth quarter revenue performance in Europe declined sequentially from the third quarter driven by the UK, Germany and Russia consistent with macro- and geo-political trends. In the Central and Eastern European region, revenue decreased 21.0 percent (20 percent adjusted for currency) year to year with Russia declining 38.8 percent. The Middle East and Africa region declined 4.3 percent as reported (5 percent adjusted for currency) compared to 2015.

Within Asia Pacific, China revenue grew 19.1 percent (22 percent adjusted for currency), reflecting the strength of the z Systems platform in the banking sector. Japan grew 8.1 percent as reported, but decreased 2 percent adjusted for currency. Fourth quarter revenue in India declined 0.8 percent as reported, but grew 1 percent adjusted for currency. Australia decreased 11.6 percent (15 percent adjusted for currency).

Total Expense and Other (Income)

($ in millions)

Yr.-to-Yr. Percent/ Margin For the fourth quarter: 2016 2015 Change Total consolidated expense and other (income) $ 5,907 $ 6,308 (6.4)% Non-operating adjustments Amortization of acquired intangible assets (132) (80) 65.4 Acquisition-related charges (4) (15) (75.1) Non-operating retirement-related (costs)/income (76) (100) (23.8) Operating (non-GAAP) expense and other (income) $ 5,696 $ 6,114 (6.8)% Total consolidated expense-to-revenue ratio 27.1% 28.6% (1.5)pts. Operating (non-GAAP) expense-to-revenue ratio 26.2% 27.7%% (1.6)pts.

Total expense and other income decreased 6.4 percent in the fourth quarter with an expense-to-revenue ratio of 27.1 percent compared to 28.6 percent in the fourth quarter of 2015. Total operating (non-GAAP) expense and other (income) decreased 6.8 percent in the fourth quarter. The decrease in total expense and other (income) was primarily driven by shifts within the operational expense base driving productivity and efficiency, the yield from workforce rebalancing actions earlier in the year, and the growth in intellectual property income (12 points). The growth in IP income year to year was a result of the company’s revitalized efforts in this area. The

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document fourth-quarter expense dynamics also reflect increased acquisition-related expenses (4 points) and a modest impact from currency (1 point) in the fourth quarter of 2016 compared with the prior year.

Results of Discontinued Operations

The loss from discontinued operations, net of tax, was $4 million in the fourth quarter of 2016 compared to $3 million of income in the fourth quarter of 2015.

Cash Flow

The company generated $3,968 million in cash flow provided by operating activities, a decrease of $1,311 million compared to the fourth quarter of 2015 driven by higher income tax payments and an increase in working capital due to the timing and mix of substantial transactions in December 2016. Net cash used in investing activities of $3,687 million decreased $1,758 million compared to the prior year, primarily due to higher cash payments for acquisitions in the fourth quarter of the prior year, net changes in marketable securities and other investments, partially offset by a cash payment in the fourth quarter related to the divestiture of the Microelectronics business. Net cash used in financing activities of $1,287 million decreased $61 million compared to the prior year, primarily due to a decline in net cash payments to settle debt, partially offset by an increase in cash used for gross common stock repurchases and dividends.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

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 pages 26 and 27 for the company’s rationale for presenting operating earnings information.

($ in millions except per share amount)

Acquisition- Retirement- Related Related Operating For the fourth quarter 2016: GAAP Adjustments Adjustments (non-GAAP) Gross profit $ 10,893 $ 124 $ 78 $ 11,095 Gross profit margin 50.0% 0.6pts. 0.4pts. 51.0% SG&A $ 4,976 $ (136) $ (69) $ 4,771 RD&E 1,431 — (6) 1,425 Other (income) and expense (136) 0 — (136) Total expense and other (income) 5,907 (136) (76) 5,696 Pre-tax income from continuing operations 4,986 260 154 5,399 Pre-tax margin from continuing operations 22.9% 1.2pts. 0.7pts. 24.8% Provision for income taxes* $ 480 $ 66 $ 77 $ 623 Effective tax rate 9.6% 0.8pts. 1.2pts. 11.5% Income from continuing operations $ 4,505 $ 193 $ 77 $ 4,776 Income margin from continuing operations 20.7% 0.9pts. 0.4pts. 21.9% Diluted earnings per share from continuing operations $ 4.73 $ 0.20 $ 0.08 $ 5.01

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document * The tax impact on operating (non-GAAP) pre-tax income from continuing operations 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 amount)

Acquisition- Retirement- Related Related Operating For the fourth quarter 2015: GAAP Adjustments Adjustments (non-GAAP) Gross profit $ 11,407 $ 105 $ 119 $ 11,630 Gross profit margin 51.7% 0.5pts. 0.5pts. 52.7% SG&A $ 5,157 $ (95) $ (88) $ 4,975 RD&E 1,362 — (12) 1,350 Other (income) and expense (146) 0 — (146) Total expense and other (income) 6,308 (95) (100) 6,114 Pre-tax income from continuing operations 5,098 199 218 5,516 Pre-tax margin from continuing operations 23.1% 0.9pts. 1.0pts. 25.0% Provision for income taxes* $ 638 $ 89 $ 82 $ 809 Effective tax rate 12.5% 1.2pts. 1.0pts. 14.7% Income from continuing operations $ 4,460 $ 110 $ 137 $ 4,707 Income margin from continuing operations 20.2% 0.5pts. 0.6pts. 21.3% Diluted earnings per share from continuing operations $ 4.59 $ 0.11 $ 0.14 $ 4.84

* The tax impact on operating (non-GAAP) pre-tax income from continuing operations 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.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

PRIOR YEAR IN REVIEW

The “Prior Year in Review” section provides a summary of the company’s financial performance in 2015 as compared to 2014. For additional information, see the company’s recast 2015 Annual Report on Form 8-K dated June 13, 2016.

The initial closing dates for the sales of IBM’s worldwide customer care outsourcing services business to SYNNEX and IBM’s System x business to Lenovo were January 31, 2014 and October 1, 2014, respectively. Management believes that presenting financial information for years 2015 versus 2014 without either or both of these items is more representative of operational performance and provides more insight into, and clarifies the basis for, historical and/or future performance, which may be more useful to investors.

($ and shares in millions except per share amounts)

Yr.-to-Yr. Percent/ Margin For the year ended December 31: 2015 2014 Change Revenue $ 81,741 $ 92,793 (11.9)%*

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gross profit margin 49.8% 50.0% (0.2)pts. Total expense and other (income) $ 24,740 $ 26,421 (6.4)% Total expense and other (income)-to-revenue ratio 30.3% 28.5% 1.8pts. Income from continuing operations before income taxes $ 15,945 $ 19,986 (20.2)% Provision for income taxes from continuing operations $ 2,581 $ 4,234 (39.1)% Income from continuing operations $ 13,364 $ 15,751 (15.2)% Income from continuing operations margin 16.3% 17.0% (0.6)pts. Loss from discontinued operations, net of tax $ (174) $ (3,729) (95.3)% Net income $ 13,190 $ 12,022 9.7% Earnings per share from continuing operations: Assuming dilution $ 13.60 $ 15.59 (12.8)% Consolidated earnings per share—assuming dilution $ 13.42 $ 11.90 12.8% Weighted-average shares outstanding Assuming dilution 982.7 1,010.0 (2.7)% Assets** $ 110,495 $ 117,271 (5.8)% Liabilities** $ 96,071 $ 105,257 (8.7)% Equity** $ 14,424 $ 12,014 20.1%

* (4.1) percent adjusted for currency; (1.2) percent adjusted for divestitures and currency ** At December 31

The following table provides the company’s operating (non-GAAP) earnings for 2015 and 2014.

($ in millions except per share amounts)

Yr.-to-Yr. Percent For the year ended December 31: 2015 2014 Change Net income as reported $ 13,190 $ 12,022 9.7% Loss from discontinued operations, net of tax (174) (3,729) (95.3) Income from continuing operations $ 13,364 $ 15,751 (15.2)% Non-operating adjustments (net of tax) Acquisition-related charges 562 670 (16.1) Non-operating retirement-related costs/(income) 734 280 161.8 Operating (non-GAAP) earnings* $ 14,659 $ 16,702 (12.2)% Diluted operating (non-GAAP) earnings per share $ 14.92 $ 16.53 (9.7)%

* See page 66 for a more detailed reconciliation of net income to operating (non-GAAP) earnings.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Snapshot

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In 2015, the company delivered $81.7 billion in revenue, $13.4 billion in income from continuing operations and $14.7 billion in operating (non-GAAP) earnings resulting in diluted earnings per share from continuing operations of $13.60 as reported and $14.92 on an operating (non-GAAP) basis. The results of continuing operations exclude a net loss from discontinued operations of $174 million in 2015 and $3,729 million in 2014 related to the divestiture of the Microelectronics business. On a consolidated basis, net income in 2015 was $13.2 billion, with diluted earnings per share of $13.42. The company generated $17.0 billion in cash from operations and $13.1 billion in free cash flow in 2015 driving shareholder returns of $9.5 billion in gross common stock repurchases and dividends.

Total consolidated revenue decreased 11.9 percent as reported and 1 percent year to year adjusted for currency and the divestitures of the System x and customer care businesses. Currency had an 8 point, or $7.2 billion, impact on reported revenue in 2015. Revenue was impacted by 3 points in 2015 from the divested businesses. Combined, the impact of currency and divested businesses reduced the reported revenue growth by 11 points.

In 2015, strategic imperatives revenue, which includes analytics, cloud, mobile, social and security, grew 17 percent year to year as reported and 26 percent adjusted for currency and the System x divestiture. In total, the strategic imperatives generated $28.9 billion in revenue in 2015, which represented approximately 35 percent of the company’s total revenue.

Cloud revenue increased 43 percent as reported in 2015 and 57 percent adjusted for currency and the System x divestiture. In 2015, Cloud revenue was $10.2 billion making the company the largest cloud provider. Cloud revenue spans across many different segments. The company leveraged its extensive relationships in enterprise IT and incumbency in the data center to help clients implement hybrid cloud environments. In addition:

· As-a-Service revenue increased 50 percent (61 percent adjusted for currency) year to year to $4.5 billion and the company exited 2015 with an annual run rate of $5.3 billion.

· Cloud revenue included $5.6 billion of revenue from foundational offerings—where the company provided software, hardware and services for clients to build their own clouds.

· Clients utilized cloud not just to reduce costs, but also to gain agility and to enable innovation. The company has been leading clients in making the move to cloud through consuming as-a-Service, or through their own clouds or the implementation of a hybrid environment.

· The company made seven cloud acquisitions in 2015 including; Cleversafe, Gravitant, and Clearleap. The company also invested nearly $1 billion in 2015 to expand its global cloud data center footprint to 46.

Business analytics revenue of $17.9 billion increased 7 percent as reported and 16 percent year to year adjusted for currency making the company the largest analytics provider. The company also moved into new areas including Watson Health and Watson IoT. In Watson Health, the company is integrating its own organic capabilities with acquired content, including the acquisition of Merge Healthcare in 2015.

In the area of engagement (security, mobile and social), revenue increased 64 percent as reported and 77 percent adjusted for currency. Security revenue increased 5 percent as reported (12 percent adjusted for currency), mobile revenue more than tripled year to year as reported and adjusted for currency and social revenue increased 14 percent as reported (21 percent adjusted for currency).

From a segment perspective, Cognitive Solutions revenue declined 9.4 percent as reported (3 percent adjusted for currency) with declines in transactional revenue and annuity revenue. Annuity-based revenue declined as reported, but grew adjusted for currency, including Software-as-a-Service. GBS revenue decreased 12.0 percent as reported and 4 percent adjusted for currency (8 points). Technology Services & Cloud Platforms revenue declined 9.6 percent as reported, but was flat year to year adjusted for currency (9 points) and divestitures with strong growth in the strategic imperatives on both an as-reported and adjusted basis. Systems revenue decreased 22.3 percent as reported, but increased 4 percent adjusted for the System x divestiture (22 points) and currency (4 points), and reflected a successful mainframe cycle in 2015 and the repositioning of Power Systems to address a broader opportunity.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The consolidated gross profit margin of 49.8 percent decreased 0.2 points year to year. The operating (non-GAAP) gross margin of 50.8 percent increased 0.2 points compared to 2014 primarily driven by the shift to higher value through portfolio actions and the relative strength of z Systems, partially offset by margin declines in GBS, Technology Services & Cloud Platforms and Cognitive Solutions.

Total expense and other (income) decreased 6.4 percent in 2015 versus 2014. Total operating (non-GAAP) expense and other (income) decreased 7.8 percent year to year. The key year-to-year drivers were:

Total Operating Consolidated (non-GAAP) · Currency* (9) points (9) points · System x divestiture (2) points (2) points · Divestiture gains 6 points 6 points · Workforce rebalancing (3) points (3) points

* Reflects impacts of translation and hedging programs

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Management Discussion International Business Machines Corporation and Subsidiary Companies

The reduction in expense was driven primarily by currency impacts, a lower level of workforce rebalancing charges and the impact of the divested System x business. These benefits were partially offset by the impact of lower divestiture gains ($1.6 billion) year to year. The reduction in operating (non-GAAP) expense was driven primarily by the same factors. The company continued to shift resources and spending within its operational expense base—driving productivity and efficiency in some areas with increased investment in support of the strategic imperatives. In 2015, the company shifted over $5 billion of spending across cost, expense and capital expenditures, to the strategic imperatives.

Pre-tax income from continuing operations of $15.9 billion decreased 20.2 percent year to year and the pre-tax margin was 19.5 percent, a decrease of 2.0 points. The continuing operations effective tax rate for 2015 was 16.2 percent, a decrease of 5.0 points versus 2014, primarily driven by benefits from the settlement of the U.S. tax audit and geographic mix of pre-tax profits; partially offset by less utilization of foreign tax credits. Income from continuing operations of $13.4 billion decreased 15.2 percent and the net income margin was 16.3 percent, a decrease of 0.6 points versus 2014. Losses from discontinued operations, net of tax, were $174 million compared to $3,729 million in 2014. Net income of $13.2 billion increased 9.7 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations decreased 16.3 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 1.1 points to 21.6 percent. Operating (non-GAAP) income from continuing operations of $14.7 billion decreased 12.2 percent including an impact of 7 points from the 2014 gains from the System x and customer care divestitures. The operating (non-GAAP) income margin from continuing operations of 17.9 percent decreased 0.1 points. The operating (non-GAAP) effective tax rate from continuing operations was 17.2 percent versus 21.0 percent in 2014. The 2015 profit and margin performance reflected portfolio actions taken as the company continued to shift to higher value, as well as investments made to add capabilities to drive the transformation.

Diluted earnings per share from continuing operations of $13.60 in 2015 decreased 12.8 percent year to year. In 2015, the company repurchased 30.3 million shares of its common stock at a cost of $4.7 billion. Operating (non-GAAP) diluted earnings per share of $14.92 decreased 9.7 percent versus 2014 including an impact of 7 points from the 2014 gains from the System x and customer care divestitures. Diluted earnings per share from discontinued operations was ($0.18) in 2015 compared to ($3.69) in 2014.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document At December 31, 2015, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end was $8.2 billion, a decrease of $0.3 billion from December 31, 2014. Key drivers in the balance sheet and total cash flows were:

Total assets decreased $6.8 billion ($0.3 billion adjusted for currency) from December 31, 2014 driven by:

· Decreases in total receivables ($4.4 billion), deferred taxes ($1.9 billion) and prepaid expenses and sundry assets ($1.1 billion); partially offset by

· Increased goodwill ($1.5 billion).

Total liabilities decreased $9.2 billion ($4.7 billion adjusted for currency) from December 31, 2014 driven by:

· Decreases in other liabilities ($2.3 billion), taxes ($2.2 billion), retirement-related liabilities ($1.8 billion), deferred income ($0.8 billion), total debt ($0.8 billion) and accounts payable ($0.8 billion).

Total equity of $14.4 billion increased $2.4 billion from December 31, 2014 as a result of:

· Higher retained earnings ($8.3 billion) and higher common stock ($0.6 billion); partially offset by

· Increased treasury stock ($4.8 billion) and increased accumulated other comprehensive losses ($1.7 billion).

The company generated $17.0 billion in cash flow provided by operating activities, an increase of $0.1 billion when compared to 2014, driven primarily by lower income tax payments, offset by net income performance. Net cash used in investing activities of $8.2 billion was $5.2 billion higher than 2014, primarily due to a decrease in cash provided from divestitures ($2.8 billion) and an increase in net cash used for acquisitions ($2.7 billion). Net cash used in financing activities of $9.2 billion decreased $6.3 billion compared to 2014, driven primarily by a decrease in cash used for gross common stock repurchases ($9.1 billion), partially offset by lower net debt issuances ($1.8 billion) and higher dividend payments ($0.6 billion).

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Results of Continuing Operations

Segment Details

The following is an analysis of the 2015 versus 2014 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.

($ in millions)

Yr.-to-Yr. Yr.-to-Yr. Percent Percent/ Change Margin Adjusted for For the year ended December 31: 2015 2014 Change Currency Revenue

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cognitive Solutions $ 17,841 $ 19,689 (9.4)% (3.0)% Gross margin 85.1% 86.8% (1.6)pts. Global Business Services 17,166 19,512 (12.0)% (4.1)%* Gross margin 28.2% 30.4% (2.2)pts. Technology Services & Cloud Platforms 35,142 38,889 (9.6)% 0.1%* Gross margin 42.7% 44.3% (1.5)pts. Systems 9,547 12,294 (22.3)% 3.9%* Gross margin 55.8% 48.7% 7.1pts. Global Financing 1,840 2,034 (9.5)% 1.5% Gross margin 45.6% 49.4% (3.7)pts. Other 206 374 (45.0)% (39.1)% Gross margin (253.0)% (215.0)% (38.0)pts. Total consolidated revenue $ 81,741 $ 92,793 (11.9)% (1.2)%*

Total consolidated gross profit $ 40,684 $ 46,407 (12.3)% Total consolidated gross margin 49.8% 50.0% (0.2)pts. Non-operating adjustments Amortization of acquired intangible assets 373 416 (10.5)% Retirement-related costs/(income) 469 173 170.7% Operating (non-GAAP) gross profit $ 41,526 $ 46,996 (11.6)% Operating (non-GAAP) gross margin 50.8% 50.6% 0.2pts.

* Adjusted for divestitures and currency

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Cognitive Solutions

($ in millions)

Yr.-to-Yr. Yr.-to-Yr. Percent Change Percent Adjusted for For the year ended December 31: 2015 2014 Change Currency Cognitive Solutions external revenue $ 17,841 $ 19,689 (9.4)% (3.0)% Solutions Software $ 12,021 $ 12,847 (6.4)% (0.3)% Transaction Processing Software 5,819 6,842 (14.9) (7.9)

In 2015, approximately 75 percent of the Cognitive Solutions business was annuity-like, including Software-as-a-Service and subscription and support. Renewal rates were steady, the SaaS business grew, and overall annuity revenue increased year to year adjusted for currency, but declined as reported. Transactional revenue declined year to year as reported and adjusted for currency as large clients with multi-year contracts continued to utilize the flexibility the company has provided in deployment of their software.

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2015 2014 Change Cognitive Solutions External gross profit $ 15,189 $ 17,085 (11.1)% External gross profit margin 85.1% 86.8% (1.6)pts. Pre-tax income $ 7,245 $ 8,215 (11.8)% Pre-tax margin 36.1% 37.5% (1.4)pts.

Profit performance for 2015 reflected the overall revenue trajectory, a higher level of investments in areas such as Watson Platform, Watson Health and Watson IoT, and an impact from currency.

Global Business Services

($ in millions)

Yr.-to-Yr. Percent Yr.-to-Yr. Change Percent Adjusted for For the year ended December 31: 2015 2014 Change Currency Global Business Services external revenue $ 17,166 $ 19,512 (12.0)% (4.1)%* Consulting $ 7,678 $ 9,057 (15.2)% (8.5)% Global Process Services 1,435 1,688 (15.0) (6.8)* Application Management 8,053 8,767 (8.2) 1.3

* Adjusted for divestitures and currency

As the company continued to transform the GBS business in 2015, revenue from the strategic imperative practices grew at strong rates. However, overall revenue performance continued to be impacted by the company’s shift away from traditional businesses, such as ERP. Clients are moving away from ERP engagements to initiatives that focus on digitizing their business with analytics, cloud and mobile technologies.

($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2015 2014 Change Global Business Services External gross profit $ 4,837 $ 5,923 (18.3)% External gross profit margin 28.2% 30.4% (2.2)pts. Pre-tax income $ 2,602 $ 3,347 (22.3)% Pre-tax margin 14.7% 16.7% (2.0)pts.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

This year-to-year profit decline reflected the market shifts in the GBS business. In parts of the portfolio where the market has been declining, there was price and profit pressure. In addition, the company continued to shift and add significant resources to the high- growth analytics, cloud and mobility practices, which impacted productivity and margin.

Technology Services & Cloud Platforms

($ in millions)

Yr.-to-Yr. Yr.-to-Yr. Percent Change Percent Adjusted for For the year ended December 31: 2015 2014 Change Currency Technology Services & Cloud Platforms external revenue $ 35,142 $ 38,889 (9.6)% 0.1%* Infrastructure Services $ 23,075 $ 25,533 (9.6)% 0.6% Technical Support Services 7,426 8,276 (10.3) 0.9* Integration Software 4,641 5,080 (8.6) (2.4)

* Adjusted for the System x divestiture and currency

In Technology Services & Cloud Platforms, the company helped clients transition to a hybrid cloud services platform bringing cloud, mobility and security to infrastructure services. In Infrastructure Services, the company continued to reinvent its portfolio, providing the most modern IT services that connect clients to the cloud-based mobile world. The Technical Support Services business continued to contribute revenue by delivering a wide range of support services to maintain and improve clients’ IT infrastructure.

Within Technology Services & Cloud Platforms, the strategic imperatives, including hybrid cloud services, grew strong double digits as reported and at constant currency in 2015. The company continued to increase its cloud capacity with 46 cloud data centers opened around the world as of December 31, 2015.

($ in millions)

Yr.-to-Yr. Percent/ Margin For the year ended December 31: 2015* 2014* Change Technology Services & Cloud Platforms External Technology Services gross profit $ 11,008 $ 12,793 (13.9)% External Technology Services gross profit margin 36.1% 37.8% (1.7)pts. External Integration Software gross profit $ 4,005 $ 4,420 (9.4)% External Integration Software gross margin 86.3% 87.0% (0.7)pts. External gross profit $ 15,014 $ 17,213 (12.8)% External gross profit margin 42.7% 44.3% (1.5)pts. Pre-tax income $ 5,669 $ 7,084 (20.0)% Pre-tax margin 15.8% 17.8% (2.0)pts.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document * Recast to conform with 2016 presentation

The Technology Services & Cloud Platforms gross profit margin year-to-year decline was driven primarily by margin declines in Infrastructure Services. The pre-tax margin decline was primarily due to investments being made in this business. The company continued to invest to deliver the most contemporary offerings that are built with cloud, analytics, mobile, security and cognitive technologies enabling it to transform clients’ enterprises. In addition, currency had a year-to-year impact on profit given the strong dollar currency environment.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Systems

($ in millions)

Yr.-to-Yr. Yr.-to-Yr. Percent Change Percent Adjusted for For the year ended December 31: 2015 2014 Change Currency Systems external revenue $ 9,547 $ 12,294 (22.3)% 3.9%* Systems Hardware $ 7,574 $ 9,991 (24.2)% 7.5%* z Systems 28.1 34.7 Power Systems (0.4) 4.5 Storage Systems (11.9) (7.0) Operating Systems Software 1,973 2,303 (14.3) (7.9)

* Adjusted for the System x divestiture and currency

Systems Hardware revenue included a successful mainframe product cycle in 2015 and continued repositioning in Power Systems. The company continued to deliver innovation to its systems to enable them to run the most contemporary workloads. Approximately half of the Systems Hardware revenue in 2015 was for solutions that address analytics workloads, or hybrid and private clouds. Operating Systems Software declined driven by declines in both z Systems and Power Systems. z Systems revenue was driven primarily by the launch of the z13 system in the first quarter of 2015. MIPS (millions of instructions per second) shipments increased 33 percent in 2015. The z13 system was contemporized for the workloads around mobile, hybrid cloud and analytics. Power Systems revenue decreased 0.4 percent as reported, but grew 4 percent adjusted for currency compared to 2014, the first year of revenue growth since 2011. The Power Systems performance reflected the progress being made to transform the platform to align around data and cloud opportunities, while embracing an open ecosystem. Storage revenue declined driven by continued weakness in traditional disk and tape.

($ in millions)

Yr.-to-Yr. Percent/ Margin For the year ended December 31: 2015* 2014* Change

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Systems External Systems Hardware gross profit $ 3,536 $ 3,947 (10.4)% External Systems Hardware gross profit margin 46.7% 39.5% 7.2pts. External Operating Systems Software gross profit $ 1,790 $ 2,041 (12.3)% External Operating Systems Software gross margin 90.7% 88.6% 2.1pts. External total gross profit $ 5,326 $ 5,988 (11.1)% External total gross profit margin 55.8% 48.7% 7.1pts. Pre-tax income $ 1,722 $ 1,384 24.4% Pre-tax margin 16.7% 10.4% 6.3pts.

* Recast to conform with 2016 presentation

Systems gross profit margin increased year to year driven primarily by an improved mix (10.3 points) due to strong growth in z Systems and the divestiture of the lower margin System x business. The improvement was partially offset by lower margins (3.2 points) in z Systems and Power Systems compared to 2014. The 2015 Systems results reflected a successful transformation and ongoing repositioning of the business including a solid mainframe product cycle.

Global Financing

See pages 76 through 81 for an analysis of Global Financing’s segment results.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

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: 2015 2014 Change Currency* Total revenue $ 81,741 $ 92,793 (11.9)% (1.2)% Geographies $ 81,430 $ 92,326 (11.8)% (1.1)% Americas 38,486 41,410 (7.1) (1.8) Europe/Middle East/Africa 26,073 30,700 (15.1) 0.3 Asia Pacific 16,871 20,216 (16.5) (1.7)

* Adjusted for divestitures and currency

Americas revenue decreased year to year as reported and adjusted for currency. There was a decline in North America as reported and adjusted for currency. Latin America declined as reported, but grew adjusted for currency. The U.S. decreased 4.4 percent as reported and 3 percent adjusted for divestitures. Canada was down 17.2 percent as reported and 2 percent adjusted for currency (13 points) and divestitures (2 points). In Latin America, Brazil decreased 26.0 percent as reported and 2 percent adjusted for currency (22 points) and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document the divested businesses (2 points), while Mexico had growth of 0.5 percent as reported and 14 percent adjusted for currency (9 points) and divestitures (4 points).

EMEA revenue decreased year to year as reported, but was flat compared to 2014 adjusted for currency and the divested businesses. Germany decreased 13.2 percent as reported, but grew 7 percent adjusted for currency (17 points) and the divested businesses (3 points). The UK decreased 6.3 percent year to year as reported, but grew 3 percent adjusted for currency (7 points) and the divested businesses (2 points). The Middle East and Africa region decreased 4.8 percent as reported, but grew 5 percent adjusted for the divested businesses (6 points) and currency (4 points). Russia decreased 32.2 percent as reported and 24 percent adjusted for the divestitures.

Asia Pacific revenue decreased 16.5 percent as reported and 2 percent adjusted for currency (9 points) and the divested businesses (6 points) compared to 2014. Japan decreased 9.9 percent as reported, but had growth of 5 percent adjusted for currency (13 points) and the divested businesses (2 points). China decreased 34.4 percent as reported and 21 percent adjusted for the divested businesses (12 points) and currency (1 point). India decreased 3.8 percent as reported, but had growth of 8 percent adjusted for the divested businesses (7 points) and currency (5 points).

Total Expense and Other (Income)

($ in millions)

Yr.-to-Yr. Percent/ For the year ended Margin December 31: 2015 2014 Change Total consolidated expense and other (income) $ 24,740 $ 26,421 (6.4)% Non-operating adjustments Amortization of acquired intangible assets (304) (374) (18.8) Acquisition-related charges (26) (12) 112.6 Non-operating retirement-related (costs)/income (581) (180) 222.4 Operating (non-GAAP) expense and other (income) $ 23,830 $ 25,855 (7.8)% Total consolidated expense-to-revenue ratio 30.3% 28.5% 1.8pts. Operating (non-GAAP) expense-to-revenue ratio 29.2% 27.9% 1.3pts.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Selling, General and Administrative

($ in millions)

Yr-to-Yr. For the year ended Percent December 31: 2015 2014 Change Selling, general and administrative expense Selling, general and administrative—other $ 16,643 $ 18,532 (10.2)% Advertising and promotional expense 1,290 1,307 (1.3)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Workforce rebalancing charges 587 1,472 (60.1) Retirement-related costs 1,052 811 29.7 Amortization of acquired intangible assets 304 374 (18.8) Stock-based compensation 322 350 (8.0) Bad debt expense 231 334 (30.8) Total consolidated selling, general and administrative expense $ 20,430 $ 23,180 (11.9)% Non-operating adjustments Amortization of acquired intangible assets (304) (374) (18.8) Acquisition-related charges (21) (11) 81.1 Non-operating retirement-related (costs)/income (533) (257) 107.3 Operating (non-GAAP) selling, general and administrative expense $ 19,573 $ 22,537 (13.2)%

Total SG&A expense decreased 11.9 percent versus 2014, primarily driven by the following factors:

· The effects of currency (7 points); · Lower workforce rebalancing charges (3 points); and · The impact of the divested System x business (1 point).

Operating (non-GAAP) expense decreased 13.2 percent year to year driven primarily by the same factors.

Bad debt expense decreased $103 million in 2015 compared to 2014. The receivables provision coverage was 2.6 percent at December 31, 2015, an increase of 40 basis points from December 31, 2014.

Research, Development and Engineering

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2015 2014 Change Total consolidated research, development and engineering $ 5,247 $ 5,437 (3.5)% Non-operating adjustment Non-operating retirement-related (costs)/income (48) 77 NM Operating (non-GAAP) research, development and engineering $ 5,200 $ 5,514 (5.7)%

NM—Not meaningful

RD&E expense was 6.4 percent of revenue in 2015 and 5.9 percent of revenue in 2014.

RD&E expense decreased 3.5 percent in 2015 versus 2014 primarily driven by:

· The effects of currency (5 points); and · The impact of the divested System x business (4 points); partially offset by · Increased base spending (4 points); and · Higher expense due to acquisitions (1 point).

Operating (non-GAAP) RD&E expense decreased 5.7 percent in 2015 compared to 2014, driven primarily by the same factors.

Intellectual Property and Custom Development Income

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2015* 2014* Change Licensing of intellectual property including royalty-based fees $ 407 $ 378 7.6% Custom development income 262 330 (20.5) Sales/other transfers of intellectual property 13 34 (62.6) Total $ 682 $ 742 (8.1)%

* Reclassified to conform to 2016 presentation

The timing and amount of licensing, sales and other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development. There were no significant individual IP transactions in 2015 or 2014.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

Other (Income) and Expense

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2015 2014 Change Other (income) and expense Foreign currency transaction losses/(gains) $ 414 $ (599) NM (Gains)/losses on derivative instruments (853) 654 NM Interest income (72) (90) (19.8)% Net (gains)/losses from securities and investment assets 47 (26) NM Other (260) (1,878) (86.1)% Total consolidated other (income) and expense $ (724) $ (1,938) (62.6)% Non-operating adjustment Acquisition-related charges (5) (1) NM Operating (non-GAAP) other (income) and expense $ (729) $ (1,939) (62.4)%

NM—Not meaningful

The decrease in consolidated other income of $1,214 million year over year was primarily driven by:

· Lower gains on divestitures ($1,623 million) primarily associated with the divestitures of the System x and customer care businesses in 2014; and · Higher foreign currency transaction losses ($1,013 million); partially offset by

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document · Increased gains on derivative instruments ($1,507 million).

Interest Expense

($ in millions)

Yr.-to-Yr. For the year ended Percent December 31: 2015 2014 Change Interest expense Total $ 468 $ 484 (3.2)%

The decrease in interest expense compared to 2014 was primarily driven by lower average debt levels, partially offset by higher average interest rates. Overall interest expense (excluding capitalized interest) was $1,009 million, a decrease of $16 million year to year.

Income Taxes

The continuing operations effective tax rate for 2015 was 16.2 percent, a decrease of 5.0 points versus 2014, primarily driven by the following factors:

· The benefit resulting from the completion of the U.S. 2011-2012 tax audit in 2015, including the associated reserve redeterminations (3.9 points); and · A benefit due to the geographic mix of pre-tax income in 2015 (3.5 points); partially offset by · A reduced benefit year to year in the utilization of foreign tax credits (2.5 points).

The continuing operations operating (non-GAAP) effective tax rate was 17.2 percent, a decrease of 3.8 points versus 2014 principally driven by the same factors described above.

Results of Discontinued Operations

The loss from discontinued operations, net of tax, was $0.2 billion in 2015 and $3.7 billion in 2014. The loss from discontinued operations in 2014 included a nonrecurring pre-tax charge of $4.7 billion, or $3.4 billion, net of tax, which included an impairment to reflect the fair value less estimated costs to sell the Microelectronics business and other estimated costs related to the transaction, including cash consideration. The discontinued operations effective tax rate in 2015 was 40.3 percent compared to 30.2 percent in 2014.

Financial Position

At December 31, 2015, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at December 31, 2015 were $8,195 million, a decrease of $282 million from December 31, 2014. During the year, the company continued to manage the investment portfolio to meet its capital preservation and liquidity objectives.

Total debt of $39,890 million decreased $832 million from the December 31, 2014 level. Within total debt, $27,205 million was in support of the Global Financing business which was leveraged at a 7.3 to 1 ratio. The company continued to have substantial flexibility in the debt markets. During 2015, the company completed bond issuances totaling $3,368 million, with terms ranging from 3 to 7 years, and interest rates ranging from 0.53 to 2.88 percent depending on maturity.

Consistent with accounting standards, the company remeasured the funded status of its retirement and postretirement plans at December 31. At December 31, 2015, the overall net underfunded position was $15,513 million, a decrease of $1,419 million from December 31, 2014 driven by an increase in discount rates. At December 31, 2015, the company’s qualified defined benefit plans were

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document well funded. In 2015, the return on the U.S. Personal Pension Plan assets was negative 1.0 percent and the plan was 101 percent funded at December 31. Overall, global asset returns were negative 0.2 percent and the qualified defined benefit plans worldwide were 97 percent funded at December 31, 2015.

During 2015, the company generated $17,008 million in cash from operations, an increase of $139 million compared to 2014. The company generated $13,075 million in free cash flow, an increase of $703 million versus 2014. The company returned $9,507 million to shareholders in 2015, with $4,897 million in dividends and $4,609 million in gross share repurchases. In 2015, the company repurchased 30.3 million shares and had $5.6 billion remaining in share repurchase authorization at December 31, 2015.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

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 pages 26 and 27 for the company’s rationale for presenting operating earnings information.

($ in millions except per share amount)

Acquisition- Retirement- Related Related Operating For the year ended December 31, 2015: GAAP Adjustments Adjustments (non-GAAP) Gross profit $ 40,684 $ 373 $ 469 $ 41,526 Gross profit margin 49.8% 0.5pts. 0.6pts. 50.8% SG&A $ 20,430 $ (324) $ (533) $ 19,573 RD&E 5,247 — (48) 5,200 Other (income) and expense (724) (5) — (729) Total expense and other (income) 24,740 (30) (581) 23,830 Pre-tax income from continuing operations 15,945 703 1050 17,697 Pre-tax margin from continuing operations 19.5% 0.9pts. 1.3pts. 21.6% Provision for income taxes* $ 2,581 $ 141 $ 316 $ 3,037 Effective tax rate 16.2% 0.2pts. 0.9pts. 17.2% Income from continuing operations $ 13,364 $ 562 $ 734 $ 14,659 Income margin from continuing operations 16.3% 0.7pts. 0.9pts. 17.9% Diluted earnings per share from continuing operations $ 13.60 $ 0.57 $ 0.75 $ 14.92

* 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 amount)

Acquisition- Retirement- Related Related Operating For the year ended December 31, 2014: GAAP Adjustments Adjustments (non-GAAP)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gross profit $ 46,407 $ 416 $ 173 $ 46,996 Gross profit margin 50.0% 0.4pts. 0.2pts. 50.6% SG&A $ 23,180 $ (385) $ (257) $ 22,537 RD&E 5,437 — 77 5,514 Other (income) and expense (1,938) (1) — (1,939) Total expense and other (income) 26,421 (386) (180) 25,855 Pre-tax income from continuing operations 19,986 803 353 21,142 Pre-tax margin from continuing operations 21.5% 0.9pts. 0.4pts. 22.8% Provision for income taxes* $ 4,234 $ 133 $ 73 $ 4,440 Effective tax rate 21.2% (0.2)pts. 0.0pts. 21.0% Income from continuing operations $ 15,751 $ 670 $ 280 $ 16,702 Income margin from continuing operations 17.0% 0.7pts. 0.3pts. 18.0% Diluted earnings per share from continuing operations $ 15.59 $ 0.66 $ 0.28 $ 16.53

* 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.

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Management Discussion International Business Machines Corporation and Subsidiary Companies

OTHER INFORMATION

Looking Forward

The company’s strategies, investments and actions are all taken with an objective of optimizing long-term performance. A long-term perspective ensures that the company is well-positioned to take advantage of the major shifts in technology, business and the global economy.

Within the IT industry, there are major shifts occurring—driven by cognitive; including data and analytics, cloud and changes in the ways individuals and enterprises are engaging. The company is bringing together its cognitive technologies on cloud platforms that create industry-based solutions in order to solve enterprise clients’ real-world problems. The company continues to address the higher value areas of enterprise IT and is amassing a unique set of capabilities and is differentiating itself from other technology providers as it moves into new spaces, and in some cases, creating entirely new markets. IBM is more than a hardware, software and services company; it has emerged as a cognitive solutions and cloud platform company. The company’s strategic imperatives— cloud, analytics, mobile, social and security solutions—are focused on these market shifts.

In 2016, the company made significant progress in its transformation, including strong revenue growth in the strategic imperatives, repositioning of the core businesses, continued high levels of investment, both organic and through acquisitions, and remixing skills. The company had 13 percent growth as reported (14 percent adjusted for currency) in the strategic imperatives, generating $33 billion of revenue, which represented 41 percent of total revenue. The growth rate achieved in 2016 keeps the company ahead of track of previous expectations of $40 billion of revenue from the strategic imperatives in 2018. In addition, the company expects to continue to allocate its capital efficiently and effectively to investments, and to return value to its shareholders through a combination of dividends and share repurchases. Over the long term, in consideration of the opportunities it will continue to develop, the company expects to have the ability to generate low single-digit revenue growth, and with a higher value business mix, high single-digit operating (non-GAAP) earnings per share growth, with free cash flow realization of GAAP net income in the 90 to 100 percent range.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company enters 2017 in a stronger position than a year ago, even taking into account the ongoing shifts in the IT industry, country- specific issues and opportunities, certain macro effects of currency and potential tax reform. In 2017, the company will continue to focus on growing the strategic imperatives and the transformation of its core businesses, with a continued high level of investment, although the higher-level investment that began in 2015 has now fully wrapped on a year-to-year basis. While pre-tax income is expected to decline year to year on a GAAP basis due to higher non-operating pension expense, the company expects growth in operating (non-GAAP) pre-tax income in 2017. In order to achieve these expectations, gross profit margin expansion is not required, which gives the company flexibility to accelerate its shift into as-a-Service faster. The company expects to continue to monetize its technology, including through IP licensing arrangements in 2017, with the opportunity for IP income to be flat year to year. Consistent with the long-term model, the company also expects over the course of 2017 to continue to acquire key capabilities, remix skills, invest in areas of growth and return value to shareholders. This is all taken into account in the full-year view. Overall, the company expects GAAP earnings per share from continuing operations for 2017 to be at least $11.95. Excluding acquisition-related charges of $0.75 per share and non-operating retirement-related items of $1.10 per share, operating (non-GAAP) earnings per share is expected to be at least $13.80. For the first quarter of 2017, the company expects operating (non-GAAP) earnings per share to be approximately 17 percent of the full year expectation. The company expects a discrete tax benefit in the first quarter of 2017, similar to the first quarter of 2016, though smaller in size, and other actions are expected to offset a portion of the benefit. This is taken into account in the earnings per share skew for first quarter.

Free cash flow realization, defined as free cash flow to income from continuing operations (GAAP), was 97 percent as reported in 2016 and is again expected to be in excess of 90 percent in 2017. The company expects free cash flow to be essentially flat year to year.

The company expects that the 2017 GAAP tax rate will be approximately 3 points lower than the operating (non-GAAP) tax rate expectation. Expectations for the operating (non-GAAP) tax rate are approximately 15 percent plus or minus three points, excluding discrete items. The rate will change year to year based on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.

In January 2017, the company announced a reorganization of its client and commercial financing business as a wholly owned subsidiary, IBM Credit, LLC. The subsidiary is expected to begin accessing capital markets directly in 2017 and the company expects to increase its financing business leverage from 7:1 to 9:1. See page 81 for additional information.

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The company expects 2017 pre-tax retirement-related plan cost to be approximately $2.9 billion, an increase of approximately $900 million compared to 2016. This estimate reflects current pension plan assumptions at December 31, 2016. Within total retirement- related plan cost, operating retirement-related plan cost is expected to be approximately $1.4 billion, approximately flat versus 2016. Non-operating retirement-related plan cost is expected to be approximately $1.5 billion, an increase of approximately $900 million compared to 2016, driven by lower income from expected return on assets. Contributions for all retirement-related plans are expected to be approximately $2.5 billion in 2017, an increase of approximately $100 million compared to 2016.

For a discussion of new accounting standards that the company will adopt in future periods, please see note B, “Accounting Changes,” beginning on page 99.

Liquidity and Capital Resources

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company has consistently generated strong cash flow from operations, providing a source of funds ranging between $16.9 billion and $19.6 billion per year over the past five years. The company provides for additional liquidity through several sources: maintaining an adequate cash balance, access to global funding sources, a committed global credit facility and other committed and uncommitted lines of credit worldwide. The following table provides a summary of the major sources of liquidity for the years ended December 31, 2012 through 2016.

Cash Flow and Liquidity Trends

($ in billions)

2016 2015 2014 2013 2012 Net cash from operating activities $ 17.0 $ 17.0 $ 16.9 $ 17.5 $ 19.6 Cash and short-term marketable securities $ 8.5 $ 8.2 $ 8.5 $ 11.1 $ 11.1 Committed global credit facility $ 10.3 $ 10.0 $ 10.0 $ 10.0 $ 10.0

The major rating agencies’ ratings on the company’s debt securities at December 31, 2016 appear in the following table and remain unchanged from December 31, 2015. The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

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

The company does not have “ratings trigger” provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. The company’s contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the company’s credit rating were to fall below investment grade. At December 31, 2016, the fair value of those instruments that were in a liability position was $206 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the company’s outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.

Moody’s Standard Investors Fitch & Poor’s Service Ratings Senior long-term debt AA- Aa3 A+ Commercial paper A-1+ Prime-1 F1

The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 87 and highlights causes and events underlying sources and uses of cash in that format on page 47. For the purpose of running its business, the company manages, monitors and analyzes cash flows in a different format.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

Management uses free cash flow as a measure to evaluate its operating results, plan share repurchase levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Global Financing receivables. Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. As previously noted, the company views Global Financing receivables as a profit generating investment which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric.

From the perspective of how management views cash flow, in 2016, after investing $3.7 billion in capital investments primarily in support of cloud and cognitive, the services backlog and the upcoming new hardware product cycles, the company generated free cash flow of $11.6 billion, a decrease of $1.5 billion compared to 2015. The decrease was driven primarily by performance-related declines in net income and a decline in cash provided by trade receivables; partially offset by a reduction in cash tax payments.

In 2016, the company continued to focus its cash utilization on returning value to shareholders including $5.3 billion in dividends and $3.5 billion in gross common stock repurchases (23.3 million shares). In addition, $5.7 billion was utilized for 15 acquisitions in 2016.

Over the past five years, the company generated over $70 billion in free cash flow. During that period, the company invested over $16 billion in strategic acquisitions and returned over $65 billion to shareholders through dividends and net share repurchases. The company’s performance during this period demonstrates that there is fungibility across the elements of share repurchases, dividends and acquisitions. The amount of prospective returns to shareholders in the form of dividends and share repurchases will vary based upon several factors including each year’s operating results, capital expenditure requirements, research and development investments and acquisitions, as well as the factors discussed below.

The company’s Board of Directors meets quarterly to consider the dividend payment. In the second quarter of 2016, the Board of Directors increased the company’s quarterly common stock dividend from $1.30 to $1.40 per share.

The table below represents the way in which management reviews cash flow as described above.

($ in billions)

For the year ended December 31: 2016 2015 2014 2013 2012 Net cash from operating activities per GAAP $ 17.0 $ 17.0 $ 16.9 $ 17.5 $ 19.6 Less: the change in Global Financing receivables 1.7 0.2 0.7 (1.3) (2.9) Net cash from operating activities, excluding Global Financing receivables 15.3 16.9 16.2 18.8 22.5 Capital expenditures, net (3.7) (3.8) (3.8) (3.8) (4.3) Free cash flow (FCF) 11.6 13.1 12.4 15.0 18.2 Acquisitions (5.7) (3.3) (0.7) (3.1) (3.7) Divestitures (0.5) (0.4) 2.4 0.3 0.6 Share repurchase (3.5) (4.6) (13.7) (13.9) (12.0) Dividends (5.3) (4.9) (4.3) (4.1) (3.8)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Non-Global Financing debt 1.3 (0.1) (1.3) 3.2 0.7 Other (includes Global Financing receivables and Global Financing debt) 2.3 0.0 2.6 2.4 (0.8) Change in cash, cash equivalents and short- term marketable securities $ 0.3 $ (0.3) $ (2.6) $ (0.1) $ (0.8) FCF as percent of Income from Continuing Operations 97% 98% 79% 89% 107%

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Events that could temporarily change the historical cash flow dynamics discussed previously include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note M, “Contingencies and Commitments,” on pages 127 to 129. With respect to pension funding, in 2016, the company contributed $507 million to its non-U.S. defined benefit plans compared to $514 million in 2015. As highlighted in the Contractual Obligations table, the company expects to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $2.3 billion in the next five years. The 2017 contributions are currently expected to be approximately $500 million. Contributions related to all retirement-related plans is expected to be approximately $2.5 billion in 2017, an increase of approximately $100 million compared to 2016. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.

The Pension Protection Act of 2006 was enacted into law in 2006, and, among other things, increased the funding requirements for certain U.S. defined benefit plans beginning after December 31, 2007. No mandatory contribution is required for the U.S. defined benefit plan in 2017 as of December 31, 2016.

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

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

Contractual Obligations

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total Contractual Payments Due In Payment Stream 2017 2018–19 2020–21 After 2021

Long-term debt obligations $ 41,138 $ 6,238 $ 10,109 $ 8,506 $ 16,284 Interest on long-term debt obligations 10,372 1,240 1,843 1,329 5,960 Capital (finance) lease obligations 7 1 4 2 — Operating lease obligations 6,883 1,414 2,546 1,812 1,111 Purchase obligations 3,334 799 1,211 783 541 Other long-term liabilities: Minimum defined benefit plan pension funding (mandated)* 2,300 500 1,000 800 — Excess 401(k) Plus Plan 1,675 181 402 456 636 Long-term termination benefits 1,322 428 183 117 595 Tax reserves** 3,066 966 Divestiture related 488 302 167 18 — Other 1,117 91 142 99 785 Total $ 71,702 $ 12,160 $ 17,607 $ 13,921 $ 25,913

* As funded status on plans will vary, obligations for mandated minimum pension payments after 2021 could not be reasonably estimated. ** These amounts represent the liability for unrecognized tax benefits. The company estimates that approximately $966 million of the liability is expected to be settled within the next 12 months. The settlement period for the noncurrent portion of our income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months.

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Total contractual obligations are reported in the previous table excluding the effects of time value and therefore, may not equal the amounts reported in the Consolidated Statement of Financial Position. Certain noncurrent liabilities are excluded from the previous table as their future cash outflows are uncertain. This includes deferred taxes, derivatives, deferred income, disability benefits and other sundry items. Certain obligations related to the company’s divestitures are included.

Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancelable, (2) the company would incur a penalty if the agreement was canceled, or (3) the company must make specified minimum payments even if it does not take delivery of the contracted products or services (take-or-pay). If the obligation to purchase goods or services is noncancelable, the entire value of the contract is included in the previous table. If the obligation is cancelable, but the company would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that is a firm commitment.

In the ordinary course of business, the company enters into contracts that specify that the company will purchase all or a portion of its requirements of a specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, the company does not consider them to be purchase obligations.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Interest on floating-rate debt obligations is calculated using the effective interest rate at December 31, 2016, plus the interest rate spread associated with that debt, if any.

Off-Balance Sheet Arrangements

From time to time, the company may enter into off-balance sheet arrangements as defined by SEC Financial Reporting Release 67 (FRR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”

At December 31, 2016, the company had no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See the table on page 70 for the company’s contractual obligations, and note M, “Contingencies and Commitments,” on page 129, for detailed information about the company’s guarantees, financial commitments and indemnification arrangements. The company does not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.

Critical Accounting Estimates

The application of GAAP requires the company to make estimates and assumptions about certain items and future events that directly affect its reported financial condition. The accounting estimates and assumptions discussed in this section are those that the company considers to be the most critical to its financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to the company’s financial condition. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the company’s Board of Directors. The company’s significant accounting policies are described in note A, “Significant Accounting Policies,” on pages 90 to 99.

A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to allow users of the Annual Report to understand a general direction cause and effect of changes in the estimates and do not represent management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.

Pension Assumptions

For the company’s defined benefit pension plans, the measurement of the benefit obligation to employees and net periodic pension (income)/cost requires the use of certain assumptions, including, among others, estimates of discount rates and expected return on plan assets.

Changes in the discount rate assumptions would impact the (gain)/loss amortization and interest cost components of the net periodic pension (income)/cost calculation and the projected benefit obligation (PBO). The company decreased the discount rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-based defined benefit plan, by 20 basis points to 3.80 percent on December 31, 2016. This change will increase pre-tax cost and expense recognized in 2017 by an estimated $61 million. If the discount rate assumption for the PPP had increased by 20 basis points on December 31, 2016, pre-tax cost and expense recognized in 2017 would have decreased by an estimated $63 million. Changes in the discount rate assumptions would impact the PBO which, in turn, may impact the company’s funding decisions if the PBO exceeds plan assets. A 25 basis point increase or decrease in the discount rate would cause a corresponding decrease or increase, respectively, in the PPP’s PBO of an estimated $1.2 billion based upon December 31, 2016 data.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Management Discussion International Business Machines Corporation and Subsidiary Companies

The expected long-term return on plan assets assumption is used in calculating the net periodic pension (income)/cost. Expected returns on plan assets are calculated based on the market-related value of plan assets, which recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic pension (income)/cost. The differences between the actual return on plan assets and the expected long-term return on plan assets are recognized over five years in the expected return on plan assets line in net periodic pension (income)/cost and also as a component of actuarial (gains)/losses, which are recognized over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets, as provided by accounting standards.

To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets assumption, each 50 basis point increase or decrease in the expected long-term return on PPP plan assets assumption would have an estimated decrease or increase, respectively, of $263 million on the following year’s pre-tax net periodic pension (income)/cost (based upon the PPP’s plan assets at December 31, 2016 and assuming no contributions are made in 2017).

The company may voluntarily make contributions or be required, by law, to make contributions to its pension plans. Actual results that differ from the estimates may result in more or less future company funding into the pension plans than is planned by management. Impacts of these types of changes on the company’s pension plans in other countries worldwide would vary depending upon the status of each respective plan.

In addition to the above, the company evaluates other pension assumptions involving demographic factors, such as retirement age and mortality, and updates these assumptions to reflect experience and expectations for the future. Actual results in any given year can differ from actuarial assumptions because of economic and other factors.

For additional information on the company’s pension plans and the development of these assumptions, see Note S, “Retirement-Related Benefits,” on pages 143 and 144.

Revenue Recognition

Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires the company to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including whether the deliverables specified in a multiple-deliverable arrangement should be treated as separate units of accounting. Other significant judgments include determining whether IBM or a reseller is acting as the principal in a transaction and whether separate contracts are considered part of one arrangement.

Revenue recognition is also impacted by the company’s ability to estimate sales incentives, expected returns and collectibility. The company considers various factors, including a review of specific transactions, the creditworthiness of the customers, historical experience and market and economic conditions when calculating these provisions and allowances. Evaluations are conducted each quarter to assess the adequacy of the estimates. If these estimates were changed by 10 percent in 2016, net income would have been impacted by $79 million (excluding Global Financing receivables).

Costs to Complete Service Contracts

The company enters into numerous service contracts through its services businesses. During the contractual period, revenue, cost and profits may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which the company uses the percentage-of-completion (POC) method of accounting. If at any time these estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost. The company performs ongoing profitability

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document analyses of its POC-based services contracts in order to determine whether the latest estimates require updating. Key factors reviewed by the company to estimate the future costs to complete each contract are future labor costs, future product costs and expected productivity efficiencies. Contract loss provisions recorded as a component of other accrued expenses and liabilities were $13 million and $12 million at December 31, 2016 and 2015, respectively.

Income Taxes

The company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the company’s belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions, and may involve a series of complex judgments about future events. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. In the event that the company changes its determination as to the amount of deferred tax assets that can be realized, the company will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

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The consolidated provision for income taxes will change period to period based on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.

To the extent that the provision for income taxes increases/ decreases by 1 percent of income from continuing operations before income taxes, consolidated net income would have decreased/improved by $123 million in 2016.

Valuation of Assets

The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires the company to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill and indefinite-lived intangible assets. Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to those assets or group of assets and if required, an estimate of fair value for the assets or group of assets. The company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Valuation of Goodwill

The company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In 2015, the company elected to perform the first step of the quantitative test to compare the fair value of each reporting unit to its carrying value instead of first conducting a qualitative assessment. In 2016, the company resumed the assessment of qualitative risk factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The company assesses qualitative factors in each of its reporting units that carry goodwill including relevant events and circumstances that affect the fair value of reporting units. Examples include, but are not limited to, macroeconomic, industry and market conditions; as well as other individual factors such as:

· A loss of key personnel; · A significant adverse shift in the operating environment of the reporting unit such as unanticipated competition; · A significant pending litigation; · A more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; and · An adverse action or assessment by a regulator.

The company assesses these qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.This quantitative test is required only if the company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.

In the fourth quarter, the company performed its annual goodwill impairment analysis.The qualitative assessment illustrated evidence of a potential impairment triggering event as a result of the financial performance of the Systems reporting unit. The quantitative analysis resulted in no impairment as the reporting unit’s estimated fair value exceeded the carrying amount by over 100 percent.

Loss Contingencies

The company is currently involved in various claims and legal proceedings. At least quarterly, the company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the company reassesses the potential liability related to its pending claims and litigation, and may revise its estimates. These revisions in the estimates of the potential liabilities could have a material impact on the company’s results of operations and financial position.

Global Financing Receivables Allowance for Credit Losses

The Global Financing business reviews its financing receivables portfolio at least quarterly in order to assess collectibility. A description of the methods used by management to estimate the amount of uncollectible receivables is included in note A, “Significant Accounting Policies,” on page 98. Factors that could result in actual receivable losses that are materially different from the estimated reserve include sharp changes in the economy, or a significant change in the economic health of a particular client that represents a concentration in Global Financing’s receivables portfolio.

To the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, Global Financing’s segment pre-tax income and the company’s income from continuing operations before income taxes would be higher or lower by an estimated $44 million depending upon whether the actual collectibility was better or worse, respectively, than the estimates.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Residual Value

Residual value represents the estimated fair value of equipment under lease as of the end of the lease. Residual value estimates impact the determination of whether a lease is classified as operating or capital. Global Financing estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and obtaining forward-looking product information such as marketing plans

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Management Discussion International Business Machines Corporation and Subsidiary Companies and technological innovations. Residual value estimates are periodically reviewed and “other than temporary” declines in estimated future residual values are recognized upon identification. Anticipated increases in future residual values are not recognized until the equipment is remarketed.

Factors that could cause actual results to materially differ from the estimates include significant changes in the used-equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.

To the extent that actual residual value recovery is lower than management’s estimates by 10 percent, Global Financing’s segment pre- tax income and the company’s income from continuing operations before income taxes for 2016 would have been lower by an estimated $72 million. If the actual residual value recovery is higher than management’s estimates, the increase in income will be realized at the end of lease when the equipment is remarketed.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect the company’s financial results and financial position. At December 31, 2016, currency changes resulted in assets and liabilities denominated in local currencies being translated into less dollars than at year-end 2015. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.

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

The company translates revenue, cost and expense in its non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that the company utilizes to disclose this information does not incorporate any operational actions that management may take in reaction to fluctuating currency rates. Currency movements impacted the company’s year-to-year revenue and earnings per share growth in 2016. Based on the currency rate movements in 2016, total revenue decreased 2.2 percent as reported and 1.6 percent at constant currency versus 2015. On an income from continuing operations before income taxes basis, these translation impacts offset by the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase of approximately $125 million in 2016, on an as-reported basis and an increase of approximately $150 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in a decrease of approximately $900 million in 2015 on an as-reported basis and a decrease of approximately $1,000 million on an operating (non-GAAP) basis. The company views these amounts as a

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document theoretical maximum impact to its as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but the company believes it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.

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

The company continues to monitor the economic conditions in Venezuela. In mid-February 2016, changes to the currency exchange systems were announced which eliminated the SICAD exchange rate and replaced the SIMADI rate with DICOM, which is expected to be a floating exchange rate. The company recorded a pre-tax loss of $43 million in the first quarter of 2016 in other (income) and expense in the Consolidated Statement of Earnings as a result of the elimination of SICAD and devaluation of the new exchange. The system for currency exchange in Venezuela has remained constant through the fourth quarter and the company continued to use the SIMADI rate since the DICOM rate had not been instrumented by the authorities. Total pre-tax loss for 2016 was $48 million. The company’s net assets denominated in local currency were $11 million at December 31, 2016. The company’s operations in Venezuela comprised less than 1 percent of total 2016, 2015 and 2014 revenue, respectively.

Market Risk

In the normal course of business, the financial position of the company is routinely subject to a variety of risks. In addition to the market risk associated with interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities, other examples of risk include collectibility of accounts receivable and recoverability of residual values on leased assets.

The company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the company does not anticipate any material losses from these risks.

The company’s debt, in support of the Global Financing business and the geographic breadth of the company’s operations, contains an element of market risk from changes in interest and currency rates. The company manages this risk, in part, through the use of a variety of financial instruments including derivatives, as described in note D, “Financial Instruments—Derivative Financial Instruments,” on pages 110 through 114.

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To meet disclosure requirements, the company performs a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of the company’s debt and other financial instruments.

The financial instruments that are included in the sensitivity analysis are comprised of the company’s cash and cash equivalents, marketable securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, long- term and short-term debt and derivative financial instruments. The company’s derivative financial instruments generally include interest rate swaps, foreign currency swaps and forward contracts.

To perform the sensitivity analysis, the company assesses the risk of loss in fair values from the effect of hypothetical changes in interest rates and foreign currency exchange rates on market-sensitive instruments. The market values for interest and foreign currency exchange risk are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document foreign currency exchange rates in effect at December 31, 2016 and 2015. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that the company would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant. In addition, the results of the model are constrained by the fact that certain items are specifically excluded from the analysis, while the financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the company’s net investment in foreign operations. As a consequence, reported changes in the values of some of the financial instruments impacting the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those instruments are designed to finance or hedge.

The results of the sensitivity analysis at December 31, 2016 and 2015, are as follows:

Interest Rate Risk

At December 31, 2016, a 10 percent decrease in the levels of interest rates with all other variables held constant would result in a decrease in the fair value of the company’s financial instruments of $147 million as compared with a decrease of $69 million at December 31, 2015. A 10 percent increase in the levels of interest rates with all other variables held constant would result in an increase in the fair value of the company’s financial instruments of $142 million as compared to an increase of $66 million at December 31, 2015. Changes in the relative sensitivity of the fair value of the company’s financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in the company’s debt maturities, interest rate profile and amount.

Foreign Currency Exchange Rate Risk

At December 31, 2016, a 10 percent weaker U.S. dollar against foreign currencies, with all other variables held constant, would result in a decrease in the fair value of the company’s financial instruments of $132 million as compared with a decrease of $74 million at December 31, 2015. Conversely, a 10 percent stronger U.S. dollar against foreign currencies, with all other variables held constant, would result in an increase in the fair value of the company’s financial instruments of $132 million compared with an increase of $74 million at December 31, 2015.

Financing Risks

See the “Description of Business” on page 34 for a discussion of the financing risks associated with the Global Financing business and management’s actions to mitigate such risks.

Cybersecurity

The company’s approach to cybersecurity draws on the depth and breadth of its global capabilities, both in terms of its offerings to clients and its internal approaches to risk management. The company has commercial solutions that deliver identity and access management, data security, application security, network security and endpoint security. IBM’s solutions include security intelligence, analytics and forensic tools that can collect information on customer IT security events and vulnerabilities and provide detailed information to customers about potential threats and security posture. The company’s services businesses offer professional solutions for security from assessment and incident response to deployment and resource augmentation. In addition, the company offers managed and outsourced security solutions from multiple security operations centers around the world. Finally, security is embedded in a multitude of IBM offerings through secure engineering processes and by critical functions (encryption, access control, etc.) in servers, storage, software, service, and other solutions.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document From an enterprise perspective, IBM implements a multi-faceted risk-management approach to identify and address cybersecurity risks. The company has established policies and procedures that provide the foundation upon which IBM’s infrastructure and data are managed. IBM performs ongoing assessments regarding its technical controls and its methods for identifying emerging risks related to cybersecurity. The company uses a layered approach with overlapping controls to defend against cybersecurity attacks and threats on networks, end-user devices, servers, applications and cloud solutions. The company also has a global incident response process to respond to cybersecurity threats. In addition, the company utilizes a combination of online training, educational tools, social media and other awareness initiatives to foster a culture of security awareness and responsibility among its workforce.

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Employees and Related Workforce

(In thousands)

For the year ended December 31: 2016 IBM/wholly owned subsidiaries 380.3 Less-than-wholly owned subsidiaries 9.6 Complementary 24.5

As a globally integrated enterprise, the company operates in more than 175 countries and is continuing to shift its business to the higher value segments of enterprise IT. The company continues to remix its skills and people needs to match the best opportunities in the marketplace.

The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment arrangements to meet specific business needs in a flexible and cost-effective manner.

GLOBAL FINANCING

Global Financing is a reportable segment that is measured as a stand-alone entity.

In 2016, the Global Financing business remained focused on its core competencies—providing IT financing to the company’s clients and business partners. For the year, Global Financing delivered external revenue of $1,692 million and total revenue of $3,494 million. Total pre-tax income of $1,656 million decreased 29.9 percent compared to 2015 and return on equity was 30.6 percent.

In addition to the overall health of the economy and its impact on corporate IT budgets, key drivers of Global Financing’s results are interest rates and originations. Interest rates directly impact Global Financing’s business by increasing or decreasing both financing revenue and the associated borrowing costs. Originations, which determine the asset base of Global Financing’s annuity-like business, are impacted by IBM’s non-Global Financing sales and services volumes and Global Financing’s participation rates. Participation rates are the propensity of IBM’s clients to finance their transactions through Global Financing in lieu of paying IBM up-front cash or financing through a third party.

Results of Operations

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For the year ended December 31: 2016 2015 2014 External revenue $ 1,692 $ 1,840 $ 2,034 Internal revenue 1,802 2,637 2,488 Total revenue 3,494 4,477 4,522 Cost 1,146 1,412 1,428 Gross profit $ 2,348 $ 3,065 $ 3,094 Gross profit margin 67.2% 68.5% 68.4% Pre-tax income $ 1,656 $ 2,364 $ 2,189 After-tax income* $ 1,126 $ 1,572 $ 1,462 Return on equity* 30.6% 41.5% 36.8%

* See page 80 for the details of the after-tax income and return on equity calculation.

Total revenue in 2016 decreased $983 million versus 2015 as a result of:

· A decline in external revenue of 8.0 percent (down 6.9 percent adjusted for currency), due to a decrease in financing revenue (down 11.2 percent to $1,231 million), partially offset by an increase in used equipment sales revenue (up 1.6 percent to $461 million); and · A decline in internal revenue of 31.7 percent, due to decreases in used equipment sales revenue (down 35.5 percent to $1,486 million) and financing revenue (down 5.2 percent to $316 million).

The decrease in external financing revenue was due to lower asset yields and a decrease in average asset balance, as well as a decline in remarketing lease revenue. The decrease in internal financing revenue was primarily due to lower asset yields, partially offset by an increase in average asset balance.

Global Financing gross profit decreased 23.4 percent in 2016 compared to 2015, due to decreases in used equipment sales gross profit and financing gross profit. The gross profit margin declined 1.3 points compared to 2015 due to a decrease in equipment sales margin, partially offset by an increase in financing margin.

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Total revenue in 2015 decreased $45 million versus 2014 as a result of:

· A decrease in external revenue of 9.5 percent (up 1.5 percent adjusted for currency), driven by decreases in financing revenue (down 10.2 percent to $1,386 million) and used equipment sales revenue (down 7.6 percent to $454 million); partially offset by · An increase in internal revenue of 6.0 percent driven by an increase in used equipment sales revenue (up 10.7 percent to $2,303 million); partially offset by a decrease in financing revenue (down 18.3 percent to $334 million).

The decrease in external and internal financing revenue was primarily due to decreases in the average asset balance and yields, as well as a decrease in remarketing lease revenue.

Global Financing gross profit decreased 0.9 percent compared to 2014 due to a decrease in financing gross profit, partially offset by an increase in used equipment sales gross profit. The gross profit margin was flat compared to 2014 with an increase in equipment sales margin, offset by a shift in mix away from higher margin financing and a decrease in financing margin.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Global Financing pre-tax income decreased 29.9 percent in 2016 versus 2015, following an increase of 8.0 percent in 2015 versus 2014. The decrease in 2016 was driven by a decrease in gross profit ($717 million) and an increase in selling, general and administrative expenses ($66 million), partially offset by a decrease in financing receivables provisions ($75 million). The increase in 2015 was driven by decreases in selling, general and administrative expenses ($107 million) and financing receivables provisions ($96 million); partially offset by the decrease in gross profit ($29 million). The decrease in financing receivable provisions in 2016 was due to lower specific reserve requirements in China, partially offset by higher reserves in Brazil in the current year. At December 31, 2016, the overall allowance for credit losses coverage rate was 1.6 percent, a decrease of 54 basis points year over year primarily due to a write-off of previously reserved receivables.

The decrease in return on equity from 2015 to 2016 was driven by the decrease in net income, partially offset by a lower average equity balance. The increase in return on equity from 2014 to 2015 was driven by the increase in net income and a lower average equity balance.

Financial Condition

Balance Sheet

($ in millions)

At December 31: 2016 2015 Cash and cash equivalents $ 1,844 $ 1,555 Net investment in sales-type and direct financing leases 6,893 7,594 Equipment under operating leases— external clients (1) 548 605 Client loans 11,478 12,525 Total client financing assets 18,920 20,725 Commercial financing receivables 9,700 8,948 Intercompany financing receivables (2) (3) 4,959 4,245 Other receivables 196 308 Other assets 872 378 Total assets $ 36,492 $ 36,157 Intercompany payables (2) $ 2,189 $ 3,089 Debt (4) 27,859 27,205 Other liabilities 2,631 2,134 Total liabilities 32,679 32,428 Total equity 3,812 3,729 Total liabilities and equity $ 36,492 $ 36,157

(1) Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in IBM’s consolidated results (2) Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on page 86 (3) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt. (4) Global Financing debt is comprised of intercompany loans and external debt. A portion of Global Financing debt is in support of the company’s internal business, or related to intercompany mark-up embedded in the Global Financing assets.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Sources and Uses of Funds

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

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

In addition to the actions previously described, the company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, non-recourse borrowings, transfer of receivables recorded as true sale in accordance with accounting guidance or sales of equipment under operating lease.

At December 31, 2016, substantially all financing assets were IT related assets, and approximately 52 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers. The reduction in investment grade year to year (3 points) was driven primarily by rating changes within the existing portfolio, not by changing the company’s approach to the market. This investment grade percentage is based on credit ratings of the companies in the portfolio. Additionally, as noted above, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 14 points to 66 percent, also a reduction of 3 points year to year.

Originations

The following are total financing originations:

($ in millions)

For the year ended December 31: 2016 2015 2014 Client financing $ 11,703 $ 14,444 $ 15,099 Commercial financing 42,666 40,571 43,664 Total $ 54,370 $ 55,015 $ 58,762

In 2016, cash collection of client financing assets exceeded new financing originations, while new financing originations of commercial financing exceeded collections. This resulted in a net decline in financing assets from December 2015. The decrease in originations in 2016 versus 2015, as well as the decrease in originations in 2015 versus 2014, was due to declining volumes. Internal loan financing with Technology Services & Cloud Platforms is executed under a loan facility and is not considered originations.

Cash generated by Global Financing in 2016 was deployed to pay intercompany payables and dividends to IBM as well as external payables to business partners and OEM suppliers.

Global Financing Receivables and Allowances

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The following table presents external financing receivables excluding residual values, and the allowance for credit losses:

($ in millions)

At December 31: 2016 2015 Gross financing receivables $ 28,043 $ 29,086 Specific allowance for credit losses 335 517 Unallocated allowance for credit losses 103 93 Total allowance for credit losses 438 610 Net financing receivables $ 27,605 $ 28,475 Allowance for credit losses coverage 1.6% 2.1%

Roll Forward of Global Financing Receivables Allowance for Credit Losses

($ in millions)

January 1, Allowance Additions/ December 31, 2016 Used* (Reductions) Other** 2016 $ 610 $ (236) $ 69 $ (5) $ 438

* Represents reserved receivables, net of recoveries, that were written off during the period ** Primarily represents translation adjustments

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The percentage of Global Financing receivables reserved was 1.6 percent at December 31, 2016, and 2.1 percent at December 31, 2015. In the fourth quarter of 2016, write-offs of $188 million of receivables previously reserved, primarily in China, was the primary driver of the 35 percent reduction in the specific allowance, from $517 million at December 31, 2015, to $335 million at December 31, 2016. See note F, “Financing Receivables” on pages 114 to 118 for additional information. Unallocated reserves increased 10 percent from $93 million at December 31, 2015, to $103 million at December 31, 2016, due to higher general reserve requirements in Brazil.

Global Financing’s bad debt expense was $69 million for 2016, compared to $144 million for 2015. The year-to-year decrease in bad debt expense was due to lower specific reserve requirements in China, partially offset by higher reserve requirements in Brazil in the current year.

Residual Value

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

Global Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment include equipment returned at the end of a lease, surplus internal equipment, or used equipment purchased externally. These sales represented 55.7 percent and 61.6 percent of Global

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Financing’s revenue in 2016 and 2015, respectively. The decrease was due to a lower volume of used equipment sales for internal transactions. The gross profit margins on total equipment sales were 60.5 percent and 66.0 percent in 2016 and 2015, respectively. The decrease in the gross profit margin was primarily driven by a shift in mix away from higher margin internal equipment sales.

The table below presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at December 31, 2016 and 2015. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at December 31, 2016 is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. While primarily focused on IBM products, guarantees are also obtained for certain OEM products. These third-party guarantees are included in minimum lease payments as provided for by accounting standards in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets.

The residual value guarantee increases the minimum lease payments that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease. The aggregate asset values associated with the guarantees of sales-type leases were $329 million and $811 million for the financing transactions originated during the years ended December 31, 2016 and December 31, 2015, respectively. In 2016, the residual value guarantee program resulted in the company recognizing approximately $220 million of revenue that would otherwise have been recognized in future periods as operating lease revenue. If the company had chosen to not participate in a residual value guarantee program in 2016 and prior years, the 2016 impact would be substantially mitigated by the effect of prior year asset values being recognized as operating lease revenue in the current year. The aggregate asset values associated with the guarantees of direct financing leases were $169 million and $185 million for the financing transactions originated during the years ended December 31, 2016 and 2015, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $19 million and $54 million for the financing transactions originated during the years ended December 31, 2016 and 2015, respectively. The cost of guarantees was $2 million and $5 million for the years ended December 31, 2016 and 2015, respectively.

Unguaranteed Residual Value

($ in millions)

Total Estimated Run Out of 2016 Balance 2020 and At December 31: 2015 2016 2017 2018 2019 Beyond Sales-type and direct financing leases $ 645 $ 585 $ 110 $ 167 $ 187 $ 121 Operating leases 144 140 50 42 33 15 Total unguaranteed residual value $ 789 $ 725 $ 160 $ 209 $ 220 $ 136 Related original amount financed $ 14,223 $ 12,845 Percentage 5.6% 5.6%

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Debt

At December 31: 2016 2015 Debt-to-equity ratio 7.3x 7.3x

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The debt used to fund Global Financing assets is composed of intercompany loans and external debt. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term and currency underlying the financing receivable and are based on arm’s-length pricing.

Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. As previously stated, the company measures Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s external client and internal business is included in the “Global Financing Results of Operations” on page 76 and in note T, “Segment Information,” on pages 150 to 154. In the company’s Consolidated Statement of Earnings, the external debt-related interest expense supporting Global Financing’s internal financing to the company is reclassified from cost of financing to interest expense.

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

($ in millions)

December 31, 2016 December 31, 2015 Global Financing Segment $ 27,859 $ 27,205 Debt to support external clients $ 24,034 $ 23,934 Debt to support internal clients 3,825 3,271 Non-Global Financing Segments 14,309 12,684 Debt supporting operations 18,134 15,955 Intercompany activity (3,825) (3,271) Total company debt $ 42,169 $ 39,890

Liquidity and Capital Resources

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

Return on Equity

($ in millions)

At December 31: 2016 2015 Numerator Global Financing after-tax income (1) * $ 1,126 $ 1,572 Denominator Average Global Financing equity (2) ** $ 3,680 $ 3,785 Global Financing return on equity (1) /(2) 30.6% 41.5%

* Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis ** Average of the ending equity for Global Financing for the last five quarters

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 80

Management Discussion International Business Machines Corporation and Subsidiary Companies

Looking Forward

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

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

As part of its transformation, the company changed the structure of its financing business in January 2017 to drive operational benefits. The client and commercial financing businesses have been reorganized as a wholly owned subsidiary, IBM Credit LLC. This will drive operational benefits by consolidating the operations of the financing business. Debt will be issued directly out of the new entity, and the new entity is expected to be able to access the capital markets later in 2017. The financing business expects to increase its leverage from approximately 7:1 to 9:1, which represents an increase of approximately $600 million in Global Financing debt. The Global Financing segment remains unchanged, and will continue to include the client and commercial financing businesses, as well as the hardware remanufacturing and remarketing business.

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

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

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

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

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Report of Management International Business Machines Corporation and Subsidiary Companies

Management Responsibility for Financial Information

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.

IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and followed.

The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets regularly and privately with the independent registered public accounting firm, with the company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of December 31, 2016.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retained to audit IBM’s Consolidated Financial Statements and the effectiveness of the internal control over financial reporting. Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document /s/ Virginia M. Rometty Virginia M. Rometty Chairman, President and Chief Executive Officer February 28, 2017

/s/ Martin J. Schroeter Martin J. Schroeter Senior Vice President and Chief Financial Officer February 28, 2017

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Report of Independent Registered Public Accounting Firm International Business Machines Corporation and Subsidiary Companies

To the Stockholders and Board of Directors of International Business Machines Corporation:

In our opinion, the accompanying Consolidated Statements of Financial Position and the related Consolidated Statements of Earnings, Comprehensive Income, Changes in Equity, and Cash Flows present fairly, in all material respects, the financial position of International Business Machines Corporation and its subsidiaries at December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing on page 82. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP New York, New York February 28, 2017

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Consolidated Statement of Earnings International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amounts)

For the year ended December 31: Notes 2016 2015 2014 Revenue Services $ 51,268 $ 49,911 $ 55,673 Sales 26,942 29,967 35,063 Financing 1,710 1,864 2,057 Total revenue T 79,919 81,741 92,793 Cost Services 34,021 33,126 36,034 Sales 6,559 6,920 9,312 Financing 1,044 1,011 1,040 Total cost 41,625 41,057 46,386 Gross profit 38,294 40,684 46,407 Expense and other (income) Selling, general and administrative 21,069 20,430 23,180 Research, development and engineering O 5,751 5,247 5,437 Intellectual property and custom development income (1,631) (682) (742) Other (income) and expense 145 (724) (1,938) Interest expense D&J 630 468 484 Total expense and other (income) 25,964 24,740 26,421 Income from continuing operations before income taxes 12,330 15,945 19,986 Provision for income taxes N 449 2,581 4,234 Income from continuing operations 11,881 13,364 15,751 Loss from discontinued operations, net of tax C (9) (174) (3,729) Net income $ 11,872 $ 13,190 $ 12,022 Earnings/(loss) per share of common stock Assuming dilution Continuing operations P $ 12.39 $ 13.60 $ 15.59 Discontinued operations P (0.01) (0.18) (3.69) Total P $ 12.38 $ 13.42 $ 11.90 Basic

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Continuing operations P $ 12.44 $ 13.66 $ 15.68 Discontinued operations P (0.01) (0.18) (3.71) Total P $ 12.43 $ 13.48 $ 11.97 Weighted-average number of common shares outstanding Assuming dilution 958,714,097 982,700,267 1,010,000,480 Basic 955,422,530 978,744,523 1,004,272,584

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

84

Consolidated Statement of Comprehensive Income International Business Machines Corporation and Subsidiary Companies

($ in millions)

For the year ended December 31: Notes 2016 2015 2014 Net income $ 11,872 $ 13,190 $ 12,022 Other comprehensive income/(loss), before tax Foreign currency translation adjustments L (20) (1,379) (1,636) Net changes related to available-for-sale securities L Unrealized gains/(losses) arising during the period (38) (54) (29) Reclassification of (gains)/losses to net income 34 86 5 Total net changes related to available-for-sale securities (3) 32 (24) Unrealized gains/(losses) on cash flow hedges L Unrealized gains/(losses) arising during the period 243 618 958 Reclassification of (gains)/losses to net income 102 (1,072) (97) Total unrealized gains/(losses) on cash flow hedges 345 (454) 861 Retirement-related benefit plans L Prior service costs/(credits) — 6 1 Net (losses)/gains arising during the period (2,490) (2,963) (9,799) Curtailments and settlements (16) 33 24 Amortization of prior service (credits)/costs (107) (100) (114) Amortization of net (gains)/losses 2,764 3,304 2,531 Total retirement-related benefit plans 150 279 (7,357) Other comprehensive income/(loss), before tax L 472 (1,523) (8,156) Income tax (expense)/benefit related to items of other comprehensive income L (263) (208) 1,883 Other comprehensive income/(loss) L 209 (1,731) (6,274) Total comprehensive income $ 12,081 $ 11,459 $ 5,748

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

85

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of Financial Position International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amounts)

At December 31: Notes 2016 2015 Assets Current assets Cash and cash equivalents $ 7,826 $ 7,686 Marketable securities D 701 508 Notes and accounts receivable—trade (net of allowances of $290 in 2016 and $367 in 2015) 9,182 8,333 Short-term financing receivables (net of allowances of $337 in 2016 and $490 in 2015) F 19,006 19,020 Other accounts receivable (net of allowances of $48 in 2016 and $51 in 2015) 1,057 1,201 Inventories E 1,553 1,551 Prepaid expenses and other current assets 4,564 4,205 Total current assets 43,888 42,504 Property, plant and equipment G 30,133 29,342 Less: Accumulated depreciation G 19,303 18,615 Property, plant and equipment—net G 10,830 10,727 Long-term financing receivables (net of allowances of $101 in 2016 and $118 in 2015) F 9,021 10,013 Prepaid pension assets S 3,034 1,734 Deferred taxes N 5,224 4,822 Goodwill I 36,199 32,021 Intangible assets—net I 4,688 3,487 Investments and sundry assets H 4,585 5,187 Total assets $ 117,470 $ 110,495 Liabilities and equity Current liabilities Taxes N $ 3,235 $ 2,847 Short-term debt D&J 7,513 6,461 Accounts payable 6,209 6,028 Compensation and benefits 3,577 3,560 Deferred income 11,035 11,021 Other accrued expenses and liabilities 4,705 4,353 Total current liabilities 36,275 34,269 Long-term debt D&J 34,655 33,428 Retirement and nonpension postretirement benefit obligations S 17,070 16,504 Deferred income 3,600 3,771 Other liabilities K 7,477 8,099 Total liabilities 99,078 96,071 Contingencies and commitments M Equity L IBM stockholders’ equity Common stock, par value $.20 per share, and additional paid-in capital 53,935 53,262

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Shares authorized: 4,687,500,000 Shares issued (2016—2,225,116,815; 2015—2,221,223,449) Retained earnings 152,759 146,124 Treasury stock, at cost (shares: 2016—1,279,249,412; 2015—1,255,494,724) (159,050) (155,518) Accumulated other comprehensive income/(loss) (29,398) (29,607) Total IBM stockholders’ equity 18,246 14,262 Noncontrolling interests A 146 162 Total equity 18,392 14,424 Total liabilities and equity $ 117,470 $ 110,495

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

86

Consolidated Statement of Cash Flows International Business Machines Corporation and Subsidiary Companies

($ in millions)

For the year ended December 31: 2016 2015 2014 Cash flows from operating activities Net income $ 11,872 $ 13,190 $ 12,022 Adjustments to reconcile net income to cash provided by operating activities Depreciation 2,837 2,662 3,145 Amortization of intangibles 1,544 1,193 1,347 Stock-based compensation 544 468 512 Deferred taxes (1,132) 1,387 (237) Net (gain)/loss on asset sales and other 62 481 (1,535) Loss on microelectronics business disposal — 71 3,381 Change in operating assets and liabilities, net of acquisitions/divestitures Receivables (including financing receivables) 712 812 1,270 Retirement related 54 (22) (655) Inventories (14) 133 (39) Other assets/other liabilities 282 (3,448) (1,886) Accounts payable 197 81 (456) Net cash provided by operating activities 16,958 17,008 16,868 Cash flows from investing activities Payments for property, plant and equipment (3,567) (3,579) (3,740) Proceeds from disposition of property, plant and equipment 424 370 404 Investment in software (583) (572) (443) Purchases of marketable securities and other investments (5,917) (3,073) (2,338) Proceeds from disposition of marketable securities and other investments 5,692 2,842 2,493 Non-operating finance receivables—net (891) (398) (1,078) Acquisition of businesses, net of cash acquired (5,679) (3,349) (656) Divestiture of businesses, net of cash transferred (454) (401) 2,357 Net cash used in investing activities (10,976) (8,159) (3,001)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cash flows from financing activities Proceeds from new debt 9,132 5,540 8,180 Payments to settle debt (6,395) (5,622) (4,644) Short-term borrowings/(repayments) less than 90 days—net 26 101 (1,753) Common stock repurchases (3,502) (4,609) (13,679) Common stock transactions—other 204 322 709 Cash dividends paid (5,256) (4,897) (4,265) Net cash used in financing activities (5,791) (9,166) (15,452) Effect of exchange rate changes on cash and cash equivalents (51) (473) (655) Net change in cash and cash equivalents 140 (790) (2,240) Cash and cash equivalents at January 1 7,686 8,476 10,716 Cash and cash equivalents at December 31 $ 7,826 $ 7,686 $ 8,476 Supplemental data Income taxes paid—net of refunds received $ 1,078 $ 2,657 $ 5,748 Interest paid on debt $ 1,158 $ 995 $ 1,061

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

87

Consolidated Statement of Changes in Equity International Business Machines Corporation and Subsidiary Companies

($ in millions)

Common Accumulated Stock and Other Total IBM Non- Additional Retained Treasury Comprehensive Stockholders’ Controlling Total Paid-In Capital Earnings Stock Income/(Loss) Equity Interests Equity 2014 Equity, January 1, 2014 $ 51,594 $ 130,042 $ (137,242) $ (21,602) $ 22,792 $ 137 $ 22,929 Net income plus other comprehensive income/ (loss) Net income 12,022 12,022 12,022 Other comprehensive income/(loss) (6,274) (6,274) (6,274) Total comprehensive income/ (loss) $ 5,748 $ 5,748 Cash dividends paid— common stock (4,265) (4,265) (4,265) Common stock issued under employee plans (7,687,026 shares) 977 977 977 Purchases (1,313,569 shares) and sales (1,264,232 shares) (6) (79) (85) (85)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document of treasury stock under employee plans—net Other treasury shares purchased, not retired (71,504,867 shares) (13,395) (13,395) (13,395) Changes in other equity 95 95 95 Changes in noncontrolling interests 8 8 Equity, December 31, 2014 $ 52,666 $ 137,793 $ (150,715) $ (27,875) $ 11,868 $ 146 $ 12,014

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

($ in millions)

Common Accumulated Stock and Other Total IBM Non- Additional Retained Treasury Comprehensive Stockholders’ Controlling Total Paid-In Capital Earnings Stock Income/(Loss) Equity Interests Equity 2015 Equity, January 1, 2015 $ 52,666 $ 137,793 $ (150,715) $ (27,875) $ 11,868 $ 146 $ 12,014 Net income plus other comprehensive income/ (loss) Net income 13,190 13,190 13,190 Other comprehensive income/(loss) (1,731) (1,731) (1,731) Total comprehensive income/ (loss) $ 11,459 $ 11,459 Cash dividends paid— common stock (4,897) (4,897) (4,897) Common stock issued under employee plans (6,013,875 shares) 606 606 606 Purchases (1,625,820 shares) and sales (1,155,558 shares) of treasury stock under employee plans—net 39 (102) (63) (63) Other treasury shares purchased, not retired (30,338,647 shares) (4,701) (4,701) (4,701) Changes in other equity (10) (10) (10) Changes in noncontrolling interests 16 16 Equity, December 31, 2015 $ 53,262 $ 146,124 $ (155,518) $ (29,607) $ 14,262 $ 162 $ 14,424

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 88

Consolidated Statement of Changes in Equity International Business Machines Corporation and Subsidiary Companies

($ in millions)

Common Accumulated Stock and Other Total IBM Non- Additional Retained Treasury Comprehensive Stockholders’ Controlling Total Paid-In Capital Earnings Stock Income/(Loss) Equity Interests Equity 2016 Equity, January 1, 2016 $ 53,262 $ 146,124 $ (155,518) $ (29,607) $ 14,262 $ 162 $ 14,424 Net income plus other comprehensive income/ (loss) Net income 11,872 11,872 11,872 Other comprehensive income/(loss) 209 209 209 Total comprehensive income/ (loss) $ 12,081 $ 12,081 Cash dividends paid— common stock (5,256) (5,256) (5,256) Common stock issued under employee plans (3,893,366 shares) 695 695 695 Purchases (854,365 shares) and sales (383,077 shares) of treasury stock under employee plans—net 18 (77) (59) (59) Other treasury shares purchased, not retired (23,283,400 shares) (3,455) (3,455) (3,455) Changes in other equity (22) 0 (22) (22) Changes in noncontrolling interests (16) (16) Equity, December 31, 2016 $ 53,935 $ 152,759 $ (159,050) $ (29,398) $ 18,246 $ 146 $ 18,392

Amounts may not add due to rounding. The accompanying notes on pages 90 through 154 are an integral part of the financial statements.

89

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

NOTE A. SIGNIFICANT ACCOUNTING POLICIES

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Basis of Presentation

The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

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

On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The transaction closed on July 1, 2015. Refer to note C, “Acquisitions/Divestitures,” for additional information on the transaction.

In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments, but did not impact the company’s Consolidated Financial Statements. Refer to note T, “Segment Information,” on pages 150 to 154 for additional information on the changes in reportable segments.

Noncontrolling interest amounts of $16 million, $8 million and $6 million, net of tax, for the years ended December 31, 2016, 2015 and 2014, respectively, are included as a reduction within other (income) and expense in the Consolidated Statement of Earnings.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are primarily majority owned. Any noncontrolling interest in the equity of a subsidiary is reported in Equity in the Consolidated Statement of Financial Position. Net income and losses attributable to the noncontrolling interest is reported as described above in the Consolidated Statement of Earnings. The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in business entities in which the company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method and the company’s proportionate share of income or loss is recorded in other (income) and expense. The accounting policy for other investments in equity securities is on page 98 within “Marketable Securities.” Equity investments in non-publicly traded entities are primarily accounted for using the cost method. All intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) (OCI) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See “Critical Accounting Estimates” on pages 71 to 74 for a discussion of the company’s critical accounting estimates.

Revenue

The company recognizes revenue when it is realized or realizable and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed,

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has: economic substance apart from the company, credit risk, risk of loss to the inventory; and, the fee to the company is not contingent upon resale or payment by the end user, the company has no further obligations related to bringing about resale or delivery and all other revenue recognition criteria have been met.

The company reduces revenue for estimated client returns, stock rotation, price protection, rebates and other similar allowances. (See Schedule II, “Valuation and Qualifying Accounts and Reserves” included in the company’s Annual Report on Form 10-K). Revenue is recognized only if these estimates can be reasonably and reliably determined. The company bases its estimates on historical results taking into consideration the type of client, the type of transaction and the specifics of each arrangement. Payments made under cooperative marketing programs are recognized as an expense only if the company receives from the client an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably and reliably estimated. If the company does not receive an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably estimated, such payments are recorded as a reduction of revenue.

Revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is a principal to the transaction. Several factors are considered to determine whether the company is an agent or principal, most notably whether the company is the primary obligor to the client, or has inventory risk. Consideration is also given to whether the company adds meaningful value to the vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in establishing the sales price or has credit risk.

The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. In addition to the aforementioned general policies, the following

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies are the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue.

Multiple-Deliverable Arrangements

The company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of services, software, hardware and/or financing. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements can also include financing provided by the company. These arrangements consist of multiple deliverables, with the hardware and software delivered in one reporting period, and the software support and hardware maintenance services delivered across multiple reporting periods. In another example, a client may outsource the running of its datacenter operations to the company on a long-term, multiple-year basis and periodically purchase servers and/or software products from the company to upgrade or expand its facility. The outsourcing services are provided on a continuous basis across multiple reporting periods, and the hardware and software products are delivered in one reporting period. To the extent that a deliverable in a multiple-deliverable arrangement is subject to specific accounting guidance that deliverable is accounted for in accordance with such specific guidance. Examples of such arrangements may include leased hardware which is subject to specific leasing guidance or software which is subject to specific software revenue recognition guidance on whether and/or how to separate multiple-deliverable arrangements into separate units of accounting (separability) and how to allocate the arrangement

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document consideration among those separate units of accounting (allocation). For all other deliverables in multiple-deliverable arrangements, the guidance below is applied for separability and allocation. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:

· The delivered item(s) has value to the client on a standalone basis; and · If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.

If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The following revenue policies are then applied to each unit of accounting, as applicable.

Revenue from the company’s cloud, analytics, mobile, security, and cognitive offerings follow the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue depending on the type of offering which can be comprised of services, hardware and/or software.

Services

The company’s primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services, consulting and systems integration, technology infrastructure and system maintenance, hosting and the design and development of complex IT systems to a client’s specifications (design and build). Many of these services can be delivered entirely or partially through as-a-Service or cloud delivery models. These services are provided on a time-and-material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.

Revenue from IT datacenter and business process outsourcing contracts is recognized in the period the services are provided using either an objective measure of output or on a straight-line basis over the term of the contract. Under the output method, the amount of revenue recognized is based on the services delivered in the period.

Revenue from application management services, technology infrastructure, and system maintenance and hosting contracts is recognized on a straight-line basis over the terms of the contracts. Revenue from time-and-material contracts is recognized as labor hours are delivered and direct expenses are incurred. Revenue related to extended warranty and product maintenance contracts is recognized on a straight-line basis over the delivery period.

Revenue from fixed-price design and build contracts is recognized under the percentage-of-completion (POC) method. Under the POC method, revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by the company.

The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For non-POC method services contracts, any losses are recorded as incurred.

In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of $5,873 million and $6,039 million at December 31, 2016 and 2015, respectively, is included in the Consolidated Statement of Financial Position. In other services contracts, the company performs the services prior to billing the client. Unbilled accounts receivable of

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document $1,611 million and $1,630 million at December 31, 2016 and 2015, respectively, is included in notes and accounts receivable-trade in the Consolidated Statement of Financial Position.

Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions. Unbilled receivables are expected to be billed within four months.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Hardware

The company’s hardware offerings include the sale or lease of system servers and storage solutions. The company also offers installation services for its more complex hardware products.

Revenue from hardware sales and sales-type leases is recognized when risk of loss has transferred to the client and there are no unfulfilled company obligations that affect the client’s final acceptance of the arrangement. Any cost of standard warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.

Software

Revenue from perpetual (one-time charge) license software is recognized at the inception of the license term if all revenue recognition criteria have been met. Revenue from post-contract support, which may include unspecified upgrades on a when-and-if-available basis, is recognized on a straight-line basis over the period such items are delivered. Revenue from software hosting or Software-as-a-Service arrangements is recognized as the service is delivered. In software hosting arrangements, the rights provided to the customer (e.g., ownership of a license, contract termination provisions and the feasibility of the customer to operate the software) are considered in determining whether the arrangement includes a license. In arrangements which include a software license, the associated revenue is recognized according to whether the license is perpetual or term. Revenue from term (recurring license charge) license software is recognized on a straight-line basis over the period that the client is entitled to use the license.

In multiple-deliverable arrangements that include software that is more than incidental to the products or services as a whole (software multiple-deliverable arrangements), software and software-related elements are accounted for in accordance with software revenue recognition guidance. Software-related elements include software products and services for which a software deliverable is essential to its functionality. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are not within the scope of software revenue recognition guidance and are accounted for based on other applicable revenue recognition guidance.

A software multiple-deliverable arrangement is separated into more than one unit of accounting if all of the following criteria are met:

· The functionality of the delivered element(s) is not dependent on the undelivered element(s); · There is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s). VSOE of fair value is based on the price charged when the deliverable is sold separately by the company on a regular basis and not as part of the multiple-deliverable arrangement; and · Delivery of the delivered element(s) represents the culmination of the earnings process for that element(s).

If any one of these criteria is not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document element is delivered. If these criteria are met for each element and there is VSOE of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative VSOE of fair value. There may be cases, however, in which there is VSOE of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate VSOE of fair value of the undelivered elements.

The company’s multiple-deliverable arrangements may have a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-deliverable arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy: VSOE, third-party evidence (TPE) or best estimate of selling price (BESP). In circumstances where the company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, BESP is used for the purpose of performing this allocation.

Financing

Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.

Best Estimate of Selling Price

In certain instances, the company is not able to establish VSOE for all elements in a multiple-deliverable arrangement. When VSOE cannot be established, the company attempts to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.

When the company is unable to establish selling price using VSOE or TPE, the company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the company would transact a sale if the product or service were sold on a stand-alone basis. BESP may be used, for example, if a product is not sold on a stand-alone basis or when the company sells a new product, for which VSOE and TPE does not yet exist, in a multiple-deliverable arrangement prior to selling the new product on a stand-alone basis.

The company determines BESP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. The determination of BESP is a formal process that includes review and approval by the company’s management. In addition, the company regularly reviews VSOE and TPE for its products and services, in addition to BESP.

Services Costs

Recurring operating costs for services contracts, including costs related to bid and proposal activities, are recognized as incurred. For fixed-price design and build contracts, the costs of external

92

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies hardware and software accounted for under the POC method are deferred and recognized based on the labor costs incurred to date, as a percentage of the total estimated labor costs to fulfill the contract. Certain eligible, nonrecurring costs incurred in the initial phases of

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document outsourcing contracts are deferred and subsequently amortized. These costs consist of transition and setup costs related to the installation of systems and processes and are amortized on a straight-line basis over the expected period of benefit, not to exceed the term of the contract. Additionally, fixed assets associated with outsourcing contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit not to exceed the term of the contract. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the estimated minimum remaining undiscounted cash flows of a contract to the unamortized contract costs. If such minimum undiscounted cash flows are not sufficient to recover the unamortized costs, an impairment loss is recognized.

Deferred services transition and setup costs were $2,072 million and $2,144 million at December 31, 2016 and 2015, respectively. Amortization of deferred services transition and setup costs was estimated at December 31, 2016 to be $590 million in 2017, $515 million in 2018, $374 million in 2019, $248 million in 2020 and $344 million thereafter.

Deferred amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements were $160 million and $184 million at December 31, 2016 and 2015, respectively. Amortization of deferred amounts paid to clients in excess of the fair value of acquired assets is recorded as an offset of revenue and was estimated at December 31, 2016 to be $53 million in 2017, $46 million in 2018, $28 million in 2019, $20 million in 2020 and $13 million thereafter. In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services.

Software Costs

Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up to three years and are recorded in software cost within cost of sales. The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to software cost within cost of sales as incurred.

The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software programs, including software coding, installation, testing and certain data conversions. These capitalized costs are amortized on a straight-line basis over periods ranging up to three years and are recorded in selling, general and administrative expense.

Product Warranties

The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. The company estimates its warranty costs standard to the deliverable based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period. Changes in deferred income for extended warranty contracts, and in the warranty liability for standard

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Statement of Financial Position, are presented in the following tables:

Standard Warranty Liability

($ in millions)

2016 2015 Balance at January 1 $ 181 $ 197 Current period accruals 145 173 Accrual adjustments to reflect experience (6) 7 Charges incurred (164) (196) Balance at December 31 $ 156 $ 181

Extended Warranty Liability (Deferred Income)

($ in millions)

2016 2015 Balance at January 1 $ 538 $ 536 Revenue deferred for new extended warranty contracts 263 286 Amortization of deferred revenue (267) (253) Other* (4) (31) Balance at December 31 $ 531 $ 538 Current portion $ 264 $ 238 Noncurrent portion $ 267 $ 300

* Other consists primarily of foreign currency translation adjustments.

Shipping and Handling

Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Statement of Earnings.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Expense and Other Income

Selling, General and Administrative

Selling, general and administrative (SG&A) expense is charged to income as incurred. Expenses of promoting and selling products and services are classified as selling expense and include such items as compensation, advertising, sales commissions and travel. General and administrative expense includes such items as compensation, legal costs, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative expense includes other operating items such as an allowance for credit losses, workforce rebalancing charges for contractually obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations, amortization of certain intangible assets and environmental remediation costs.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Advertising and Promotional Expense

The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from vendors are recorded net of advertising and promotional expense in the period in which the related advertising and promotional expense is incurred. Advertising and promotional expense, which includes media, agency and promotional expense, was $1,327 million, $1,290 million and $1,307 million in 2016, 2015 and 2014, respectively, and is recorded in SG&A expense in the Consolidated Statement of Earnings.

Research, Development and Engineering

Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset.

Intellectual Property and Custom Development Income

The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how. Certain IP transactions to third parties are licensing/royalty-based and others are transaction-based sales/ other transfers. Income from licensing arrangements is recognized at the inception of the perpetual license term if all revenue recognition criteria have been met. Income from royalty-based fee arrangements is recognized over time or as the licensee sells future related products (i.e., variable royalty, based upon licensee’s revenue). The company also enters into cross-licensing arrangements of patents, and income from these arrangements is recognized when earned. In addition, the company earns income from certain custom development projects for strategic technology partners and specific clients. The company records the income from these projects if the fee is not refundable, is not dependent upon the success of the project and when all revenue recognition have been met.

Other (Income) and Expense

Other (income) and expense includes interest income (other than from Global Financing external transactions), gains and losses on certain derivative instruments, gains and losses from securities and other investments, gains and losses from certain real estate transactions, foreign currency transaction gains and losses, gains and losses from the sale of businesses, other than reported as discontinued operations, and amounts related to accretion of asset retirement obligations.

Business Combinations and Intangible Assets Including Goodwill

The company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of completed technology is recorded in Cost, and amortization of all other intangible assets is recorded in SG&A expense. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.

Impairment

Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values. Goodwill and indefinite-

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document lived intangible assets are tested at least annually, in the fourth quarter, for impairment and whenever changes in circumstances indicate an impairment may exist. Goodwill is tested at the reporting unit level which is the operating segment, or a business, which is one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the segment level. Components are aggregated as a single reporting unit if they have similar economic characteristics.

Depreciation and Amortization

Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 20 years; and computer equipment, 1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years.

Capitalized software costs incurred or acquired after technological feasibility has been established are amortized over periods ranging up to 3 years. Capitalized costs for internal-use software are amortized on a straight-line basis over periods ranging up to 3 years. Other intangible assets are amortized over periods between 1 and 7 years.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Environmental

The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the company accrues remediation costs for known environmental liabilities. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts are recorded for environmental liabilities that are not probable or estimable.

Asset Retirement Obligations

Asset retirement obligations (ARO) are legal obligations associated with the retirement of long-lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets.

Defined Benefit Pension and Nonpension Postretirement Benefit Plans

The funded status of the company’s defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. For the nonpension postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held in an irrevocable trust fund, held for the sole benefit of participants, which are invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess.

The current portion of the retirement and nonpension postretirement benefit obligations represents the actuarial present value of benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is recorded in compensation and benefits in the Consolidated Statement of Financial Position.

Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses previously recognized as a component of OCI and amortization of the net transition asset remaining in accumulated other comprehensive income/(loss) (AOCI). Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Certain events, such as changes in the employee base, plan amendments and changes in actuarial assumptions, result in a change in the benefit obligation and the corresponding change in OCI. The result of these events is amortized as a component of net periodic cost/(income) over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets. Net periodic cost/(income) is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions.

(Gains)/losses and prior service costs/(credits) not recognized as a component of net periodic cost/(income) in the Consolidated Statement of Earnings as they arise are recognized as a component of OCI in the Consolidated Statement of Comprehensive Income. Those (gains)/losses and prior service costs/(credits) are subsequently recognized as a component of net periodic cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service costs/(credits) represent the cost of benefit changes attributable to prior service granted in plan amendments.

The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the company’s management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.

Defined Contribution Plans

The company’s contribution for defined contribution plans is recorded when the employee renders service to the company. The charge is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions.

Stock-Based Compensation

Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. The company grants its employees Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs) and Performance Share Units (PSUs) and periodically grants stock options. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five- year period. The fair value of the awards is determined and fixed on the grant date based on the company’s stock price, adjusted for the exclusion of dividend equivalents. The company estimates the fair value of stock options using a Black-Scholes

95

Notes to Consolidated Financial Statements

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document International Business Machines Corporation and Subsidiary Companies valuation model. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions.

The company records deferred tax assets for awards that result in deductions on the company’s income tax returns, based on the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statement of Earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).

Income Taxes

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When the company changes its determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made.

The company recognizes tax liabilities when, despite the company’s belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in taxes and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Statement of Financial Position. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense.

Translation of Non-U.S. Currency Amounts

Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to United States (U.S.) dollars at year- end exchange rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange prevailing during the year.

Inventories, property, plant and equipment—net and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other (income) and expense. Income and expense items are translated at the weighted-average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in which exchange rates change.

Derivative Financial Instruments

Derivatives are recognized in the Consolidated Statement of Financial Position at fair value and are reported in prepaid expenses and other current assets, investments and sundry assets, other accrued expenses and liabilities or other liabilities. Classification of each derivative as current or noncurrent is based upon whether the maturity of the instrument is less than or greater than 12 months. To

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document qualify for hedge accounting, the company requires that the instruments be effective in reducing the risk exposure that they are designated to hedge. For instruments that hedge cash flows, hedge designation criteria also require that it be probable that the underlying transaction will occur. Instruments that meet established accounting criteria are formally designated as hedges. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception. The company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated hedge period.

Where the company applies hedge accounting, the company designates each derivative as a hedge of: (1) the fair value of a recognized financial asset or liability, or of an unrecognized firm commitment (fair value hedge attributable to interest rate or foreign currency risk); (2) the variability of anticipated cash flows of a forecasted transaction, or the cash flows to be received or paid related to a recognized financial asset or liability (cash flow hedge attributable to interest rate or foreign currency risk); or (3) a hedge of a long- term investment (net investment hedge) in a foreign operation. In addition, the company may enter into derivative contracts that economically hedge certain of its risks, even though hedge accounting does not apply or the company elects not to apply hedge accounting. In these cases, there exists a natural hedging relationship in which changes in the fair value of the derivative, which are recognized currently in net income, act as an economic offset to changes in the fair value of the underlying hedged item(s).

Changes in the fair value of a derivative that is designated as a fair value hedge, along with offsetting changes in the fair value of the underlying hedged exposure, are recorded in earnings each period. For hedges of interest rate risk, the fair value adjustments are recorded as adjustments to interest expense and cost of financing in the Consolidated Statement of Earnings. For hedges of currency risk associated with recorded financial assets or liabilities, derivative fair value adjustments are recognized in other (income) and expense in the Consolidated Statement of Earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded, net of applicable taxes, in OCI, in the Consolidated Statement of Comprehensive Income. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in AOCI is released to net income and reported in interest expense, cost, SG&A expense or other (income) and expense in the

96

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Consolidated Statement of Earnings based on the nature of the underlying cash flow hedged. Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. The effective portion of changes in the fair value of net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded as foreign currency translation adjustments in AOCI. Changes in the fair value of the portion of a net investment hedging derivative excluded from the effectiveness assessment are recorded in interest expense. If the underlying hedged item in a fair value hedge ceases to exist, all changes in the fair value of the derivative are included in net income each period until the instrument matures. When the derivative transaction ceases to exist, a hedged asset or liability is no longer adjusted for changes in its fair value except as required under other relevant accounting standards.

Derivatives that are not designated as hedges, as well as changes in the fair value of derivatives that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (collectively, “ineffectiveness”), are recorded in earnings for each period and are primarily reported in other (income) and expense. When a cash flow hedging relationship is discontinued, the net gain or loss in AOCI must generally remain in AOCI until the item that was hedged affects earnings. However, when it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period thereafter, the net gain or loss in AOCI must be reclassified into earnings immediately.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company reports cash flows arising from derivative financial instruments designated as fair value or cash flow hedges consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as fair value or cash flow hedges are classified in cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and derivatives that do not qualify as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. For currency swaps designated as hedges of foreign currency denominated debt (included in the company’s debt risk management program as addressed in note D, “Financial Instruments,” on pages 110 through 114), cash flows directly associated with the settlement of the principal element of these swaps are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement of Cash Flows.

Financial Instruments

In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. See note D, “Financial Instruments,” on pages 109 to 110 for further information. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

Fair Value Measurement

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

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

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

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

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

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

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

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

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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document · Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

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

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

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

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

Cash Equivalents

All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.

Marketable Securities

Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt securities that are not expected to be realized in cash within one year and alliance equity securities are included in investments and sundry assets. Debt and marketable equity securities are considered available for sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in OCI. The realized gains and losses for available-for-sale securities are included in other (income) and expense in the Consolidated Statement of Earnings. Realized gains and losses are calculated based on the specific identification method.

In determining whether an other-than-temporary decline in market value has occurred, the company considers the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and near-term prospects of the issuer or underlying collateral of a security; and the company’s intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity and debt securities that the company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other (income) and expense in the period in which the loss occurs. For debt securities that the company has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in other (income) and expense, while the remaining loss is recognized in OCI. The credit loss component recognized in other (income) and expense is identified as the amount of the principal cash flows not expected to be received over the remaining term of the debt security as projected using the company’s cash flow projections.

Inventories

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash provided by operating activities in the Consolidated Statement of Cash Flows.

Allowance for Credit Losses

Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. A reasonable estimate of probable net losses on the value of customer receivables is recognized by establishing an allowance for credit losses.

Notes and Accounts Receivable—Trade

An allowance for uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.

Financing Receivables

Financing receivables include sales-type leases, direct financing leases and loans. Leases are accounted for in accordance with lease accounting standards. Loan receivables are financial assets recorded at amortized cost which approximates fair value. The company determines its allowances for credit losses on financing receivables based on two portfolio segments: lease receivables and loan receivables. The company further segments the portfolio into two classes: major markets and growth markets.

When calculating the allowances, the company considers its ability to mitigate a potential loss by repossessing leased equipment and by considering the current fair market value of any other collateral. The value of the equipment is the net realizable value. The allowance for credit losses for capital leases, installment sales and customer loans includes an assessment of the entire balance of the capital lease or loan, including amounts not yet due. The methodologies that the company uses to calculate its receivables reserves, which are applied consistently to its different portfolios, are as follows:

Individually Evaluated—The company reviews all financing receivables considered at risk on a quarterly basis. The review primarily consists of an analysis based upon current information available about the client, such as financial statements, news reports, published credit ratings, current market-implied credit analysis, as well as the current economic environment, collateral net of repossession cost and prior collection history. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when foreclosure is probable. Using this information, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Collectively Evaluated—The company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Factors that could result in actual receivable losses that are materially different from the estimated reserve include sharp changes in the economy, or a significant change in the economic health of a particular client that represents a concentration in the company’s receivables portfolio.

Other Credit-Related Policies

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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Non-Accrual—Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables (impaired loans or nonperforming leases) with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables may be removed from non-accrual status, if appropriate, based upon changes in client circumstances.

Impaired Loans—As stated above, the company evaluates all financing receivables considered at-risk, including loans, for impairment on a quarterly basis. The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status as appropriate. Client loans are primarily for software and services and are unsecured. These loans are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation.

Write Off—Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that the customer is no longer in operation and/or, there is no reasonable expectation of additional collections or repossession. The company’s assessments factor in the history of collections and write-offs in specific countries and across the portfolio.

Estimated Residual Values of Lease Assets

The recorded residual values of lease assets are estimated at the inception of the lease to be the expected fair value of the assets at the end of the lease term. The company periodically reassesses the realizable value of its lease residual values. Any anticipated increases in specific future residual values are not recognized before realization through remarketing efforts. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct-financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to financing income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing income.

Common Stock

Common stock refers to the $.20 par value per share capital stock as designated in the company’s Certificate of Incorporation. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted- average basis.

Earnings Per Share of Common Stock

Earnings per share (EPS) is computed using the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings. Basic EPS of common stock is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock awards, convertible notes and stock options.

NOTE B. ACCOUNTING CHANGES

New Standards to be Implemented

In January 2017, the Financial Accounting Standards Board (FASB) issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance is effective January 1, 2018 and early adoption is permitted. The guidance will be applied prospectively to any transactions

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document occurring within the period of adoption. The company adopted the guidance effective January 1, 2017 and does not expect a material impact in the consolidated financial statements.

In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments in sundry assets and prepaid and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $102 million. In January 2017, the company had a transaction generating approximately $400 million to $500 million benefit to income tax expense, income from continuing operations and net income for the three months ended March 31, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.

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In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance.

In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective January 1, 2017 and upon transition did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share- based awards compared to grant date, however these impacts are not expected to be material. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. Prior to adoption, the company reported this activity as an operating cash outflow. For the years ended December 31, 2016 and 2015, respectively, the amounts for this activity that were recorded as operating cash outflows were $126 million and $248 million. This provision of the guidance requires retrospective application upon adoption on January 1, 2017.

In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right- of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company will adopt the guidance as of the effective date of January 1, 2019. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The company’s operating lease commitments were $6.9 billion at December 31, 2016. In 2016, the use of third-party residual value guarantee insurance resulted in the company recognizing $220 million of sales-type lease revenue that would otherwise have been recognized over the lease period as operating lease revenue.

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1,

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method.

Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has since made significant progress, including identification of changes to policy, processes, systems and controls.

The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements.

Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements in the year of adoption. There will be no impact to cash flows.

The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change.

Standards Implemented

In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The guidance was a change in financial presentation only.

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In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. The guidance did not have a material impact in the consolidated financial results.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance was effective January 1, 2016. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results.

In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted it on a prospective basis. The guidance did not have a material impact in the consolidated financial results.

In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company had debt issuance costs of $82 million and $74 million at December 31, 2016 and 2015, respectively. Debt issuance costs were previously included in investments and sundry assets in the Consolidated Statement of Financial Position.

NOTE C. ACQUISITIONS/DIVESTITURES

Acquisitions

Purchase price consideration for all acquisitions, as reflected in the tables in this note, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

2016

In 2016, the company completed fifteen acquisitions at an aggregate cost of $5,899 million.

The Weather Company (TWC)—On January 29, 2016, the company completed the acquisition of TWC’s B2B, mobile and cloud- based Web-properties, weather.com, Weather Underground, The Weather Company brand and WSI, its global business-to-business brand, for cash consideration of $2,278 million. The cable television segment was not acquired by IBM, but is licensing weather forecast data and analytics from IBM under a long-term contract. TWC was a privately held business. Goodwill of $1,717 million has been assigned to the Cognitive Solutions segment. It is expected that none of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years.

Truven Health Analytics, Inc. (Truven)—On April 8, 2016, the company completed the acquisition of 100 percent of Truven, a leading provider of healthcare analytics solutions, for cash consideration of $2,612 million, of which $200 million will be paid in July 2017. Truven has developed proprietary analytic methods and assembled analytic content assets, creating extensive national healthcare utilization, performance, quality and cost data. Truven was a privately held business. Goodwill of $1,933 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 15 percent of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years.

Other Acquisitions—The Technology Services & Cloud Platforms segment completed acquisitions of four businesses: in the first quarter: Ustream, Inc. (Ustream), a privately held business, and AT&T’s application and hosting services business; in the third quarter, G4S’s cash solutions business; and in the fourth quarter, Sanovi Technologies Private Limited (Sanovi), a privately held business. Global Business Services (GBS) completed acquisitions of six privately held businesses: in the first quarter, Resource/Ammirati, ecx International AG (ecx.io) and Optevia Limited (Optevia); in the second quarter, Aperto AG (Aperto) and Bluewolf Group, LLC (Bluewolf); and in the fourth quarter, Fluid, Inc.’s Expert Personal Shopper (XPS) business. The Cognitive Solutions segment

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document completed acquisitions of three privately held businesses: in the second quarter, Resilient Systems, Inc. (Resilient) and EZ Legacy, Ltd. (EZSource); and in the fourth quarter, Promontory Financial Group, LLC (Promontory).

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Each acquisition is expected to enhance the company’s portfolio of product and services capabilities. Ustream provides cloud-based video streaming to enterprises and broadcasters. The acquisition of AT&T’s application and hosting services business strengthens the company’s cloud portfolio. The acquisition of G4S’s cash solutions business brings together the engineering skills of G4S with the company’s analytics and remote technology capabilities to expand delivery solutions. Sanovi provides hybrid cloud recovery, cloud migration and business continuity software for enterprise data centers and cloud infrastructure. Resource/Ammirati is a leading U.S. based digital marketing and creative agency, addressing the rising demand from businesses seeking to reinvent themselves for the digital economy. Ecx.io enhances GBS’ IBM Interactive Experience (IBM iX) with new digital marketing, commerce and platform skills to accelerate clients’ digital transformations. Optevia is a Software-as-a Service systems integrator specializing in CRM solutions for public sector organizations. Aperto also joined IBM iX, supporting the company’s growth in Europe, with expertise in digital strategy projects, including website and application development. Bluewolf extends the company’s analytics, experience design and industry consulting leadership with one of the world’s leading Salesforce consulting practices to deliver differentiated, consumer-grade experiences via the cloud. Fluid, Inc.’s Expert Personal Shopper business extends the company’s portfolio of SaaS offerings and services, helping clients conduct commerce and engage with their customers. Resilient, a provider of incident response solutions, automates and orchestrates the many processes needed when dealing with cyber incidents from breaches to lost devices. EZSource helps developers quickly and easily understand and change mainframe code based on data displayed through dashboards and other visualizations. Promontory, a global market-leading risk management and regulatory compliance consulting firm, helps address clients’ escalating regulations and risk management requirements.

All of these Other Acquisitions were for 100 percent of the acquired businesses.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2016.

2016 Acquisitions

($ in millions)

Amortization The Truven Life Weather Health Other (in Years) Company Analytics Acquisitions Current assets $ 76 $ 171 $ 153 Fixed assets/noncurrent assets 123 127 110 Intangible assets Goodwill N/A 1,717 1,933 593 Completed technology 1–7 160 338 96 Client relationships 3–7 313 516 226 Patents/trademarks 1–7 349 54 42 Total assets acquired 2,738 3,141 1,220 Current liabilities (88) (148) (96) Noncurrent liabilities (372) (381) (76)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total liabilities assumed (460) (529) (171) Bargain purchase gain — — (40)* Total purchase price $ 2,278 $ 2,612 $ 1,009

N/A—Not applicable. * Bargain purchase gain relating to AT&T’s application and hosting services business was recognized in selling, general and administrative expense in the Consolidated Statement of Earnings in the three months ended March 31, 2016.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired businesses and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset.

For the Other Acquisitions, the overall weighted-average life of the identified amortizable intangible assets acquired is 6.3 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $119 million has been assigned to the Technology Services & Cloud Platforms segment, goodwill of $303 million has been assigned to the GBS segment and goodwill of $171 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 55 percent of the goodwill will be deductible for tax purposes.

On February 3, 2017, the company announced that it had acquired Agile 3 Solutions, LLC (Agile 3 Solutions), a privately held business based in San Francisco, California. Agile 3 Solutions is a developer of software used by the C-Suite and senior executives to better visualize, understand and manage risks associated with the protection of sensitive data. The business will be integrated within the Technology Services & Cloud Platforms segment. At the date of issuance of the financial statements, the initial purchase accounting was not complete for this acquisition.

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2015

In 2015, the company completed fourteen acquisitions at an aggregate cost of $3,555 million.

Merge Healthcare, Inc. (Merge)—On October 13, 2015, the company completed the acquisition of 100 percent of Merge, a publicly held business and a leading provider of medical image handling and processing, interoperability and clinical systems designed to advance healthcare quality and efficiency, for cash consideration of $1,036 million. Merge joined the company’s Watson Health business unit, bolstering clients’ ability to analyze and cross-reference medical images against billions of data points already in the Watson Health Cloud. Goodwill of $695 million was assigned to the Cognitive Solutions ($502 million) and Technology Services & Cloud Platforms ($193 million) segments. It was expected that none of the goodwill would be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired was 7.0 years.

Cleversafe, Inc. (Cleversafe)—On November 6, 2015, the company completed the acquisition of 100 percent of Cleversafe, a privately held business and a leading developer and manufacturer of object-based storage software and appliances, for cash consideration of $1,309 million. Cleversafe’s integration into the company’s Cloud business gives clients strategic data flexibility, simplified management and consistency with on-premise, cloud and hybrid cloud deployment options. Goodwill of $1,000 million was assigned to the Technology Services & Cloud Platforms ($590 million) and Systems ($410 million) segments. It was expected that none of the goodwill would be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired was 6.9 years.

Other Acquisitions—The Cognitive Solutions segment completed acquisitions of six privately held businesses: in the first quarter, AlchemyAI, Inc. (AlchemyAI) and Blekko, Inc. (Blekko); in the second quarter, Explorys, Inc. (Explorys) and Phytel, Inc. (Phytel); in

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document the third quarter, Compose, Inc. (Compose); and in the fourth quarter, IRIS Analytics GmbH (IRIS Analytics). The Technology Services & Cloud Platforms segment completed acquisitions of four privately held businesses: in the second quarter, Blue Box Group, Inc. (Blue Box); in the third quarter, StrongLoop, Inc. (StrongLoop); and in the fourth quarter, Gravitant, Inc. (Gravitant) and Clearleap, Inc. (Clearleap). GBS completed acquisitions of two privately held businesses in the fourth quarter, Advanced Application Corporation (AAC) and Meteorix, LLC. (Meteorix).

AlchemyAI provides scalable cognitive computing application program interface services and computing applications. Blekko technology provides advanced Web-crawling, categorization and intelligent filtering. Explorys provides secure cloud-based solutions for clinical integration, at-risk population management, cost of care measurement and pay-for-performance. Phytel’s SaaS-based population health management offerings help providers identify patients at risk for care gaps and engage the patient to begin appropriate preventative care. Blue Box provides hosted, managed, OpenStack-based production-grade private clouds for the enterprise and service provider markets. Compose offers auto-scaling, production-ready databases to help software development teams deploy data services efficiently. StrongLoop provides application development software that enables software developers to build applications using application programming interfaces. AAC engages in system integration application development, software support and services. AAC was an affiliate of JBCC Holdings Inc. and IBM Japan Ltd. The company acquired all the shares of AAC which became a wholly owned subsidiary as of October 1, 2015. Gravitant develops cloud-based software to enable organizations to easily plan, buy and manage, or “broker,” software and computing services from multiple suppliers across hybrid clouds. Meteorix offers consulting, deployment, integration and ongoing post-production services for Workday Financial Management and Human Capital Management applications. Clearleap provides cloud-based video services. IRIS Analytics provides technology and consultancy services to the payments industry to detect electronic payment fraud.

All of these Other Acquisitions were for 100 percent of the acquired businesses with the exception of the AAC acquisition.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2015.

2015 Acquisitions

($ in millions)

Amortization Life (in Other Years) Merge Cleversafe Acquisitions Current assets $ 94 $ 23 $ 60 Fixed assets/noncurrent assets 128 63 82 Intangible assets Goodwill N/A 695 1,000 895 Completed technology 5–7 133 364 163 Client relationships 5–7 145 23 95 Patents/trademarks 2–7 54 11 23 Total assets acquired 1,248 1,484 1,318 Current liabilities (73) (15) (34) Noncurrent liabilities (139) (160) (73) Total liabilities assumed (212) (175) (107) Total purchase price $ 1,036 $ 1,309 $ 1,210

N/A—Not applicable

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

For the “Other Acquisitions,” the overall weighted-average life of the identified intangible assets acquired was 6.4 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $518 million was assigned to the Cognitive Solutions segment, $303 million was assigned to the Technology Services & Cloud Platforms segment, and $74 million was assigned to the GBS segment. It was expected that 7 percent of the goodwill would be deductible for tax purposes.

2014

In 2014, the company completed six acquisitions at an aggregate cost of $608 million.

The Cognitive Solutions segment completed acquisitions of four privately held businesses: in the first quarter, Cloudant, Inc. (Cloudant); in the second quarter, Silverpop Systems, Inc. (Silverpop) and Cognea Group Pty LTD (Cognea); and in the third quarter, CrossIdeas s.p.a. (CrossIdeas). Technology Services & Cloud Platforms completed acquisitions of two privately held businesses: in the first quarter, Aspera, Inc. (Aspera); and in the third quarter, Lighthouse Security Group, LLC (Lighthouse).

Aspera’s technology helps make cloud computing faster, more predictable and more cost effective for big data transfers such as enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity. Cloudant extends the company’s mobile and cloud platform by enabling developers to easily and quickly create next-generation mobile and Web-based applications. Silverpop is a provider of cloud-based capabilities that deliver personalized customer engagements in highly scalable environments. Cognea offers personalized artificial intelligence capabilities designed to serve as an intuitive interface between human users and data- driven information. CrossIdeas delivers next generation identity and access governance capabilities to help mitigate access risks and segregation of duty violations. Lighthouse provides cloud-enabled managed identity and access management solutions. All acquisitions were for 100 percent of the acquired businesses.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2014.

2014 Acquisitions

($ in millions)

Amortization Total Life (in Years) Acquisitions Current assets $ 56 Fixed assets/noncurrent assets 39 Intangible assets Goodwill N/A 442 Completed technology 5–7 68 Client relationships 7 77 Patents/trademarks 1–7 18 Total assets acquired 701 Current liabilities (26) Noncurrent liabilities (67) Total liabilities assumed (93)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total purchase price $ 608

N/A—Not applicable

The overall weighted-average life of the identified amortizable intangible assets acquired was 6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $442 million was assigned to the Cognitive Solutions ($311 million) and Technology Services & Cloud Platforms ($131 million) segments. It was expected that approximately 1 percent of the goodwill would be deductible for tax purposes.

Divestitures

Microelectronics—On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would acquire the company’s Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The transaction closed on July 1, 2015.

The transaction includes a 10-year exclusive manufacturing sourcing agreement in which GLOBALFOUNDRIES will provide server processor semiconductor technology for use in IBM Systems. The agreement provides the company with capacity and market-based pricing for current semiconductor nodes in production and progression to nodes in the future for both development and production needs. As part of the transaction, the company will provide GLOBALFOUNDRIES with certain transition services, including IT, supply chain, packaging and test services and lab services. The initial term for these transition services was one to three years, with GLOBALFOUNDRIES having the ability to renew.

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In the third quarter of 2014, the company recorded a pre-tax charge of $4.7 billion related to the sale of the Microelectronics disposal group, which was part of the Systems reportable segment. The pre-tax charge reflected the fair value less the estimated cost of selling the disposal group including an impairment to the semiconductor long-lived assets of $2.4 billion, $1.5 billion representing the cash consideration expected to be transferred to GLOBALFOUNDRIES and $0.8 billion of other related costs. Additional pre-tax charges of $116 million were recorded during 2015 related to the disposal, and pre-tax charges of less than $1 million were recorded during the year ended December 31, 2016. The cumulative pre-tax charge was $4.8 billion as of December 31, 2016. Any additional charges that may be recorded in future periods are expected to be immaterial.

Reporting the related assets and liabilities initially as held for sale at September 30, 2014 was based on meeting all of the criteria for such reporting in the applicable accounting guidance. While the company met certain criteria for held for sale reporting in prior periods, it did not meet all of the criteria until September 30, 2014. In addition, at September 30, 2014, the company concluded that the Microelectronics business met the criteria for discontinued operations reporting. The disposal group constituted a component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging and test services. These cash flows are not direct cash flows as they are not significant and the company has no significant continuing involvement.

All assets and liabilities of the business, classified as held for sale at June 30, 2015, were transferred at closing. The company transferred $515 million of net cash to GLOBALFOUNDRIES in the third quarter of 2015. This amount included $750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIES and other miscellaneous items. A second

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document cash payment in the amount of $500 million was transferred in December 2016. The remaining cash consideration of $250 million is expected to be transferred in December 2017.

Summarized financial information for discontinued operations is shown below.

($ in millions)

For the year ended December 31: 2016 2015 2014 Total revenue $ 0 $ 720 $ 1,335 Loss from discontinued operations, before tax (11) (175) (619) Loss on disposal, before tax 0 (116) (4,726) Total loss from discontinued operations, before income taxes (11) (291) (5,346) Provision/(benefit) for income taxes (2) (117) (1,617) Loss from discontinued operations, net of tax $ (9) $ (174) $ (3,729)

Industry Standard Server—On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the company’s industry standard server portfolio (System x) for an adjusted purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. The company sold to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. As of March 31, 2016, all Lenovo common stock was sold.

IBM and Lenovo entered into a strategic relationship which included a global OEM and reseller agreement for sales of IBM’s industry- leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions. Effective with the initial closing of the transaction, Lenovo assumed related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time. In addition, as part of the transaction agreement, the company is providing Lenovo with certain transition services, including IT and supply chain services. The initial term for these transition services ranged from less than one year to three years. Certain services could be renewed by Lenovo for an additional year.

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The initial closing was completed on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of pre-tax gains of $63 million and $57 million in 2015 and 2016, respectively.

Overall, the company expects to recognize a total pre-tax gain on the sale of approximately $1.6 billion, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain was approximately $1.3 billion, of which the cumulative gain recorded as of December 31, 2016 is $1.2 billion. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement.

Customer Care—On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX would acquire the company’s worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX common stock, which represented less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Concentrix, SYNNEX’s outsourcing business, became an IBM strategic business partner for global customer care business process outsourcing services.

The initial closing was completed on January 31, 2014, with subsequent closings occurring during 2014. For the full year of 2014, the company recorded a pre-tax gain of $202 million related to this transaction.

In the second quarter of 2015, resolution of the final balance sheet adjustments was concluded. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of a pre-tax gain of $7 million in 2015. Through December 31, 2016, the cumulative pre-tax gain attributed to this transaction was $213 million.

Others—In addition to those above, the company completed the following divestitures:

2016—In the first quarter of 2016, the company completed four software product-related divestitures. In the fourth quarter of 2016, the company completed the divestiture of one service-related offering. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $42 million related to these transactions in 2016.

2015—In the first quarter of 2015, the company completed two software product-related divestitures and in the second quarter, the company completed one software product-related divestiture and the divestiture of one Global Business Services’ offering. In the fourth quarter of 2015, the company completed three software product-related divestitures. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $81 million related to these transactions in 2015.

2014—In the second quarter of 2014, the company completed one software product-related divestiture and the divestiture of one Global Business Services’ offering. In the third quarter, the company completed four software product-related divestitures. In the fourth quarter of 2014, the company completed two software product-related divestitures. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $132 million related to these transactions in 2014.

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NOTE D. FINANCIAL INSTRUMENTS

Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2016 and 2015.

($ in millions)

At December 31, 2016: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit $ — $ 3,629 $ — $ 3,629 Money market funds 1,204 — — 1,204 Total 1,204 3,629 — 4,832(6) Debt securities—current (2) — 699 — 699(6)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Debt securities—noncurrent (3) 1 6 — 8 Available-for-sale equity investments (3) 7 — — 7 Derivative assets (4) Interest rate contracts — 555 — 555 Foreign exchange contracts — 560 — 560 Equity contracts — 11 — 11 Total — 1,126 — 1,126(7) Total assets $ 1,212 $ 5,460 $ — $ 6,672(7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 188 $ — $ 188 Equity contracts — 10 — 10 Interest rate contracts — 8 — 8 Total liabilities $ — $ 206 $ — $ 206(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2) U.S. government securities reported as marketable securities in the Consolidated Statement of Financial Position (3) Included within investments and sundry assets in the Consolidated Statement of Financial Position (4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2016 were $532 million and $594 million, respectively (5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2016 were $145 million and $61 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $116 million.

107

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

At December 31, 2015: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit $ — $ 2,856 $ — $ 2,856 Money market funds 2,069 — — 2,069 Other securities — 18 — 18 Total 2,069 2,874 — 4,943(6) Debt securities—current (2) — 506 — 506(6) Debt securities—noncurrent (3) 1 6 — 8 Trading security investments (3) 28 — — 28 Available-for-sale equity investments (3) 192 — — 192 Derivative assets (4) Interest rate contracts — 656 — 656 Foreign exchange contracts — 332 — 332 Equity contracts — 6 — 6 Total — 994 — 994(7)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total assets $ 2,290 $ 4,381 $ — $ 6,671(7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 164 $ — $ 164 Equity contracts — 19 — 19 Interest rate contracts — 3 — 3 Total liabilities $ — $ 186 $ — $ 186(7)

(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2) Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position (3) Included within investments and sundry assets in the Consolidated Statement of Financial Position (4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2015 were $292 million and $702 million, respectively (5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2015 were $164 million and $22 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $139 million each.

There were no transfers between Levels 1 and 2 for the years ended December 31, 2016 and 2015.

108

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

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

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At December 31, 2016 and 2015, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt is $34,655 million and $33,428 million and the estimated fair value is $36,838 million and $35,220 million at December 31, 2016 and 2015, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Debt and Marketable Equity Securities

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

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

($ in millions)

Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2016: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 3 $ 5 $ 0 $ 7

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

($ in millions)

Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2015: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 186 $ 6 $ 0 $ 192

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

During the fourth quarter of 2014, the company acquired equity securities in conjunction with the sale of the System x business which were classified as available-for-sale securities. Based on an evaluation of available evidence as of December 31, 2015, the company recorded an other-than-temporary impairment loss of $86 million resulting in an adjusted cost basis of $185 million as of December 31, 2015. In the first quarter of 2016, the company recorded a gross realized loss of $37 million (before taxes) related to the sale of all the outstanding shares. The loss on this sale was recorded in other (income) and expense in the Consolidated Statement of Earnings.

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

($ in millions)

For the year ended December 31: 2016 2015 2014 Proceeds $ 151 $ 8 $ 21 Gross realized gains (before taxes) 3 1 0 Gross realized losses (before taxes) 37 1 5

109

Notes to Consolidated Financial Statements

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document International Business Machines Corporation and Subsidiary Companies

The after-tax net unrealized gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) and the after-tax net (gains)/ losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:

($ in millions)

For the year ended December 31: 2016 2015 Net unrealized gains/(losses) arising during the period $ (23) $ (33) Net unrealized (gains)/losses reclassified to net income* 21 53

* Includes pre-tax writedowns of $86 million in 2015. There were no writedowns in 2016.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at December 31, 2016.

Derivative Financial Instruments

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

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

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at December 31, 2016 and 2015 was $11 million and $28 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions as of December 31, 2016 and 2015 was $1,126 million and $994 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $116 million and $139 million at December 31, 2016 and 2015, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at December 31, 2016 and 2015, this exposure was reduced by $141 million and $90 million of cash collateral and $35 million and $40 million of non-cash collateral in U.S. Treasury securities, respectively, received by the company. At December 31, 2016 and 2015, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $834 million and $726 million, respectively. At

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document December 31, 2016 and 2015, the net exposure related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $90 million and $47 million, respectively.

In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at December 31, 2016 and 2015 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $141 million and $90 million at December 31, 2016 and 2015, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. No amount was rehypothecated at December 31, 2016 and 2015.

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

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

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

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At December 31, 2016 and 2015, the total notional amount of the company’s interest rate swaps was $7.3 billion at both periods. The weighted-average remaining maturity of these instruments at December 31, 2016 and 2015 was approximately 6.2 years and 7.2 years, respectively.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward-starting interest rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at December 31, 2016 and 2015.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document At December 31, 2016 and 2015, net gains of less than $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, less than $1 million of gains, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At December 31, 2016 and 2015, the total notional amount of derivative instruments designated as net investment hedges was $6.7 billion and $5.5 billion, respectively. The weighted-average remaining maturity of these instruments at December 31, 2016 and 2015 was approximately 0.2 years at both periods.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At December 31, 2016 and 2015, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.3 billion and $8.2 billion, respectively, with a weighted-average remaining maturity of 0.7 years at both periods.

At December 31, 2016 and 2015, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $462 million and net gains of $147 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $397 million of gains and $121 million of gains, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately nine years. At December 31, 2016, the total notional amount of cross currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.4 billion. At December 31, 2015, no amounts were outstanding under this program.

At December 31, 2016 and 2015, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gains of $29 million and net losses of $2 million (before taxes), respectively, in accumulated other comprehensive income/ (loss). Within these amounts, $27 million of gains and less than $1 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency

Asset/Liability Management

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At December 31, 2016 and 2015, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $12.7 billion and $11.7 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures,

111

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At December 31, 2016 and 2015, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion at both periods.

Other Risks

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at December 31, 2016 and 2015.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at December 31, 2016 and 2015.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At December 31, 2016, the company did not have any derivative instruments relating to this program outstanding. At December 31, 2015, the total notional amount of derivative instruments in economic hedges of investment securities was less than $0.1 billion.

The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity as of December 31, 2016 and 2015, as well as for the years ended December 31, 2016, 2015 and 2014, respectively.

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions)

Fair Value of Derivative Assets Fair Value of Derivative Liabilities Balance Sheet Balance Sheet At December 31: Classification 2016 2015 Classification 2016 2015 Designated as hedging instruments Prepaid expenses and Other accrued expenses Interest rate contracts other current assets $ — $ — and liabilities $ — $ — Investments and sundry assets 555 656 Other liabilities 8 3 Foreign exchange Prepaid expenses and Other accrued expenses contracts other current assets 421 197 and liabilities 46 70 Investments and sundry assets 17 5 Other liabilities 35 19 Fair value of derivative Fair value of derivative assets $ 993 $ 858 liabilities $ 89 $ 92 Not designated as hedging instruments Foreign exchange Prepaid expenses and Other accrued expenses contracts other current assets $ 100 $ 90 and liabilities $ 89 $ 75 Investments and sundry assets 22 40 Other liabilities 18 — Prepaid expenses and Other accrued expenses Equity contracts other current assets 11 6 and liabilities 10 19 Investments and sundry assets — — Other liabilities — — Fair value of derivative Fair value of derivative assets $ 133 $ 136 liabilities $ 117 $ 94 Total debt designated as hedging instruments Short-term debt N/A N/A $ 1,125 $ — Long-term debt N/A N/A $ 7,844 $ 7,945 Total $ 1,126 $ 994 $ 9,175 $ 8,131

N/A—Not applicable

112

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gain/(Loss) Recognized in Earnings Consolidated Statement of Attributable to Risk Earnings Line Recognized on Derivatives Being Hedged (2) For the year ended December 31: Item 2016 2015 2014 2016 2015 2014 Derivative instruments in fair value hedges (1) (5) Interest rate contracts Cost of financing $ 28 $ 108 $ 231 $ 58 $ (1) $ (127) Interest expense 31 94 206 63 (1) (114) Derivative instruments not designated as hedging instruments Foreign exchange contracts Other (income) and expense (189) 127 (776) N/A N/A N/A Interest rate contracts Other (income) and expense 0 (1) 34 N/A N/A N/A Equity contracts SG&A expense 112 (27) 51 N/A N/A N/A Other (income) and expense (1) (9) (9) N/A N/A N/A Total $ (18) $ 291 $ (263) $ 121 $ (1) $ (241)

($ in millions)

Gain/(Loss) Recognized in Earnings and Other Comprehensive Income Consolidated Ineffectiveness and Effective Portion Statement of Effective Portion Amounts Excluded from For the year ended Recognized in OCI Earnings Line Reclassified from AOCI Effectiveness Testing (3) December 31: 2016 2015 2014 Item 2016 2015 2014 2016 2015 2014 Derivative instruments in cash flow hedges Interest rate contracts $ — $ — $ — Interest expense $ (24) $ 0 $ (1) $ — $ — $ — Foreign exchange Other (income) contracts 243 618 958 and expense (68) 731 98 (3) 5 (1) Cost (13) 192 (15) — — — SG&A expense 4 149 15 — — — Instruments in net investment hedges (4) Foreign exchange contracts 311 889 1,136 Interest expense — — — 77 13 0 Total $ 555 $ 1,507 $ 2,095 $ (102) $ 1,072 $ 97 $ 74 $ 18 $ (1)

(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. (2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de- designated hedging relationships during the period. (3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships. (4) Instruments in net investment hedges include derivative and non-derivative instruments. (5) For the years ended December 31, 2016, 2015 and 2014, fair value hedges resulted in a loss of $4 million, a loss of $2 million and a gain of $4 million in ineffectiveness, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document N/A—Not applicable

113

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

For the 12 months ending December 31, 2016, 2015 and 2014, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

NOTE E. INVENTORIES

($ in millions)

At December 31: 2016 2015 Finished goods $ 358 $ 352 Work in process and raw materials 1,195 1,199 Total $ 1,553 $ 1,551

NOTE F. FINANCING RECEIVABLES

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

($ in millions)

At December 31: 2016 2015 Current Net investment in sales-type and direct financing leases $ 2,909 $ 3,057 Commercial financing receivables 9,706 8,948 Client loan and installment payment receivables (loans) 6,390 7,015 Total $ 19,006 $ 19,020 Noncurrent Net investment in sales-type and direct financing leases $ 3,950 $ 4,501 Client loan and installment payment receivables (loans) 5,071 5,512 Total $ 9,021 $ 10,013

Net investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $585 million and $645 million at December 31, 2016 and 2015, respectively, and is reflected net of unearned income of $513 million and $536 million, and net of the allowance for credit losses of $133 million and $213 million at those dates, respectively. Scheduled maturities of minimum lease payments outstanding at December 31, 2016, expressed as a percentage of the total, are approximately: 2017, 46 percent; 2018, 29 percent; 2019, 16 percent; 2020, 6 percent; and 2021 and beyond, 2 percent.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Commercial financing receivables, net of allowance for credit losses of $28 million and $19 million at December 31, 2016 and 2015, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan and installment payment receivables (loans), net of allowance for credit losses of $276 million and $377 million at December 31, 2016 and 2015, respectively, are loans that are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years.

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

The allowance for credit losses at December 31, 2016 reflects a write-off in the fourth quarter of $188 million of previously reserved customer accounts as a result of recent experience and history across the portfolio, particularly in China. Of this total, $41 million was in major markets and $147 million in growth markets and $73 million and $115 million was in lease receivables and loan receivables, respectively.

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $689 million and $545 million at December 31, 2016 and 2015, respectively. These borrowings are included in note J, “Borrowings,” on pages 120 to 122.

The company did not have any financing receivables held for sale as of December 31, 2016 and 2015.

Financing Receivables by Portfolio Segment

The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial financing receivables and other miscellaneous current financing receivables at December 31, 2016 and 2015. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets.

114

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

Major Growth At December 31, 2016: Markets Markets Total Financing receivables Lease receivables $ 5,013 $ 1,323 $ 6,336 Loan receivables 9,148 2,589 11,737 Ending balance $ 14,161 $ 3,912 $ 18,073 Collectively evaluated for impairment $ 14,119 $ 3,646 $ 17,765 Individually evaluated for impairment $ 43 $ 266 $ 309 Allowance for credit losses Beginning balance at January 1, 2016 Lease receivables $ 25 $ 188 $ 213 Loan receivables 83 293 377

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total $ 109 $ 481 $ 590 Write-offs (59) (176) (235) Provision 7 51 58 Other 0 (3) (3) Ending balance at December 31, 2016 $ 57 $ 353 $ 410 Lease receivables $ 6 $ 127 $ 133 Loan receivables $ 51 $ 225 $ 276 Collectively evaluated for impairment $ 30 $ 98 $ 128 Individually evaluated for impairment $ 27 $ 255 $ 281

($ in millions)

Major Growth At December 31, 2015: Markets Markets Total Financing receivables Lease receivables $ 5,517 $ 1,524 $ 7,041 Loan receivables 9,739 3,165 12,904 Ending balance $ 15,256 $ 4,689 $ 19,945 Collectively evaluated for impairment $ 15,180 $ 4,227 $ 19,406 Individually evaluated for impairment $ 76 $ 462 $ 539 Allowance for credit losses Beginning balance at January 1, 2015 Lease receivables $ 32 $ 133 $ 165 Loan receivables 79 317 396 Total $ 111 $ 450 $ 561 Write-offs (14) (48) (62) Provision 20 122 141 Other (8) (43) (51) Ending balance at December 31, 2015 $ 109 $ 481 $ 590 Lease receivables $ 25 $ 188 $ 213 Loan receivables $ 83 $ 293 $ 377 Collectively evaluated for impairment $ 43 $ 36 $ 79 Individually evaluated for impairment $ 65 $ 445 $ 511

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

115

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Financing Receivables on Non-Accrual Status

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The following table presents the recorded investment in financing receivables which were on non-accrual status at December 31, 2016 and 2015.

($ in millions)

At December 31: 2016 2015 Major markets $ 2 $ 2 Growth markets 38 63 Total lease receivables $ 40 $ 65 Major markets $ 19 $ 13 Growth markets 127 91 Total loan receivables $ 145 $ 104 Total receivables $ 185 $ 168

Impaired Loans

The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on a non-accrual status. The following tables present impaired client loan receivables at December 31, 2016 and 2015.

($ in millions)

Recorded Related At December 31, 2016: Investment Allowance Major markets $ 31 $ 28 Growth markets 191 185 Total $ 223 $ 213

($ in millions)

Recorded Related At December 31, 2015: Investment Allowance Major markets $ 50 $ 47 Growth markets 297 284 Total $ 347 $ 331

($ in millions)

Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2016: Investment Recognized Basis Major markets $ 55 $ 0 $ — Growth markets 284 0 — Total $ 339 $ 0 $ —

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2015: Investment Recognized Basis Major markets $ 51 $ 0 $ — Growth markets 315 0 — Total $ 367 $ 0 $ —

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit rating.

The tables present the net recorded investment for each class of receivables, by credit quality indicator, at December 31, 2016 and 2015. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non- investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

Lease Receivables

($ in millions)

Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 496 $ 44 A1 – A3 1,162 181 Baa1 – Baa3 1,381 140 Ba1 – Ba2 1,144 246 Ba3 – B1 566 313 B2 – B3 271 163 Caa – D 26 69 Total $ 5,047 $ 1,156

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Loan Receivables

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 904 $ 87 A1 – A3 2,117 355 Baa1 – Baa3 2,515 274 Ba1 – Ba2 2,084 483 Ba3 – B1 1,031 613 B2 – B3 494 320 Caa – D 48 135 Total $ 9,193 $ 2,268

At December 31, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (34 percent), Government (14 percent), Manufacturing (13 percent), Services (12 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).

Lease Receivables

($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 535 $ 34 A1 – A3 1,318 142 Baa1 – Baa3 1,486 343 Ba1 – Ba2 1,208 309 Ba3 – B1 510 243 B2 – B3 401 189 Caa – D 33 76 Total $ 5,492 $ 1,336

* Reclassified to conform to 2016 presentation

Loan Receivables

($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 941 $ 73 A1 – A3 2,318 305 Baa1 – Baa3 2,613 738 Ba1 – Ba2 2,125 664 Ba3 – B1 897 522 B2 – B3 705 406 Caa – D 58 164

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total $ 9,656 $ 2,872

* Reclassified to conform to 2016 presentation

At December 31, 2015, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (36 percent), Manufacturing (14 percent), Government (11 percent), Services (11 percent), Retail (9 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Past Due Financing Receivables

($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and At December 31, 2016: > 90 Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 8 $ 11 $ 4,994 $ 5,013 $ 34 Growth markets 23 78 1,222 1,323 77 Total lease receivables $ 31 $ 89 $ 6,216 $ 6,336 $ 111 Major markets $ 15 $ 5 $ 9,129 $ 9,148 $ 62 Growth markets 16 177 2,396 2,589 80 Total loan receivables $ 31 $ 182 $ 11,524 $ 11,737 $ 141 Total $ 62 $ 271 $ 17,740 $ 18,073 $ 253

(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved. (2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days

($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and At December 31, 2015:* > 90 Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 5 $ 33 $ 5,479 $ 5,517 $ 108 Growth markets 30 140 1,355 1,524 60 Total lease receivables $ 35 $ 173 $ 6,834 $ 7,041 $ 168 Major markets $ 7 $ 35 $ 9,696 $ 9,739 $ 134 Growth markets 31 309 2,825 3,165 86 Total loan receivables $ 38 $ 344 $ 12,521 $ 12,904 $ 220 Total $ 73 $ 517 $ 19,355 $ 19,945 $ 388

(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days * Reclassified to conform to 2016 presentation

Troubled Debt Restructurings

The company assessed all restructurings that occurred on or after January 1, 2015 and determined that there were no significant troubled debt restructurings for the years ended December 31, 2016 and 2015.

NOTE G. PROPERTY, PLANT AND EQUIPMENT

($ in millions)

At December 31: 2016 2015 Land and land improvements $ 506 $ 558 Buildings and building improvements 6,326 6,552 Plant, laboratory and office equipment 22,318 21,116 Plant and other property—gross 29,150 28,226 Less: Accumulated depreciation 18,842 18,051 Plant and other property—net 10,308 10,176 Rental machines 984 1,115 Less: Accumulated depreciation 461 565 Rental machines—net 523 551 Total—net $ 10,830 $ 10,727

In 2016, the company recorded a pre-tax impairment charge related to certain property, plant and equipment of $215 million. The remaining fair value of these assets is not material. There were no material pre-tax impairment charges related to property, plant and equipment in 2015.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

NOTE H. INVESTMENTS AND SUNDRY ASSETS

($ in millions)

At December 31: 2016 2015 Deferred transition and setup costs and other deferred arrangements* $ 1,497 $ 1,624 Derivatives—noncurrent 594 702 Alliance investments Equity method 85 82 Non-equity method 19 393 Prepaid software 230 273 Long-term deposits 267 256 Other receivables 416 516 Employee benefit-related 272 273 Prepaid income taxes 477 496

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Other assets 729 571 Total $ 4,585 $ 5,187

* Deferred transition and setup costs and other deferred arrangements are related to services client arrangements. Refer to note A, “Significant Accounting Policies,” on page 93 for additional information.

NOTE I. INTANGIBLE ASSETS INCLUDING GOODWILL

Intangible Assets

The following table details the company’s intangible asset balances by major asset class.

($ in millions)

Gross Net Carrying Accumulated Carrying At December 31, 2016: Amount Amortization Amount Intangible asset class Capitalized software $ 1,537 $ (661) $ 876 Client relationships 2,831 (1,228) 1,602 Completed technology 3,322 (1,668) 1,654 Patents/trademarks 730 (205) 525 Other* 46 (15) 31 Total $ 8,466 $ (3,778) $ 4,688

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

($ in millions)

Gross Net Carrying Accumulated Carrying At December 31, 2015: Amount Amortization Amount Intangible asset class Capitalized software $ 1,348 $ (581) $ 767 Client relationships 1,856 (927) 929 Completed technology 2,960 (1,397) 1,563 Patents/trademarks 335 (142) 193 Other* 44 (10) 35 Total $ 6,543 $ (3,057) $ 3,487

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

The net carrying amount of intangible assets increased $1,201 million during the year ended December 31, 2016, primarily due to intangible asset additions resulting from acquisitions, partially offset by amortization. There was no impairment of intangible assets recorded in 2016 and 2015. The aggregate intangible amortization expense was $1,544 million and $1,193 million for the years ended December 31, 2016 and 2015, respectively. In addition, in 2016 and 2015, respectively, the company retired $817 million and $1,809 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2016:

($ in millions)

Capitalized Acquired Software Intangibles Total 2017 $ 494 $ 957 $ 1,450 2018 300 809 1,109 2019 83 646 729 2020 — 547 547 2021 — 435 435

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Goodwill

As described in note T, “Segment Information,” the company changed its reportable segments in January 2016. Goodwill was assigned to the new reportable segments on a fair value allocation basis. The changes in the goodwill balances by reportable segment, for the years ended December 31, 2016 and 2015, are as follows:

($ in millions)

Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2016 Additions Adjustments Divestitures Adjustments* 31, 2016 Cognitive Solutions $ 15,621 $ 3,821 $ 5 $ (12) $ 48 $ 19,484 Global Business Services 4,396 303 4 (1) (95) 4,607 Technology Services & Cloud Platforms 10,156 119 (12) (5) (1) 10,258 Systems 1,848 — (4) — 5 1,850 Total $ 32,021 $ 4,244 $ (7) $ (18) $ (42) $ 36,199

* Primarily driven by foreign currency translation

($ in millions)

Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2015 Additions Adjustments Divestitures Adjustments* 31, 2015

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cognitive Solutions $ 15,156 $ 1,020 $ (2) $ (18) $ (535) $ 15,621 Global Business Services 4,555 74 0 (1) (232) 4,396 Technology Services & Cloud Platforms 9,373 1,087 (1) (7) (296) 10,156 Systems 1,472 410 0 — (33) 1,848 Total $ 30,556 $ 2,590 $ (3) $ (26) $ (1,096) $ 32,021

* Primarily driven by foreign currency translation

There were no goodwill impairment losses recorded during the full year of 2016 or 2015 and the company has no accumulated impairment losses.

Purchase price adjustments recorded in 2016 and 2015 were related to acquisitions that were completed on or prior to September 30, 2016 or December 31, 2014, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments of $7 million were recorded during 2016 with the primary drivers being deferred tax assets, accounts receivable, deferred income, inventory and other current liabilities.

NOTE J. BORROWINGS

Short-Term Debt

($ in millions)

At December 31: 2016 2015 Commercial paper $ 899 $ 600 Short-term loans 375 590 Long-term debt—current maturities 6,239 5,271 Total $ 7,513 $ 6,461

The weighted-average interest rate for commercial paper at December 31, 2016 and 2015 was 0.7 percent and 0.4 percent, respectively. The weighted-average interest rates for short-term loans were 9.5 percent and 5.2 percent at December 31, 2016 and 2015, respectively.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Long-Term Debt

Pre-Swap Borrowing

($ in millions)

At December 31: Maturities 2016 2015 U.S. dollar notes and debentures (average interest rate at December 31, 2016): 3.98% 2017 $ 5,104 $ 9,351

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 3.21% 2018–2019 8,856 7,591 1.84% 2020–2021 4,941 3,717 2.35% 2022 1,901 1,900 3.38% 2023 1,500 1,500 3.63% 2024 2,000 2,000 7.00% 2025 600 600 3.45% 2026 1,350 — 6.22% 2027 469 469 6.50% 2028 313 313 5.88% 2032 600 600 8.00% 2038 83 83 5.60% 2039 745 745 4.00% 2042 1,107 1,107 7.00% 2045 27 27 4.70% 2046 650 — 7.13% 2096 316 316 30,563 30,319 Other currencies (average interest rate at December 31, 2016, in parentheses): Euros (1.6%) 2019–2028 7,122 4,892 Pound sterling (2.7%) 2020–2022 1,296 1,555 Japanese yen (0.9%) 2017–2026 1,576 1,180 Swiss francs (6.3%) 2020 7 9 Canadian (2.2%) 2017 373 360 Other (11.0%) 2017–2020 208 506 41,145 38,820 Less: net unamortized discount 839 838 Less: net unamortized debt issuance costs 82 74 Add: fair value adjustment* 669 790 40,893 38,699 Less: current maturities 6,239 5,271 Total $ 34,655 $ 33,428

* The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value plus a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company is in compliance with all of its significant debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Post-Swap Borrowing (Long-Term Debt, Including Current Portion)

($ in millions)

2016 2015 For the year ended December 31: Amount Average Rate Amount Average Rate Fixed-rate debt $ 27,414 3.18% $ 25,499 3.41% Floating-rate debt* 13,480 1.59% 13,199 0.96% Total $ 40,893 $ 38,699

* Includes $7,338 million in 2016 and 2015 of notional interest rate swaps that effectively convert fixed-rate long-term debt into floating-rate debt (See note D, “Financial Instruments,” on pages 110 through 114.)

Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2016, are as follows:

($ in millions)

Total 2017 $ 6,239 2018 4,918 2019 5,196 2020 4,593 2021 3,914 2022 and beyond 16,284 Total $ 41,145

Interest on Debt

($ in millions)

For the year ended December 31: 2016 2015 2014 Cost of financing $ 576 $ 540 $ 542 Interest expense 706 481 484 Net investment derivative activity (77) (13) 0 Interest capitalized 2 0 4 Total interest paid and accrued $ 1,208 $ 1,008 $ 1,030

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Refer to the related discussion on page 152 in note T, “Segment Information,” for total interest expense of the Global Financing segment. See note D, “Financial Instruments,” on pages 110 through 114 for a discussion of the use of currency and interest rate swaps in the company’s debt risk management program.

Lines of Credit

In 2016, the company increased the size of its five-year Credit Agreement (the “Credit Agreement”) to $10.25 billion and extended the term by one year to November 10, 2021. The total expense recorded by the company related to this global credit facility was $5.5 million in 2016, $5.3 million in 2015 and $5.4 million in 2014. The Credit Agreement permits the company and its Subsidiary Borrowers to borrow up to $10.25 billion on a revolving basis. Borrowings of the Subsidiary Borrowers will be unconditionally backed by the company. The company may also, upon the agreement of either existing lenders, or of the additional banks not currently party to the Credit Agreement, increase the commitments under the Credit Agreement up to an additional $1.75 billion. Subject to certain terms of the Credit Agreement, the company and Subsidiary Borrowers may borrow, prepay and reborrow amounts under the Credit Agreement at any time during the Credit Agreement. Interest rates on borrowings under the Credit Agreement will be based on prevailing market interest rates, as further described in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants, events of default, and indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of default, as specified in the Credit Agreement, are remote. As of December 31, 2016, there were no borrowings by the company, or its subsidiaries, under the Credit Agreement.

The company also has other committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

NOTE K. OTHER LIABILITIES

($ in millions)

At December 31: 2016 2015 Income tax reserves $ 2,621 $ 3,150 Excess 401(k) Plus Plan 1,494 1,445 Disability benefits 538 590 Derivative liabilities 61 22 Special restructuring actions 358 362 Workforce reductions 424 407 Deferred taxes 424 253 Other taxes payable 90 89 Environmental accruals 262 270 Warranty accruals 68 83 Asset retirement obligations 142 134 Acquisition related 111 200 Divestiture related* 270 575 Other 613 519 Total $ 7,477 $ 8,099

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document * Primarily related to the divestiture of the Microelectronics business

In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost competitiveness and to rebalance skills. The noncurrent contractually obligated future payments associated with these activities are reflected in the workforce reductions caption in the previous table.

In addition, the company executed certain special restructuring-related actions prior to 2006. The previous table provides the noncurrent liabilities associated with these special actions. Current liabilities are included in other accrued expenses and liabilities in the Consolidated Statement of Financial Position and were immaterial at December 31, 2016.

The noncurrent liabilities are workforce accruals related to terminated employees who are no longer working for the company who were granted annual payments to supplement their incomes in certain countries. Depending on the individual country’s legal requirements, these required payments will continue until the former employee begins receiving pension benefits or passes away.

The company employs extensive internal environmental protection programs that primarily are preventive in nature. The company also participates in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned facilities and Superfund sites. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts have been recorded for non-ARO environmental liabilities that are not probable or estimable. The total amounts accrued for non-ARO environmental liabilities, including amounts classified as current in the Consolidated Statement of Financial Position, that do not reflect actual or anticipated insurance recoveries, were $272 million and $283 million at December 31, 2016 and 2015, respectively. Estimated environmental costs are not expected to materially affect the consolidated financial position or consolidated results of the company’s operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation regulations.

As of December 31, 2016, the company was unable to estimate the range of settlement dates and the related probabilities for certain asbestos remediation AROs. These conditional AROs are primarily related to the encapsulated structural fireproofing that is not subject to abatement unless the buildings are demolished and non-encapsulated asbestos that the company would remediate only if it performed major renovations of certain existing buildings. Because these conditional obligations have indeterminate settlement dates, the company could not develop a reasonable estimate of their fair values. The company will continue to assess its ability to estimate fair values at each future reporting date. The related liability will be recognized once sufficient additional information becomes available. The total amounts accrued for ARO liabilities, including amounts classified as current in the Consolidated Statement of Financial Position were $173 million and $166 million at December 31, 2016 and 2015, respectively.

NOTE L. EQUITY ACTIVITY

The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which 945,867,403 shares were outstanding at December 31, 2016 and 150,000,000 shares of preferred stock with a $.01 per share par value, none of which were outstanding at December 31, 2016.

Stock Repurchases

The Board of Directors authorizes the company to repurchase IBM common stock. The company repurchased 23,283,400 common shares at a cost of $3,455 million, 30,338,647 common shares at a cost of $4,701 million and 71,504,867 common shares at a cost of $13,395 million in 2016, 2015 and 2014, respectively. These amounts reflect transactions executed through December 31 of each year. Actual cash disbursements for repurchased shares may differ due to varying settlement dates for these transactions. At December 31, 2016, $5,109 million of Board common stock repurchase authorization was available. The company plans to purchase shares on the open market or in private transactions from time to time, depending on market conditions.

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Other Stock Transactions

The company issued the following shares of common stock as part of its stock-based compensation plans and employees stock purchase plan: 3,893,366 shares in 2016, 6,013,875 shares in 2015, and 7,687,026 shares in 2014. The company issued 383,077 treasury shares in 2016, 1,155,558 treasury shares in 2015 and 1,264,232 treasury shares in 2014, as a result of restricted stock unit releases and exercises of stock options by employees of certain acquired businesses and by non-U.S. employees. Also, as part of the company’s stock-based compensation plans, 854,365 common shares at a cost of $126 million, 1,625,820 common shares at a cost of $248 million, and 1,313,569 common shares at a cost of $236 million in 2016, 2015 and 2014, respectively, were remitted by employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the treasury stock balance in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity.

Reclassifications and Taxes Related to Items of Other Comprehensive Income

($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2016: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (20) $ (120) $ (140) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (38) $ 14 $ (23) Reclassification of (gains)/losses to other (income) and expense 34 (13) 21 Total net changes related to available-for-sale securities $ (3) $ 1 $ (2) Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 243 $ (80) $ 163 Reclassification of (gains)/losses to: Cost of sales 13 (8) 6 SG&A expense (4) (2) (7) Other (income) and expense 68 (26) 42 Interest expense 24 (9) 15 Total unrealized gains/(losses) on cash flow hedges $ 345 $ (126) $ 219 Retirement-related benefit plans (1) Net (losses)/gains arising during the period $ (2,490) $ 924 $ (1,566) Curtailments and settlements (16) 1 (15) Amortization of prior service (credits)/costs (107) 34 (74) Amortization of net (gains)/losses 2,764 (976) 1,788 Total retirement-related benefit plans $ 150 $ (19) $ 132 Other comprehensive income/(loss) $ 472 $ (263) $ 209

(1) These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.)

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2015: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,379) $ (342) $ (1,721) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (54) $ 21 $ (33) Reclassification of (gains)/losses to other (income) and expense 86 (33) 53 Total net changes related to available-for-sale securities $ 32 $ (12) $ 20 Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 618 $ (218) $ 399 Reclassification of (gains)/losses to: Cost of sales (192) 57 (135) SG&A expense (149) 43 (105) Other (income) and expense (731) 281 (451) Interest expense 0 0 0 Total unrealized gains/(losses) on cash flow hedges $ (454) $ 162 $ (292) Retirement-related benefit plans (1) Prior service costs/(credits) $ 6 $ (2) $ 4 Net (losses)/gains arising during the period (2,963) 1,039 (1,925) Curtailments and settlements 33 (9) 24 Amortization of prior service (credits)/costs (100) 36 (65) Amortization of net (gains)/losses 3,304 (1,080) 2,223 Total retirement-related benefit plans $ 279 $ (17) $ 262 Other comprehensive income/(loss) $ (1,523) $ (208) $ (1,731)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.)

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2014: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,636) $ (438) $ (2,074) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (29) $ 11 $ (18) Reclassification of (gains)/losses to other (income) and expense 5 (2) 3

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total net changes related to available-for-sale securities $ (24) $ 9 $ (15) Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 958 $ (341) $ 618 Reclassification of (gains)/losses to: Cost of sales 15 (7) 9 SG&A expense (15) 6 (9) Other (income) and expense (98) 38 (60) Interest expense 1 0 0 Total unrealized gains/(losses) on cash flow hedges $ 861 $ (304) $ 557 Retirement-related benefit plans (1) Prior service costs/(credits) $ 1 $ 0 $ 1 Net (losses)/gains arising during the period (9,799) 3,433 (6,366) Curtailments and settlements 24 (7) 17 Amortization of prior service (credits)/costs (114) 41 (73) Amortization of net (gains)/losses 2,531 (852) 1,678 Total retirement-related benefit plans $ (7,357) $ 2,615 $ (4,742) Other comprehensive income/(loss) $ (8,156) $ 1,883 $ (6,274)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

($ in millions)

Net Change Net Unrealized Net Unrealized Foreign Retirement- Gains/(Losses) Accumulated Gains/(Losses) Currency Related on Available- Other on CashFlow Translation Benefit For-Sale Comprehensive Hedges Adjustments* Plans Securities Income/(Loss) December 31, 2013 $ (165) $ 332 $ (21,767) $ (1) $ (21,602) Other comprehensive income before reclassifications 618 (2,074) (6,348) (18) (7,822) Amount reclassified from accumulated other comprehensive income (60) 0 1,605 3 1,548 Total change for the period 557 (2,074) (4,742) (15) (6,274) December 31, 2014 392 (1,742) (26,509) (15) (27,875) Other comprehensive income before reclassifications 399 (1,721) (1,897) (33) (3,252) Amount reclassified from accumulated other comprehensive income (691) 0 2,158 53 1,520 Total change for the period (292) (1,721) 262 20 (1,731) December 31, 2015 100 (3,463) (26,248) 5 (29,607) Other comprehensive income before reclassifications 163 (140) (1,581) (23) (1,581) Amount reclassified from accumulated other comprehensive income 56 0 1,714 21 1,791

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total change for the period 219 (140) 132 (2) 209 December 31, 2016 $ 319 $ (3,603) $ (26,116) $ 2 $ (29,398)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

NOTE M. CONTINGENCIES AND COMMITMENTS

Contingencies

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

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the years ended December 31, 2016, 2015 and 2014 were not material to the Consolidated Financial Statements.

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

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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

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

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

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and in March 2016, SCO filed a notice of appeal to the Tenth Circuit Court of Appeals.

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court.

On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claims damages for lost profits. Iusacell’s complaint relates to a contractual dispute in Mexico, which is the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement. On November 14, 2014, the District Court in the Southern District of New York granted IBM’s motion to stay Iusacell’s action against the company pending the arbitration in Mexico between Iusacell and IBM Mexico.

IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK is seeking a declaration

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. Proceedings to determine remedies were held in July 2014, and in February 2015 the High Court held that for IBM to make changes to accruals under the plan would require a new consultation of the participants, but other changes (including to early retirement policy) would not require such consultation. IBM UK has appealed both the breach and remedies judgments. If the appeal is unsuccessful, the Court’s rulings would require IBM to reverse the changes made to the UK defined benefit plans retroactive to their effective dates. This could result in an estimated non- operating one-time pre-tax charge of approximately $290 million, plus ongoing defined benefit related accruals. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK.

In March 2011, the company announced that it had agreed to settle a civil enforcement action with the Securities and Exchange Commission (SEC) relating to alleged violations of the Foreign Corrupt Practices Act of 1977 (FCPA). On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. The two-year period expired in July 2015. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

In March 2015, putative class action litigation was commenced in the United States District Court for the Southern District of New York related to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business. The company and three of its officers were named as defendants. Plaintiffs allege that defendants violated Sections 20(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In May 2015, a related putative class action was also commenced in the United States District Court for the Southern District of New York based on the same underlying facts, alleging violations of the Employee Retirement Income Security Act (“ERISA”). The company, management’s Retirement Plans Committee, and three current or former IBM executives were named as defendants. On September 7, 2016, the Court granted the company’s motions to dismiss the plaintiffs’ claims in both actions. On October 21, 2016, the ERISA plaintiffs filed an amended complaint, dropping the company as a defendant. The matter remains pending in the United States District Court.

In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company is cooperating with the SEC in this matter.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non- income tax assessments and non-income tax litigation matters. In 2016, the company also received new non-income tax assessments from the municipality of Rio de Janeiro. The total potential amount related to all these matters for all applicable years is approximately $980 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

Commitments

The company’s extended lines of credit to third-party entities include unused amounts of $6,542 million and $5,477 million at December 31, 2016 and 2015, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $2,463 million and $2,097 million at December 31, 2016 and 2015, respectively.

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

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

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

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $34 million and $34 million at December 31, 2016 and 2015, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position was immaterial.

NOTE N. TAXES

($ in millions)

For the year ended December 31: 2016 2015 2014 Income from continuing operations before income taxes U.S. operations $ 3,650 $ 5,915 $ 7,509 Non-U.S. operations 8,680 10,030 12,477 Total income from continuing operations before income taxes $ 12,330 $ 15,945 $ 19,986

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The income from continuing operations provision for income taxes by geographic operations is as follows:

($ in millions)

For the year ended December 31: 2016 2015 2014 U.S. operations $ 38 $ 849 $ 2,093 Non-U.S. operations 411 1,732 2,141 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The components of the income from continuing operations provision for income taxes by taxing jurisdiction are as follows:

($ in millions)

For the year ended December 31: 2016 2015 2014 U.S. federal Current $ 186 $ (321) $ 1,134 Deferred (746) 553 105 $ (560) $ 232 $ 1,239 U.S. state and local Current $ 244 $ 128 $ 541 Deferred (44) 116 (105) $ 200 $ 244 $ 436 Non-U.S. Current $ 988 $ 2,101 $ 2,825 Deferred (179) 4 (266) $ 809 $ 2,105 $ 2,559 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234 Discontinued operations provision for income taxes (2) (117) (1,617) Provision for social security, real estate, personal property and other taxes 3,417 3,497 4,068 Total taxes included in net income $ 3,864 $ 5,961 $ 6,685

A reconciliation of the statutory U.S. federal tax rate to the company’s effective tax rate from continuing operations is as follows:

For the year ended December 31: 2016 2015 2014 Statutory rate 35% 35% 35% Foreign tax differential (21) (17) (14) Japan resolution (10) 0 0 State and local 1 1 1 Domestic incentives (1) (2) (2)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Other 0 (1) 1 Effective rate 4% 16% 21%

Percentages rounded for disclosure purposes.

The significant components reflected within the tax rate reconciliation labeled “Foreign tax differential” include the effects of foreign subsidiaries’ earnings taxed at rates other than the U.S. statutory rate, foreign export incentives, the U.S. tax impacts of non-U.S. earnings repatriation and any net impacts of intercompany transactions. These items also reflect audit settlements, excluding Japan, or changes in the amount of unrecognized tax benefits associated with each of these items.

In 2016, the company favorably settled the remaining open items on the company’s U.S. income tax returns for 2011 and 2012 resulting in no further adjustments.

In April 2010, the company appealed the determination of the Japanese Tax Authorities with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1.0 billion adjusted for currency, had been included in unrecognized tax benefits as of December 2015. In April 2011, the company received notification that the appeal was denied, and in June 2011, the company filed a lawsuit challenging this decision. In May 2014, the Tokyo District Court ruled in favor of the company. The Japanese government appealed the ruling to the Tokyo High Court. On March 25, 2015, the Tokyo High Court ruled in favor of IBM and, on April 7, 2015, the Japanese government appealed the ruling to the Japan Supreme Court. On February 18, 2016, the Supreme Court denied the government appeal thereby upholding the Tokyo High Court’s decision in favor of the company as the final judgment in this matter. This led to a refund of the taxes previously paid of $1.0 billion, which the company received in the first-quarter 2016 and included in the effective tax rate. Interest of $0.2 billion was also received.

The 2016 continuing operations effective tax rate decreased 12.5 points from 2015 driven by: the favorable resolution of the Japan tax matter described above (9.5 points), a benefit due to the year-to-year decrease in tax charges related to intercompany payments made by foreign subsidiaries and the intercompany licensing of certain IP (5.7 points), and a benefit from the geographic mix of pre-tax earnings year over year. These benefits were partially offset by a reduced benefit year to year related to audit settlements (2.3 points) and a decreased benefit year to year in the utilization of foreign tax credits (0.6 points).

The effect of tax law changes on deferred tax assets and liabilities did not have a material impact on the company’s effective tax rate.

The significant components of deferred tax assets and liabilities recorded in the Consolidated Statement of Financial Position were:

Deferred Tax Assets

($ in millions)

At December 31: 2016 2015* Retirement benefits $ 4,671 $ 4,621 Share-based and other compensation 1,132 963 Domestic tax loss/credit carryforwards 1,676 1,055 Deferred income 741 762 Foreign tax loss/credit carryforwards 816 767 Bad debt, inventory and warranty reserves 473 528 Depreciation 270 329 Accruals 624 904 Other 1,503 1,000 Gross deferred tax assets 11,906 10,929

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Less: valuation allowance 916 740 Net deferred tax assets $ 10,990 $ 10,189

* Reclassified to conform to 2016 presentation

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Deferred Tax Liabilities

($ in millions)

At December 31: 2016 2015 Depreciation $ 856 $ 919 Retirement benefits 406 252 Goodwill and intangible assets 1,800 1,407 Leases 651 916 Software development costs 672 554 Deferred transition costs 351 395 Other 1,455 1,177 Gross deferred tax liabilities $ 6,191 $ 5,620

For income tax return purposes, the company has foreign and domestic loss carryforwards, the tax effect of which is $855 million, as well as domestic and foreign credit carryforwards of $1,982 million. Substantially all of these carryforwards are available for at least two years and the majority are available for 10 years or more.

The valuation allowances as of December 31, 2016, 2015 and 2014 were $916 million, $740 million and $646 million, respectively. The amounts principally apply to certain foreign, state and local loss carryforwards and credits. In the opinion of management, it is more likely than not that these assets will not be realized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense.

The amount of unrecognized tax benefits at December 31, 2016 decreased by $834 million in 2016 to $3,740 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

($ in millions)

2016 2015 2014 Balance at January 1 $ 4,574 $ 5,104 $ 4,458 Additions based on tax positions related to the current year 560 464 697 Additions for tax positions of prior years 334 569 586 Reductions for tax positions of prior years (including impacts due to a lapse in statute) (1,443) (1,348) (579) Settlements (285) (215) (58) Balance at December 31 $ 3,740 $ 4,574 $ 5,104

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The additions to unrecognized tax benefits related to the current and prior years are primarily attributable to non-U.S. issues, certain tax incentives and credits and state issues. The settlements and reductions to unrecognized tax benefits for tax positions of prior years are primarily attributable to the favorable resolution of the Japan tax matter, currency, non-U.S. audits and impacts due to lapses in statutes of limitation.

The liability at December 31, 2016 of $3,740 million can be reduced by $775 million of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, U.S. tax credits, state income taxes and timing adjustments. The net amount of $2,965 million, if recognized, would favorably affect the company’s effective tax rate. The net amounts at December 31, 2015 and 2014 were $3,724 million and $4,229 million, respectively.

Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2016, the company recognized $62 million in interest expense and penalties; in 2015, the company recognized $141 million in interest expense and penalties; and, in 2014, the company recognized $216 million in interest expense and penalties. The company has $625 million for the payment of interest and penalties accrued at December 31, 2016, and had $613 million accrued at December 31, 2015.

Within the next 12 months, the company believes it is reasonably possible that the total amount of unrecognized tax benefits associated with certain positions may be reduced. The potential decrease in the amount of unrecognized tax benefits is associated with the anticipated resolution of the company’s U.S. income tax audit for 2013 and 2014, as well as various non-U.S. audits. The company estimates that the unrecognized tax benefits at December 31, 2016 could be reduced by $966 million.

The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2012. With limited exception, the company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations related to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any significant adjustments that are expected to result for these years.

In the fourth quarter of 2013, the company received a draft tax assessment notice for approximately $866 million (approximately $789 million at 2016 year-end currency rates) from the Indian Tax Authorities for 2009. In July 2016, the Karnataka High Court in Bangalore set aside this assessment by way of court order and the company reached a mutual agreement with the Income Tax Department for a new assessment, which will take place over an 18 month period. At December 31, 2016, the company has recorded $568 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the Indian Tax Authorities. The company believes it will prevail on these matters.

In the first quarter of 2016, the U.S. Internal Revenue Service commenced its audit of the company’s U.S. tax returns for 2013 and 2014. The company anticipates that this audit will be completed by the end of 2017.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The company has not provided deferred taxes on $71.4 billion of undistributed earnings of non-U.S. subsidiaries at December 31, 2016, as it is the company’s policy to indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document NOTE O. RESEARCH, DEVELOPMENT AND ENGINEERING

RD&E expense was $5,751 million in 2016, $5,247 million in 2015 and $5,437 million in 2014. In addition, RD&E expense included in discontinued operations was $1 million in 2016, $197 million in 2015 and $368 million in 2014.

The company incurred total expense of $5,421 million, $5,178 million and $5,595 million in 2016, 2015 and 2014, respectively, for scientific research and the application of scientific advances to the development of new and improved products and their uses, as well as services and their application. Within these amounts, software-related expense was $3,470 million, $3,064 million and $3,064 million in 2016, 2015 and 2014, respectively.

Expense for product-related engineering was $332 million, $267 million and $211 million in 2016, 2015 and 2014, respectively.

NOTE P. EARNINGS PER SHARE OF COMMON STOCK

The following table presents the computation of basic and diluted earnings per share of common stock.

($ in millions except per share amounts)

For the year ended December 31: 2016 2015 2014 Weighted-average number of shares on which earnings per share calculations are based Basic 955,422,530 978,744,523 1,004,272,584 Add—incremental shares under stock-based compensation plans 2,416,940 3,037,001 4,332,155 Add—incremental shares associated with contingently issuable shares 874,626 918,744 1,395,741 Assuming dilution 958,714,097 982,700,267 1,010,000,480 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Loss from discontinued operations, net of tax (9) (174) (3,729) Net income on which basic earnings per share is calculated $ 11,872 $ 13,190 $ 12,022 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Net income applicable to contingently issuable shares 0 (1) (3) Income from continuing operations on which diluted earnings per share is calculated $ 11,881 $ 13,363 $ 15,749 Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (9) (174) (3,729) Net income on which diluted earnings per share is calculated $ 11,872 $ 13,189 $ 12,020 Earnings/(loss) per share of common stock Assuming dilution Continuing operations $ 12.39 $ 13.60 $ 15.59 Discontinued operations (0.01) (0.18) (3.69) Total $ 12.38 $ 13.42 $ 11.90 Basic Continuing operations $ 12.44 $ 13.66 $ 15.68 Discontinued operations (0.01) (0.18) (3.71) Total $ 12.43 $ 13.48 $ 11.97

Weighted-average stock options to purchase 405,552 common shares in 2016, 41,380 common shares in 2015 and 17,420 common shares in 2014 were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document options was greater than the average market price of the common shares for the full year, and therefore, the effect would have been antidilutive.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

NOTE Q. RENTAL EXPENSE AND LEASE COMMITMENTS

Rental expense, including amounts charged to inventories and fixed assets, and excluding amounts previously reserved, was $1,508 million in 2016, $1,474 million in 2015 and $1,592 million in 2014. Within these amounts, rental expense reflected in discontinued operations was $29 million and $95 million, in 2015 and 2014, respectively. Rental expense in agreements with rent holidays and scheduled rent increases is recorded on a straight-line basis over the lease term. Contingent rentals are included in the determination of rental expense as accruable. The table below depicts gross minimum rental commitments under noncancelable leases, amounts related to vacant space associated with workforce transformation, sublease income commitments and capital lease commitments. These amounts reflect activities primarily related to office space, as well as data centers.

($ in millions)

2017 2018 2019 2020 2021 Beyond 2021 Operating lease commitments Gross minimum rental commitments (including vacant space below) $ 1,414 $ 1,328 $ 1,218 $ 1,016 $ 796 $ 1,111 Vacant space $ 42 $ 29 $ 20 $ 15 $ 11 $ 9 Sublease income commitments $ 12 $ 8 $ 6 $ 3 $ — $ — Capital lease commitments $ 1 $ 2 $ 2 $ 2 $ — $ —

NOTE R. STOCK-BASED COMPENSATION

The following table presents total stock-based compensation cost included in income from continuing operations.

($ in millions)

For the year ended December 31: 2016 2015 2014 Cost $ 88 $ 100 $ 121 Selling, general and administrative 401 322 350 Research, development and engineering 55 51 54 Other (income) and expense* — (6) (13) Pre-tax stock-based compensation cost 544 468 512 Income tax benefits (179) (156) (174) Net stock-based compensation cost $ 364 $ 312 $ 338

* Reflects the one-time effects related to divestitures

The amount of stock-based compensation cost included in discontinued operations, net of tax, was immaterial in all periods.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total unrecognized compensation cost related to non-vested awards at December 31, 2016 and 2015 was $934 million and $871 million, respectively. The amount at December 31, 2016 is expected to be recognized over a weighted-average period of approximately 2.6 years.

There was no significant capitalized stock-based compensation cost at December 31, 2016, 2015, and 2014.

Incentive Awards

Stock-based incentive awards are provided to employees under the terms of the company’s long-term performance plans (the “Plans”). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the “Committee”). Awards available under the Plans principally include restricted stock units, performance share units, stock options or any combination thereof.

The amount of shares originally authorized to be issued under the company’s existing Plans was 273 million at December 31, 2016. In addition, certain incentive awards granted under previous plans, if and when those awards were canceled, could be reissued under the company’s existing Plans. As such, 66.2 million additional shares were considered authorized to be issued under the company’s existing Plans as of December 31, 2016. There were 106.7 million unused shares available to be granted under the Plans as of December 31, 2016.

Under the company’s long-standing practices and policies, all awards are approved prior to or on the date of grant. The awards approval process specifies the individual receiving the grant, the number of options or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. All awards for senior management are approved by the Committee. All awards for employees other than senior management are approved by senior management pursuant to a series of delegations that were approved by the Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee. Awards that are given as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. With respect to awards given in connection with promotions or new hires, the company’s policy requires approval of such awards prior to the grant date, which is typically the date of the promotion or the date of hire.

Stock Awards

Stock awards are made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs), or Performance Share Units (PSUs).

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The tables below summarize RSU and PSU activity under the Plans during the years ended December 31, 2016, 2015 and 2014.

RSUs

2016 2015 2014 Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Balance at January 1 $ 159 7,527, 341 $ 171 7,734,277 $ 166 8,635,317 RSUs granted 140 3,985,870 143 4,230,186 172 2,525,947 RSUs released 174 (1,860,660) 164 (3,567,495) 157 (2,401,761) RSUs canceled/forfeited 158 (753,459) 167 (869,627) 167 (1,025,226) Balance at December 31 $ 147 8,899,092 $ 159 7,527,341 $ 171 7,734,277

PSUs

2016 2015 2014 Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units Balance at January 1 $ 173 2,928,932 $ 185 3,140,707 $ 178 2,824,294 PSUs granted at target 140 990,336 153 1,137,242 180 1,430,098 Performance adjustments* 194 (387,457) 185 (168,055) 157 29,960 PSUs released 194 (419,759) 185 (840,552) 157 (1,027,181) PSUs canceled/forfeited 174 (237,294) 184 (340,410) 187 (116,464) Balance at December 31** $ 155 2,874,758 $ 173 2,928,932 $ 185 3,140,707

* Represents the change in shares issued to employees after vesting of PSUs because final performance metrics were above or below specified targets ** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued will depend on final performance against specified targets over the vesting period.

RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year period. For RSUs, dividend equivalents are not paid. The fair value of such RSUs is determined and fixed on the grant date based on the company’s stock price adjusted for the exclusion of dividend equivalents.

The remaining weighted-average contractual term of RSUs at December 31, 2016, 2015 and 2014 is the same as the period over which the remaining cost of the awards will be recognized, which is approximately three years. The fair value of RSUs granted during the years ended December 31, 2016, 2015 and 2014 was $557 million, $606 million and $434 million, respectively. The total fair value of RSUs vested and released during the years ended December 31, 2016, 2015 and 2014 was $323 million, $583 million and $378 million, respectively. As of December 31, 2016, 2015 and 2014, there was $814 million, $800 million and $754 million, respectively, of unrecognized compensation cost related to non-vested RSUs. The company received no cash from employees as a result of employee vesting and release of RSUs for the years ended December 31, 2016, 2015 and 2014.

PSUs are stock awards where the number of shares ultimately received by the employee depends on the company’s performance against specified targets and typically vest over a three-year period. For PSUs, dividend equivalents are not paid. The fair value of each PSU is determined on the grant date, based on the company’s stock price, adjusted for the exclusion of dividend equivalents, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets. The fair value of PSUs granted at target during the years ended December 31, 2016, 2015 and 2014 was $138 million, $174 million and $257 million, respectively. Total fair value of PSUs vested and released during the years ended December 31, 2016, 2015 and 2014 was $81 million, $156 million and $161 million, respectively.

In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31, 2016, 2015 and 2014 were $118 million, $228 million and $222 million, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 134

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Stock Options

During the years ended December 31, 2015 and 2014, the company did not grant stock options. During the year ended December 31, 2016, the company made one grant of 1.5 million premium-priced stock options. The option award cliff vests in three years and has a contractual term of 10 years. The total compensation cost to be recognized over the three-year vesting period is expected to be $12 million.

The company estimates the fair value of stock options at the date of grant using the Black-Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company.

The following table summarizes option activity under the Plans during the years ended December 31, 2016, 2015 and 2014.

2016 2015 2014 Weighted- Weighted- Weighted- Average Number of Average Number of Average Number of Exercise Shares Exercise Shares Exercise Shares Price Under Option Price Under Option Price Under Option Balance at January 1 $ 94 479,774 $ 97 1,750,949 $ 97 5,622,951 Options granted 140 1,500,000 — — — — Options exercised 91 (361,088) 98 (1,214,109) 97 (3,740,252) Options canceled/expired 86 (4,763) 100 (57,066) 95 (131,750) Balance at December 31 $ 137 1,613,923 $ 94 479,774 $ 97 1,750,949 Exercisable at December 31 $ 103 113,923 $ 94 479,774 $ 97 1,750,949

The shares under option at December 31, 2016 were in the following exercise price ranges:

Options Outstanding Weighted- Weighted-Average Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $ 7,198,794 0.3 $129 – $154 140 1,500,000 39,236,250 9.1 $ 137 1,613,923 $ 46,435,044 8.5

Options Exercisable Weighted- Weighted-Average

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $ 7,198,794 0.3

Exercises of Employee Stock Options

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $20 million, $74 million and $323 million, respectively. The total cash received from employees as a result of employee stock option exercises for the years ended December 31, 2016, 2015 and 2014 was approximately $33 million, $119 million and $364 million, respectively. In connection with these exercises, the tax benefits realized by the company for the years ended December 31, 2016, 2015 and 2014 were $7 million, $26 million and $107 million, respectively.

The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury shares. Total treasury shares held at December 31, 2016 and 2015 were approximately 1,279 million and 1,255 million shares, respectively.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Acquisitions

In connection with various acquisition transactions, there was an additional 0.6 million options outstanding at December 31, 2016, as a result of the company’s conversion of stock-based awards previously granted by the acquired entities. The weighted-average exercise price of these awards was $33 per share.

IBM Employees Stock Purchase Plan

The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to purchase full or fractional shares of IBM common stock at a 5 percent discount off the average market price on the day of purchase through payroll deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee during the year. The ESPP provides for offering periods during which shares may be purchased and continues as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering period.

Employees purchased 1.2 million, 1.3 million and 1.3 million shares under the ESPP during the years ended December 31, 2016, 2015 and 2014, respectively. Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased through the ESPP. Dividends are paid on full and fractional shares and can be reinvested. The company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share.

In July 2014, the “2014 ESPP Reserve” became effective and 25 million additional shares of authorized common stock were reserved and approved for issuance. The 2014 ESPP provides for semi-annual offerings commencing July 1, 2014, and continuing as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Approximately 21.8 million, 23.1 million and 24.4 million shares were available for purchase under the ESPP at December 31, 2016, 2015 and 2014, respectively.

NOTE S. RETIREMENT-RELATED BENEFITS

Description of Plans

IBM sponsors defined benefit pension plans and defined contribution plans that cover eligible regular employees, a supplemental retention plan that covers certain U.S. executives and nonpension postretirement benefit plans primarily consisting of retiree medical and dental benefits for eligible retirees and dependents.

U.S. Plans

Defined Benefit Pension Plans

IBM Personal Pension Plan

IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory defined benefit pension benefits via the IBM Personal Pension Plan. Prior to 2008, the IBM Personal Pension Plan consisted of a tax qualified (qualified) plan and a non-tax qualified (nonqualified) plan. Effective January 1, 2008, the nonqualified plan was renamed the Excess Personal Pension Plan (Excess PPP) and the qualified plan is now referred to as the Qualified PPP. The combined plan is now referred to as the PPP. The Qualified PPP is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The Excess PPP, which is unfunded, provides benefits in excess of IRS limitations for qualified plans.

Benefits provided to the PPP participants are calculated using benefit formulas that vary based on the participant. The first method uses a five-year, final pay formula that determines benefits based on salary, years of service, mortality and other participant-specific factors. The second method is a cash balance formula that calculates benefits using a percentage of employees’ annual salary, as well as an interest crediting rate.

Benefit accruals under the IBM Personal Pension Plan ceased December 31, 2007 for all participants.

U.S. Supplemental Executive Retention Plan

The company also sponsors a nonqualified U.S. Supplemental Executive Retention Plan (Retention Plan). The Retention Plan, which is unfunded, provides benefits to eligible U.S. executives based on average earnings, years of service and age at termination of employment.

Benefit accruals under the Retention Plan ceased December 31, 2007 for all participants.

Defined Contribution Plans

IBM 401(k) Plus Plan

U.S. regular, full-time and part-time employees are eligible to participate in the IBM 401(k) Plus Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Under the IBM 401(k) Plus Plan, eligible employees receive a dollar-for-dollar match of their contributions generally up to 6 percent of eligible compensation for those hired prior to January 1, 2005, and, generally up to 5 percent of eligible compensation for those hired on or after January 1, 2005. In addition, eligible employees generally receive automatic contributions from the company equal to 1, 2 or 4 percent of eligible compensation based on their eligibility

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document to participate in the PPP as of December 31, 2007. Employees generally receive automatic contributions and matching contributions after the completion of one year of service.

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All contributions, including the company match, are made in cash and invested in accordance with participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments. Matching and automatic contributions are made once annually at the end of the year. In order to receive such contributions each year, a participant must be employed on December 15 of the plan year. However, matching and automatic contributions can be made for certain types of separations that occur prior to December 15, including, for example, if the participant has completed certain service and/or age requirements at separation. The company’s matching contributions vest immediately and participants are always fully vested in their own contributions.

IBM Excess 401(k) Plus Plan

The IBM Excess 401(k) Plus Plan (Excess 401(k)) is an unfunded, nonqualified defined contribution plan. Employees whose eligible compensation is expected to exceed the IRS compensation limit for qualified plans are eligible to participate in the Excess 401(k). The purpose of the Excess 401(k) is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply.

Amounts deferred into the Excess 401(k) are record-keeping (notional) accounts and are not held in trust for the participants. Participants in the Excess 401(k) may invest their notional accounts in investments which mirror the primary investment options available under the 401(k) Plus Plan. Participants in the Excess 401(k) are also eligible to receive company match and automatic contributions (at the same rate as under the 401(k) Plus Plan) on eligible compensation deferred into the Excess 401(k) and on compensation earned in excess of the Internal Revenue Code pay limit once they have completed one year of service. Amounts deferred into the Excess 401(k), including company contributions are recorded as liabilities in the Consolidated Statement of Financial Position. Matching and automatic contributions are made once annually at the end of the year. In order to receive such contributions each year, a participant must be employed on December 15 of the plan year. However, matching and automatic contributions can be made for certain types of separations that occur prior to December 15, including, for example, if the participant has completed certain service and/or age requirements at separation.

Nonpension Postretirement Benefit Plan

U.S. Nonpension Postretirement Plan

The company sponsors a defined benefit nonpension postretirement benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future Health Account (FHA) for employees who were more than five years from retirement eligibility. Employees who were within five years of retirement eligibility are covered under the company’s prior retiree health benefits arrangements. Under either the FHA or the prior retiree health benefit arrangements, there is a maximum cost to the company for retiree health benefits. Effective January 1, 2014, the company amended the plan to establish a Health Reimbursement Arrangement (HRA) for each Medicare-eligible plan retiree, surviving spouse and long-term disability plan participant who is eligible for company-subsidized coverage and who enrolls in an individual plan under the Medicare Exchange. The company also amended its life insurance plan. Employees retiring on or after January 1, 2015 are not eligible for life insurance.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Since January 1, 2004, new hires, as of that date or later, are not eligible for company-subsidized nonpension postretirement benefits.

Non-U.S. Plans

Certain subsidiaries and branches outside the United States sponsor defined benefit and/or defined contribution plans that cover eligible regular employees. The company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee’s compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.

In addition, certain of the company’s non-U.S. subsidiaries sponsor nonpension postretirement benefit plans that provide medical and dental benefits to eligible non-U.S. retirees and eligible dependents, as well as life insurance for certain eligible non-U.S. retirees. However, most non-U.S. retirees are covered by local government sponsored and administered programs.

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Plan Financial Information Summary of Financial Information

The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the Consolidated Statement of Earnings.

($ in millions)

U.S. Plans Non-U.S. Plans Total For the year ended December 31: 2016 2015 2014 2016 2015 2014 2016 2015 2014 Defined benefit pension plans $ (334) $ (284) $ (833) $ 1,039 $ 1,421 $ 1,267 $ 705 $ 1,137 $ 434 Retention Plan 17 23 15 — — — 17 23 15 Total defined benefit pension plans (income)/cost $ (317) $ (261) $ (818) $ 1,039 $ 1,421 $ 1,267 $ 722 $ 1,160 $ 449 IBM 401(k) Plus Plan and non-U.S. plans $ 626 $ 676 $ 713 $ 420 $ 442 $ 526 $ 1,046 $ 1,117 $ 1,239 Excess 401(k) 24 21 14 — — — 24 21 14 Total defined contribution plans cost $ 650 $ 697 $ 727 $ 420 $ 442 $ 526 $ 1,070 $ 1,138 $ 1,253 Nonpension postretirement benefit plans cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66 $ 211 $ 273 $ 272 Total retirement-related benefits net periodic cost $ 527 $ 654 $ 115 $ 1,475 $ 1,918 $ 1,859 $ 2,003 $ 2,572 $ 1,974

The following table presents a summary of the total PBO for defined benefit pension plans, APBO for nonpension postretirement benefit plans, fair value of plan assets and the associated funded status recorded in the Consolidated Statement of Financial Position.

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Benefit Obligations Fair Value of Plan Assets Funded Status* At December 31: 2016 2015 2016 2015 2016 2015 U.S. Plans Overfunded plans Qualified PPP $ 50,403 $ 51,287 $ 51,405 $ 51,716 $ 1,002 $ 429 Underfunded plans Excess PPP $ 1,509 $ 1,522 $ — $ — $ (1,509) $ (1,522) Retention Plan 307 312 — — (307) (312) Nonpension postretirement benefit plan 4,470 4,652 26 71 (4,444) (4,582) Total underfunded U.S. plans $ 6,286 $ 6,486 $ 26 $ 71 $ (6,260) $ (6,415) Non-U.S. Plans Overfunded plans Qualified defined benefit pension plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Nonpension postretirement benefit plans 0 0 0 0 0 0 Total overfunded non-U.S. plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Underfunded plans Qualified defined benefit pension plans $ 21,447 $ 22,039 $ 16,374 $ 17,677 $ (5,074) $ (4,362) Nonqualified defined benefit pension plans 5,919 5,911 — — (5,919) (5,911) Nonpension postretirement benefit plans 692 618 71 59 (622) (558) Total underfunded non-U.S. plans $ 28,059 $ 28,568 $ 16,445 $ 17,737 $ (11,614) $ (10,832) Total overfunded plans $ 68,017 $ 68,053 $ 71,051 $ 69,786 $ 3,034 $ 1,734 Total underfunded plans $ 34,344 $ 35,054 $ 16,470 $ 17,807 $ (17,874) $ (17,247)

* Funded status is recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as prepaid pension assets; (Liability) amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

At December 31, 2016, the company’s qualified defined benefit pension plans worldwide were 98 percent funded compared to the benefit obligations, with the U.S. Qualified PPP 102 percent funded. Overall, including nonqualified plans, the company’s defined benefit pension plans worldwide were 90 percent funded.

Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information

The following tables to page 142 represent financial information for the company’s retirement-related benefit plans, excluding defined contribution plans. The defined benefit pension plans under U.S. Plans consists of the Qualified PPP, the Excess PPP and the Retention

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Plan. The defined benefit pension plans and the nonpension postretirement benefit plans under non-U.S. Plans consists of all plans sponsored by the company’s subsidiaries. The nonpension postretirement benefit plan under U.S. Plan consists of only the U.S. Nonpension Postretirement Benefit Plan.

The tables below present the components of net periodic (income)/cost of the retirement-related benefit plans recognized in the Consolidated Statement of Earnings, excluding defined contribution plans.

($ in millions)

Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ — $ — $ — $ 420 $ 454 $ 449 Interest cost 2,048 2,028 2,211 1,035 1,075 1,533 Expected return on plan assets (3,689) (3,953) (4,096) (1,867) (1,919) (2,247) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) 10 10 10 (106) (98) (111) Recognized actuarial losses 1,314 1,654 1,056 1,408 1,581 1,400 Curtailments and settlements — — — 22 35 26 Multi-employer plans/other costs* — — — 126 293 217 Total net periodic (income)/cost $ (317) $ (261) $ (818) $ 1,039 $ 1,421 $ 1,267

($ in millions)

Nonpension Postretirement Benefit Plans U.S. Plan Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ 17 $ 24 $ 26 $ 5 $ 7 $ 7 Interest cost 165 163 187 51 50 63 Expected return on plan assets 0 0 0 (6) (7) (9) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) (7) (7) (7) (5) (5) (5) Recognized actuarial losses 20 39 0 9 10 11 Curtailments and settlements — — — (38) 0 0 Total net periodic cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66

* The non-U.S. plans amount includes $56 million, $233 million and $148 million related to the IBM Spain pension litigation for 2016, 2015 and 2014, respectively. See page 142 for additional information.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans, excluding defined contribution plans.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 Change in benefit obligation Benefit obligation at January 1 $ 53,120 $ 56,643 $ 44,717 $ 49,834 $ 4,652 $ 5,053 $ 618 $ 817 Service cost — — 420 454 17 24 5 7 Interest cost 2,048 2,028 1,035 1,075 165 163 51 50 Plan participants’ contributions — — 30 34 50 52 — — Acquisitions/divestitures, net — — (63) 39 0 (8) 0 0 Actuarial losses/(gains) 602 (1,920) 3,217 (861) 16 (204) 16 (52) Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Direct benefit payments (123) (117) (381) (402) (30) (23) (27) (26) Foreign exchange impact — — (2,222) (3,907) — — 35 (174) Medicare/Government subsidies — — — — — 1 — — Amendments/curtailments/ settlements/other — — 20 235 — 0 0 0 Benefit obligation at December 31 $ 52,218 $ 53,120 $ 44,981 $ 44,717 $ 4,470 $ 4,652 $ 692 $ 618 Change in plan assets Fair value of plan assets at January 1 $ 51,716 $ 55,772 $ 35,748 $ 39,543 $ 71 $ 16 $ 59 $ 84 Actual return on plan assets 3,118 (542) 3,828 417 0 0 8 7 Employer contributions — — 464 474 305 409 0 0 Acquisitions/divestitures, net — — (73) 53 0 0 0 0 Plan participants’ contributions — — 30 34 50 52 — — Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Foreign exchange impact — — (2,175) (3,004) — — 9 (26) Amendments/curtailments/ settlements/other — — (10)* 14* — — 0 (1) Fair value of plan assets at December 31 $ 51,405 $ 51,716 $ 36,020 $ 35,748 $ 26 $ 71 $ 71 $ 59 Funded status at December 31 $ (814) $ (1,405) $ (8,960) $ (8,969) $ (4,444) $ (4,582) $ (622) $ (558) Accumulated benefit obligation** $ 52,218 $ 53,120 $ 44,514 $ 44,071 N/A N/A N/A N/A

* Includes the reinstatement of certain plan assets in Brazil due to government rulings in 2011 and 2013 allowing certain previously restricted plan assets to be returned to IBM. Return of assets to IBM over a three-year period began June 2011 and September 2013 respectively, with approximately $23 million returned in 2016 and $33 million returned during 2015. The remaining surplus in Brazil at December 31, 2016 is excluded from total plan assets due to continued restrictions imposed by the government on the use of those plan assets. ** Represents the benefit obligation assuming no future participant compensation increases N/A—Not applicable

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 140

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The following table presents the net funded status recognized in the Consolidated Statement of Financial Position.

($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans At December 31: 2016 2015 2016 2015 2016 2015 2016 2015 Prepaid pension assets $ 1,002 $ 429 $ 2,032 $ 1,304 $ 0 $ 0 $ 0 $ 0 Current liabilities— compensation and benefits (118) (116) (303) (297) (368) (320) (15) (11) Noncurrent liabilities— retirement and nonpension postretirement benefit obligations (1,698) (1,718) (10,689) (9,976) (4,076) (4,262) (607) (547) Funded status—net $ (814) $ (1,405) $ (8,960) $ (8,969) $ (4,444) $ (4,582) $ (622) $ (558)

The following table presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in OCI and the changes in the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in AOCI for the retirement- related benefit plans.

($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 Net loss at January 1 $ 19,363 $ 18,442 $ 20,724 $ 21,676 $ 609 $ 852 $ 128 $ 189 Current period loss/(gain) 1,173 2,576 1,251 661 16 (204) 14 (51) Curtailments and settlements — — (22) (33) — — 20 0 Amortization of net loss included in net periodic (income)/cost (1,314) (1,654) (1,408) (1,581) (20) (39) (9) (10) Net loss at December 31 $ 19,222 $ 19,363 $ 20,544 $ 20,724 $ 605 $ 609 $ 154 $ 128 Prior service costs/ (credits) at January 1 $ 101 $ 110 $ (294) $ (386) $ 30 $ 23 $ (21) $ (26) Current period prior service costs/(credits) — — — (6) — — — 0 Curtailments and Settlements — — 0 — — — 18 —

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Amortization of prior service (costs)/credits included in net periodic (income)/cost (10) (10) 106 98 7 7 5 5 Prior service costs/ (credits) at December 31 $ 90 $ 101 $ (188) $ (294) $ 37 $ 30 $ 1 $ (21) Transition (assets)/ liabilities at January 1 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Amortization of transition assets/ (liabilities) included in net periodic (income)/ cost — — 0 0 — — 0 0 Transition (assets)/ liabilities at December 31 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Total loss recognized in accumulated other comprehensive income/ (loss)* $ 19,313 $ 19,464 $ 20,356 $ 20,429 $ 642 $ 639 $ 154 $ 106

* See note L, “Equity Activity,” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/ liabilities of the retirement-related benefit plans that will be amortized from AOCI into net periodic (income)/cost in 2017.

($ in millions)

Defined Benefit Nonpension Postretirement Pension Plans Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans Net loss $ 1,348 $ 1,434 $ 21 $ 6 Prior service costs/(credits) 16 (93) (7) 0 Transition (assets)/liabilities — 0 — 0

On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contribution plans. During the fourth quarter of 2016, an arbitration ruling related to the defined contribution plan resulted in an additional charge of $56 million. For the years ended December 31, 2016, 2015 and 2014, the company recorded pre-tax retirement- related obligations of $56 million, $233 million and $148 million, respectively, in selling, general and administrative expense in the

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of Earnings. These obligations are reflected in “Non-U.S. Plans— Multi-employer plans/other costs” in the table on page 139.

Assumptions Used to Determine Plan Financial Information Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.

The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for retirement-related benefit plans.

Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Discount rate 4.00% 3.70% 4.50% 2.40% 2.34% 3.32% Expected long-term returns on plan assets 7.00% 7.50% 8.00% 5.53% 5.67% 6.08% Rate of compensation increase N/A N/A N/A 2.40% 2.49% 2.52% Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.80% 4.00% 3.70% 1.80% 2.40% 2.34% Rate of compensation increase N/A N/A N/A 2.45% 2.40% 2.49%

N/A—Not applicable

Nonpension Postretirement Benefit Plans U.S. Plan Non-U.S. Plans 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic cost for the year ended December 31 Discount rate 3.70% 3.40% 4.10% 7.06% 7.51% 7.78% Expected long-term returns on plan assets N/A N/A N/A 9.95% 10.17% 10.22% Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.60% 3.70% 3.40% 8.26% 7.06% 7.51%

N/A—Not applicable

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Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Discount Rate

The discount rate assumptions used for retirement-related benefit plans accounting reflect the yields available on high-quality, fixed- income debt instruments at the measurement date. For the U.S. and certain non-U.S. countries, a portfolio of high-quality corporate bonds is used to construct a yield curve. The cash flows from the company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. In other non-U.S. countries, where the markets for high-quality long-term bonds are not generally as well developed, a portfolio of long-term government bonds is used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates.

For the U.S. defined benefit pension plans, the changes in the discount rate assumptions impacted the net periodic (income)/ cost and the PBO. The changes in the discount rate assumptions resulted in an increase in 2016 net periodic income of $103 million, a decrease in 2015 net periodic income of $286 million and an increase in 2014 net periodic income of $275 million. The changes in the discount rate assumptions resulted in an increase in the PBO of $998 million and a decrease of $1,621 million at December 31, 2016 and 2015, respectively.

For the U.S. nonpension postretirement benefit plans, the changes in the discount rate assumptions had no material impact on net periodic cost for the years ended December 31, 2016, 2015 and 2014, and resulted in an increase in the APBO of $33 million and a decrease of $109 million at December 31, 2016 and 2015, respectively.

For all of the company’s retirement-related benefit plans, the change in the discount rate assumptions resulted in an increase in the benefit obligation of approximately $4.8 billion at December 31, 2016 and a decrease of approximately $2.4 billion at December 31, 2015.

Expected Long-Term Returns on Plan Assets

Expected returns on plan assets, a component of net periodic (income)/cost, represent the expected long-term returns on plan assets based on the calculated market-related value of plan assets. Expected long-term returns on plan assets take into account long-term expectations for future returns and the investment policies and strategies as described on page 144. These rates of return are developed by the company and are tested for reasonableness against historical returns. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a pattern of income and cost recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized as a component of net loss or gain in AOCI, which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic (income)/cost.

For the U.S. defined benefit pension plan, the expected long-term rate of return on plan assets for the years ended December 31, 2016, 2015 and 2014 was 7.0 percent, 7.5 percent and 8 percent, respectively. The change in the rate in 2016 resulted in a decrease in 2016 net periodic income of $268 million. For the year ended December 31, 2015, the change in the rate resulted in a decrease in net periodic income of $264 million. There was no impact on net periodic income for the year ended December 31, 2014 as the rate was flat at 8 percent compared to the prior year. For 2017, the projected long-term rate of return on plan assets is 5.75 percent. The 125 basis point year-to-year decline is primarily driven by a change in investment strategy.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For the U.S. nonpension postretirement benefit plans, the company maintains a highly liquid trust fund balance to ensure timely payments are made. As a result, for the years ended December 31, 2016, 2015 and 2014, the expected long-term return on plan assets and the actual return on those assets were not material.

Rate of Compensation Increases and Mortality Rate

The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. The rate of compensation increase is not applicable to the U.S. defined benefit pension plans as benefit accruals ceased December 31, 2007 for all participants. Mortality rate assumptions are based on life expectancy and death rates for different types of participants. Mortality rates are periodically updated based on actual experience. In the U.S., the Society of Actuaries released new mortality tables in 2014 and updated them in 2015 and 2016. The company utilized these tables in its plan remeasurements at December 31, 2016 and 2015. For the U.S. retirement-related plans, the change in mortality assumptions resulted in a decrease to the plan benefit obligations of $0.6 billion and a decrease of $0.7 billion at December 31, 2016 and 2015, respectively.

Interest Crediting Rate

Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the PBO. This assumption provides a basis for projecting the expected interest rate that participants will earn on the benefits that they are expected to receive in the following year and is based on the average from August to October of the one-year U.S. Treasury Constant Maturity yield plus one percent.

For the PPP, the change in the interest crediting rate to 1.3 percent for the year ended December 31, 2016 from 1.1 percent for the year ended December 31, 2015 resulted in a decrease in 2016 net periodic income of $7 million. The interest crediting rate of 1.1 percent for the year ended December 31, 2015, was unchanged from December 31, 2014 and therefore, had no impact on the decrease in 2015 net periodic income. The change in the interest crediting rate to 1.1 percent for the year ended December 31, 2014, from 1.2 percent for the year ended December 31, 2013, resulted in an increase in 2014 net periodic income of $8 million.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Healthcare Cost Trend Rate

For nonpension postretirement benefit plan accounting, the company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. However, the healthcare cost trend rate has an insignificant effect on plan costs and obligations as a result of the terms of the plan which limit the company’s obligation to the participants. The company assumes that the healthcare cost trend rate for 2017 will be 6.75 percent. In addition, the company assumes that the same trend rate will decrease to 5 percent over the next seven years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on 2016, 2015 and 2014 net periodic cost or the benefit obligations as of December 31, 2016 and 2015.

Plan Assets

Retirement-related benefit plan assets are recognized and measured at fair value. Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions.

Investment Policies and Strategies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors described on pages 142 through 143. The Qualified PPP portfolio’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. In 2016, the company changed its investment strategy, modifying the target asset allocation, primarily by reducing equity securities and increasing debt securities. This change was designed to reduce the potential negative impact that equity markets might have on the funded status of the plan. The Qualified PPP portfolio’s target allocation is 70 percent fixed-income securities, 20 percent equity securities, 5 percent real estate and 5 percent other investments.

The assets are managed by professional investment firms and investment professionals who are employees of the company. They are bound by investment mandates determined by the company’s management and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies.

Market liquidity risks are tightly controlled, with $5,010 million of the Qualified PPP portfolio as of December 31, 2016 invested in private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded securities. In addition, the Qualified PPP portfolio had $2,142 million in commitments for future investments in private markets to be made over a number of years. These commitments are expected to be funded from plan assets.

Derivatives are used as an effective means to achieve investment objectives and/or as a component of the plan’s risk management strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management and credit exposure, cash equitization and to manage currency and commodity strategies.

Outside the U.S., the investment objectives are similar to those described above, subject to local regulations. The weighted-average target allocation for the non-U.S. plans is 25 percent equity securities, 60 percent fixed-income securities, 3 percent real estate and 12 percent other investments, which is consistent with the allocation decisions made by the company’s management. In some countries, a higher percentage allocation to fixed income is required to manage solvency and funding risks. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. plans do not invest in illiquid assets and their use of derivatives is consistent with the U.S. plan and mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies.

The company’s nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a nominal, highly liquid trust fund balance to ensure timely benefit payments.

144

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Defined Benefit Pension Plan Assets

The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2016. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $ 5,778 $ 1 $ — $ 5,779 $ 4,080 $ 0 $ — $ 4,080 Equity mutual funds (2) 93 — — 93 35 — — 35 Fixed income Government and related (3) — 14,897 — 14,897 — 7,577 16 7,593 Corporate bonds (4) — 18,063 101 18,164 — 2,045 1 2,045 Mortgage and asset- backed securities — 652 5 656 — 4 — 4 Fixed income mutual funds (5) 359 — — 359 22 — — 22 Insurance contracts — — — — — 1,137 — 1,137 Cash and short-term investments (6) 55 1,927 — 1,982 294 707 — 1,001 Real estate — — — — — — 294 294 Derivatives (7) 18 20 — 38 43 752 — 796 Other mutual funds (8) — — — — 114 — — 114 Subtotal 6,303 35,560 106 41,969 4,589 12,223 310 17,122 Investments measured at net asset value using the NAV practical expedient (9) — — — 9,641 — — — 18,946 Other (10) — — — (205) — — — (48) Fair value of plan assets $ 6,303 $ 35,560 $ 106 $ 51,405 $ 4,589 $ 12,223 $ 310 $ 36,020

(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $28 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $15 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4) The U.S. Plan includes IBM corporate bonds of $4 million, representing 0.01 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.003 percent of the non-U.S. Plan assets. (5) Invests predominantly in fixed income securities (6) Includes cash, cash equivalents and short-term marketable securities (7) Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives (8) Invests in both equity and fixed-income securities (9) Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10) Represents net unsettled transactions, relating primarily to purchases and sales of plan assets

145

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The U.S. nonpension postretirement benefit plan assets of $26 million were invested in cash, categorized as Level 1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $71 million, primarily in Brazil, and, to a lesser extent, in

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds, categorized as Level 2 in the fair value hierarchy.

The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2015. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries. In the following table, some Level 2 and Level 3 assets have been reclassified to reflect the FASB guidance removing investments using NAV as a practical expedient from the fair value hierarchy. The December 31, 2015 Level 3 reconciliation tables have also been reclassified to reflect this change. Refer to note B, “Accounting Changes,” for additional information.

($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $ 11,210 $ 1 $ — $ 11,211 $ 4,631 $ 0 $ — $ 4,631 Equity mutual funds (2) 99 — — 99 90 — — 90 Fixed income Government and related (3) — 9,854 — 9,854 — 7,482 16 7,499 Corporate bonds (4) — 17,088 2 17,090 — 1,896 4 1,899 Mortgage and asset-backed securities — 633 10 643 — 6 — 6 Fixed income mutual funds (5) 313 — — 313 38 — — 38 Insurance contracts — — — — — 1,079 — 1,079 Cash and short-term investments (6) 244 2,305 — 2,549 142 422 — 564 Real estate — — — — — — 411 411 Derivatives (7) (82) 2 — (80) (1) 481 — 480 Other mutual funds (8) — — — — 115 — — 115 Subtotal 11,784 29,884 12 41,680 5,016 11,366 431 16,812 Investments measured at net asset value using the NAV practical expedient (9) — — — 10,179 — — — 18,986 Other (10) — — — (143) — — — (50) Fair value of plan assets $ 11,784 $ 29,884 $ 12 $ 51,716 $ 5,016 $ 11,366 $ 431 $ 35,748

(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $34 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $14 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4) The U.S. Plan includes IBM corporate bonds of $23 million, representing 0.04 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.004 percent of the non-U.S. Plan assets. (5) Invests in predominantly fixed-income securities (6) Includes cash and cash equivalents and short-term marketable securities (7) Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives (8) Invests in both equity and fixed-income securities (9) Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10) Represents net unsettled transactions, relating primarily to purchases and sales of plan assets

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The U.S. nonpension postretirement benefit plan assets of $71 million were invested in cash, categorized as Level 1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $59 million, primarily in Brazil, and, to a lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds, categorized as Level 2 in the fair value hierarchy.

146

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2016 and 2015 for the U.S. Plan.

($ in millions)

Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2016 $ 2 $ 10 $ 12 Return on assets held at end of year (3) 0 (2) Return on assets sold during the year 0 1 1 Purchases, sales and settlements, net 103 (5) 99 Transfers, net (2) (2) (3) Balance at December 31, 2016 $ 101 $ 5 $ 106

($ in millions)

Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2015 $ 4 $ 20 $ 24 Return on assets held at end of year 0 0 0 Return on assets sold during the year 1 0 1 Purchases, sales and settlements, net (5) (2) (7) Transfers, net 2 (8) (6) Balance at December 31, 2015 $ 2 $ 10 $ 12

The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2016 and 2015 for the non-U.S. Plans.

($ in millions)

Government Corporate Real and Related Bonds Estate Total Balance at January 1, 2016 $ 16 $ 4 $ 411 $ 431

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Return on assets held at end of year 1 0 (22) (21) Return on assets sold during the year 0 0 35 35 Purchases, sales and settlements, net 0 (3) (68) (72) Transfers, net 0 — — 0 Foreign exchange impact 0 0 (62) (63) Balance at December 31, 2016 $ 16 $ 1 $ 294 $ 310

147

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

Government Corporate and Related Bonds Real Estate Total Balance at January 1, 2015 $ 32 $ 1 $ 411 $ 444 Return on assets held at end of year (2) 0 28 26 Return on assets sold during the year 0 0 42 42 Purchases, sales and settlements, net (10) 3 (51) (58) Transfers, net — — — — Foreign exchange impact (3) 0 (20) (23) Balance at December 31, 2015 $ 16 $ 4 $ 411 $ 431

Valuation Techniques

The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation techniques during 2016 and 2015.

Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM common stock is valued at the closing price reported on the New York Stock Exchange. Mutual funds are typically valued based on quoted market prices. These assets are generally classified as Level 1.

The fair value of fixed-income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded.

Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short- term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2.

Real estate valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data, including appraisals, to determine if the carrying value of these assets should be adjusted. These assets are classified as Level 3.

Exchange traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded, while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates. These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices.

Certain investments are measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient. These investments, which include commingled funds, hedge funds, private equity and real estate partnerships, are typically valued using the net asset value (NAV) provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. In accordance with FASB guidance, these investments have not been classified in the fair value hierarchy. Refer to note B, “Accounting Changes.”

Contributions

Defined Benefit Pension Plans

It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.

The company contributed $169 million in cash and $295 million in U.S. Treasury Securities to non-U.S. defined benefit pension plans as well as $43 million in cash to multi-employer plans for the year ended December 31, 2016. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows. For the year ended December 31, 2015, the company contributed $474 million in cash to non-U.S. defined benefit pension plans and $40 million in cash to multi-employer plans. The cash contributions to multi-employer plans represent the annual cost included in net periodic (income)/cost recognized in the Consolidated Statement of Earnings. The company’s participation in multi-employer plans has no material impact on the company’s financial statements.

In 2017, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year.

The Pension Protection Act of 2006 (the Act), enacted into law in 2006, is a comprehensive reform package that, among other provisions, increases pension funding requirements for certain U.S. defined benefit plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement-related benefit plans. The additional funding requirements by the Act apply to plan years beginning after December 31, 2007. The Act was updated by the Worker, Retiree and Employer Recovery Act of 2008, which revised the funding requirements in the Act by clarifying that pension plans may smooth the value of pension plans over 24 months. At December 31, 2016, no mandatory contribution was required for 2017.

In 2017, the company estimates contributions to its non-U.S. defined benefit and multi-employer plans to be approximately $500 million, the largest of which will be contributed to defined benefit pension plans in the UK, Japan and Spain. This amount represents the legally mandated minimum contributions.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Financial market performance in 2017 could increase the legally mandated minimum contribution in certain countries which require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally mandated amount based on market conditions or other factors.

Defined Contribution Plans

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company contributed $1,046 million and $1,117 million in cash to the defined contribution plans during the years ended December 31, 2016 and 2015, respectively. In 2017, the company estimates cash contributions to the defined contribution plans to be approximately $1.0 billion.

Nonpension Postretirement Benefit Plans

The company contributed $305 million and $408 million to the nonpension postretirement benefit plans during the years ended December 31, 2016 and 2015, respectively. The $305 million contribution in 2016 consisted of $80 million in cash and $225 million in U.S. Treasury securities. The $408 million contribution in 2015 consisted of $328 million in cash and $80 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

Expected Benefit Payments

Defined Benefit Pension Plan Expected Payments

The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2016 and include benefits attributable to estimated future compensation increases, where applicable.

($ in millions)

Total Qualified Nonqualified Qualified Nonqualified Expected U.S. Plan U.S. Plans Non-U.S. Plans Non-U.S. Plans Benefit Payments Payments Payments Payments Payments 2017 $ 3,519 $ 120 $ 1,689 $ 306 $ 5,634 2018 3,519 121 1,705 301 5,646 2019 3,504 121 1,730 312 5,668 2020 3,589 122 1,741 358 5,809 2021 3,525 123 1,783 376 5,806 2022—2026 16,970 594 9,077 2,121 28,762

The 2017 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.

Nonpension Postretirement Benefit Plan Expected Payments

The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ APBO at December 31, 2016.

($ in millions)

Total Qualified Nonqualified Expected U.S. Plan Non-U.S. Plans Non-U.S. Plans Benefit Payments Payments Payments Payments 2017 $ 396 $ 6 $ 30 $ 432

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2018 397 6 32 435 2019 403 6 34 443 2020 405 6 37 448 2021 395 7 39 441 2022—2026 1,743 36 219 1,998

The 2017 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position.

Other Plan Information

The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more detailed presentation of the funded status of the company’s defined benefit pension plans, see the table on page 140.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

($ in millions)

2016 2015 Benefit Plan Benefit Plan At December 31: Obligation Assets Obligation Assets Plans with PBO in excess of plan assets $ 29,182 $ 16,374 $ 29,784 $ 17,677 Plans with ABO in excess of plan assets 28,770 16,272 29,135 17,492 Plans with assets in excess of PBO 68,017 71,051 68,053 69,786

NOTE T. SEGMENT INFORMATION

In January 2016, the company made a number of changes to its organizational structure and management system consistent with its ongoing transformation to a cognitive solutions and cloud platform business. With these changes, the company updated its reportable segments. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes. The company’s five reportable segments are as follows:

The Cognitive Solutions segment includes solutions units that address many of the company’s strategic areas, including analytics, commerce and security, several of the new initiatives around Watson Platform, Watson Health, Watson Internet of Things and Transaction Processing Software. The Technology Services & Cloud Platforms segment includes the company’s cloud infrastructure and platform capabilities, the previously reported Global Technology Services business and Integration Software. Operating Systems Software has been aligned with the underlying hardware platforms in the Systems segment. The Global Business Services and Global Financing segments remain unchanged.

The company also realigned a portion of its software support revenue, which was previously managed and reported in Integrated Technology Services within Global Technology Services, to the underlying software product areas.

The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics.

Information about each segment’s business and the products and services that generate each segment’s revenue is located in the “Description of Business” section on pages 32 to 34, and in the “Segment Details,” on pages 36 to 41 in the Management Discussion.

Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arm’s-length, market- based transfer price. Systems that are used by Technology Services & Cloud Platforms in outsourcing engagements are primarily sourced internally from the Systems segment and software is sourced from various segments. Software used by Technology Services & Cloud Platforms on external engagements is sourced internally through Cognitive Solutions and the Systems segments. For providing IT services that are used internally, Technology Services & Cloud Platforms and Global Business Services recover cost, as well as a reasonable fee, that is intended to reflect the arm’s-length value of providing the services. They enter into arm’s-length loans at prices equivalent to market rates with Global Financing to facilitate the acquisition of equipment and software used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate.

The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result, a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, certain marketing functions and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management system, e.g., advertising expense is allocated based on the gross profits of the segments. A portion of the shared expenses, which are recorded in net income, are not allocated to the segments. These expenses are associated with the elimination of internal transactions and other miscellaneous items.

The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income from continuing operations. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.

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Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Management System Segment View

($ in millions)

Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 External revenue $ 18,187 $ 16,700 $ 35,337 $ 7,7 14 $ 1,692 $ 79,630 Internal revenue 2,630 409 715 750 1,802 6,307 Total revenue $ 20,817 $ 17,109 $ 36,052 $ 8,464 $ 3,494 $ 85,936

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Pre-tax income from continuing operations $ 6,352 $ 1,732 $ 4,707 $ 933 $ 1,656 $ 15,380 Revenue year-to-year change 3.8% (3.1)% 0.6% (18.0)% (22.0)% (2.7)% Pre-tax income year-to-year change (12.3)% (33.4)% (17.0)% (45.8)% (29.9)% (21.5)% Pre-tax income margin 30.5% 10.1% 13.1% 11.0% 47. 4% 1 7.9%

2015 External revenue $ 17,841 $ 17,166 $ 35,142 $ 9,547 $ 1,840 $ 81,535 Internal revenue 2,215 499 698 778 2,637 6,826 Total revenue $ 20,055 $ 17,664 $ 35,840 $ 10,325 $ 4,477 $ 88,361 Pre-tax income from continuing operations $ 7,245 $ 2,602 $ 5,669 $ 1,722 $ 2,364 $ 19,602 Revenue year-to-year change (8.4)% (11.9)% (9.8)% (22.4)% (1.0)% (11.2)% Pre-tax income year-to-year change (11.8)% (22.3)% (20.0)% 24.4% 8.0% (11.8)% Pre-tax income margin 36.1% 14.7% 15.8% 16.7% 52.8% 22.2%

2014 External revenue $ 19,689 $ 19,512 $ 38,889 $ 12,294 $ 2,034 $ 92,418 Internal revenue 2,216 543 840 1,006 2,488 7,093 Total revenue $ 21,906 $ 20,055 $ 39,729 $ 13,300 $ 4,522 $ 99,512 Pre-tax income from continuing operations $ 8,215 $ 3,347 $ 7,084 $ 1,384 $ 2,189 $ 22,219 Revenue year-to-year change (0.1)% (8.5)% (0.9)% (19.8)% 5.1% (5.1)% Pre-tax income year-to-year change (5.2)% (2.9)% (7.3)% (21.5)% 0.8% (6.2)% Pre-tax income margin 37.5% 16.7% 17.8% 10.4% 48.4% 22.3%

151

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Reconciliations of IBM as Reported

($ in millions)

For the year ended December 31: 2016 2015 2014 Revenue Total reportable segments $ 85,936 $ 88,361 $ 99,512 Other revenue 289 206 374 Elimination of internal transactions (6,307) (6,826) (7,093) Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For the year ended December 31: 2016 2015** 2014** Pre-tax income from continuing operations: Total reportable segments $ 15,380 $ 19,602 $ 22,219 Amortization of acquired intangible assets (998) (677) (791) Acquisition-related charges (5) (26) (12) Non-operating retirement- related (costs)/income (598) (1,050) (353) Elimination of internal transactions (1,160) (1,675) (1,746) Unallocated corporate amounts* (290) (230) 688 Total pre-tax income from continuing operations $ 12,330 $ 15,945 $ 19,986

* The 2014 amount includes the gain related to the Retail Store Solutions divestiture and the net gain related to the System x business divestiture.

** Reclassified to conform to 2016 presentation.

Immaterial Items

Investment in Equity Alliances and

Equity Alliances Gains/(Losses)

The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments did not have a material effect on the financial position or the financial results of the segments.

Segment Assets and Other Items

Cognitive Solutions assets are mainly goodwill, acquired intangible assets and accounts receivable. Global Business Services assets are primarily goodwill and accounts receivable. Technology Services & Cloud Platforms assets are primarily goodwill, plant, property and equipment including the assets associated with the outsourcing business, deferred services arrangement transition costs, accounts receivable and acquired intangible assets. Systems assets are primarily goodwill, plant, property and equipment, and manufacturing inventory. Global Financing assets are primarily financing receivables, cash and marketable securities, and fixed assets under operating leases.

To ensure the efficient use of the company’s space and equipment, several segments may share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each user segment. This is consistent with the company’s management system and is reflected accordingly in the table on page 153. In those cases, there will not be a precise correlation between segment pre-tax income and segment assets.

Similarly, the depreciation amounts reported by each segment are based on the assigned landlord ownership and may not be consistent with the amounts that are included in the segments’ pre-tax income. The amounts that are included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures that are reported by each segment also are consistent with the landlord ownership basis of asset assignment.

Global Financing amounts for interest income and interest expense reflect the interest income and interest expense associated with the Global Financing business, including the intercompany financing activities discussed on page 34, as well as the income from investment in cash and marketable securities. The explanation of the difference between cost of financing and interest expense for segment presentation versus presentation in the Consolidated Statement of Earnings is included on page 80 of the Management Discussion.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 152

Notes to Consolidated Financial Statements International Business Machines Corporation and Subsidiary Companies

Management System Segment View

($ in millions)

Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 Assets $ 25,517 $ 8,628 $ 24,085 $ 3,812 $ 36,492 $ 98,534 Depreciation/amortization of intangibles* 1,228 104 2,224 375 317 4,248 Capital expenditures/investments in intangibles 495 55 2,382 453 380 3,764 Interest income — — — — 1,547 1,547 Interest expense — — — — 371 371

2015 Assets $ 20,017 $ 8,327 $ 23,530 $ 3,967 $ 36,157 $ 91,999 Depreciation/amortization of intangibles* 921 81 1,944 321 343 3,610 Capital expenditures/investments in intangibles 448 86 2,619 321 356 3,830 Interest income — — — — 1,720 1,720 Interest expense — — — — 469 469

2014 Assets $ 19,525 $ 8,831 $ 22,512 $ 4,219 $ 38,845 $ 93,933 Depreciation/amortization of intangibles* 1,040 98 1,982 734 455 4,308 Capital expenditures/investments in intangibles 413 79 2,321 627 482 3,921 Interest income — — — — 1,951 1,951 Interest expense — — — — 518 518

* Segment pre-tax income from continuing operations does not include the amortization of intangible assets.

153

Notes to Consolidated Financial Statements

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document International Business Machines Corporation and Subsidiary Companies

Reconciliations of IBM as Reported

($ in millions)

At December 31: 2016 2015 2014 Assets Total reportable segments $ 98,534 $ 91,999 $ 93,933 Elimination of internal transactions (5,670) (4,709) (5,193) Unallocated amounts Cash and marketable securities 6,752 6,634 7,182 Notes and accounts receivable 2,660 2,333 4,253 Deferred tax assets 5,078 4,693 6,465 Plant, other property and equipment 2,656 2,650 2,169 Pension assets 3,034 1,734 2,160 Other 4,425 5,161 6,303 Total IBM consolidated assets $ 117,470 $ 110,495 $ 117,271

Major Clients

No single client represented 10 percent or more of the company’s total revenue in 2016, 2015 or 2014.

Geographic Information

The following provides information for those countries that are 10 percent or more of the specific category.

Revenue*

($ in millions)

For the year ended December 31: 2016 2015 2014 United States $ 30,194 $ 30,514 $ 32,021 Japan 8,339 7,544 8,382 Other countries 41,386 43,683 52,390 Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

* Revenues are attributed to countries based on the location of the client.

Plant and Other Property—Net

($ in millions)

At December 31: 2016 2015 2014 United States $ 4,701 $ 4,644 $ 4,388 Other countries 5,607 5,532 5,690 Total $ 10,308 $ 10,176 $ 10,078

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Revenue by Classes of Similar Products or Services

The following table presents external revenue for similar classes of products or services within the company’s reportable segments. Client solutions often include IBM software and systems and other suppliers’ products if the client solution requires it. For each of the segments that include services; Software-as-a-Service, consulting, education, training and other product-related services are included as services. For each of these segments, software includes product license charges and ongoing subscriptions.

($ in millions)

For the year ended December 31: 2016 2015 2014 Cognitive Solutions Software $ 13,969 $ 14,557 $ 16,502 Services 4,111 3,175 3,143 Systems 107 108 44 Global Business Services Services $ 16,399 $ 16,851 $ 19,202 Software 179 164 186 Systems 121 151 124 Technology Services & Cloud Platforms Services $ 24,311 $ 23,947 $ 26,462 Maintenance 5,862 6,085 6,790 Software 3,818 3,907 4,332 Systems 1,346 1,203 1,304 Systems Servers $ 3,567 $ 5,032 $ 7,177 Storage 2,083 2,325 2,641 Software 1,586 1,749 2,053 Services 478 442 423 Global Financing Financing $ 1,231 $ 1,386 $ 1,543 Used equipment sales 461 454 491

NOTE U. SUBSEQUENT EVENTS

On January 31, 2017, the company announced that the Board of Directors approved a quarterly dividend of $1.40 per common share. The dividend is payable March 10, 2017 to shareholders of record on February 10, 2017.

On January 24, 2017, the company issued $2.75 billion in bonds as follows: $500 million of 3-year floating-rate bonds priced at LIBOR plus 23 basis points, $750 million of 3-year fixed-rate bonds with a 1.9 percent coupon, $1.0 billion of 5-year fixed-rate bonds with a 2.5 percent coupon and $500 million of 10-year fixed-rate bonds with a 3.3 percent coupon.

154

Five-Year Comparison of Selected Financial Data International Business Machines Corporation and Subsidiary Companies

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ($ in millions except per share amounts)

For the year ended December 31: 2016 2015 2014 2013 2012 Revenue $ 79,919 $ 81,741 $ 92,793 $ 98,367 $ 102,874 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 $ 16,881 $ 16,999 Loss from discontinued operations, net of tax $ (9) $ (174) $ (3,729) $ (398) $ (395) Net income $ 11,872 $ 13,190 $ 12,022 $ 16,483 $ 16,604 Operating (non-GAAP) earnings* $ 13,031 $ 14,659 $ 16,702 $ 18,356 $ 18,022 Earnings/(loss) per share of common stock: Assuming dilution: Continuing operations $ 12.39 $ 13.60 $ 15.59 $ 15.30 $ 14.71 Discontinued operations $ (0.01) $ (0.18) $ (3.69) $ (0.36) $ (0.34) Total $ 12.38 $ 13.42 $ 11.90 $ 14.94 $ 14.37 Basic: Continuing operations $ 12.44 $ 13.66 $ 15.68 $ 15.42 $ 14.88 Discontinued operations $ (0.01) $ (0.18) $ (3.71) $ (0.36) $ (0.35) Total $ 12.43 $ 13.48 $ 11.97 $ 15.06 $ 14.53 Diluted operating (non-GAAP)* $ 13.59 $ 14.92 $ 16.53 $ 16.64 $ 15.60 Cash dividends paid on common stock $ 5,256 $ 4,897 $ 4,265 $ 4,058 $ 3,773 Per share of common stock 5.50 5.00 4.25 3.70 3.30 Investment in property, plant and equipment $ 3,567 $ 3,579 $ 3,740 $ 3,623 $ 4,082 Return on IBM stockholders’ equity 74.0% 101.1% 72.5% 83.8% 81.6%

At December 31: 2016 2015 2014 2013 2012 Total assets $ 117,470 $ 110,495 $ 117,271 $ 125,641 $ 118,965 Net investment in property, plant and equipment $ 10,830 $ 10,727 $ 10,771 $ 13,821 $ 13,996 Working capital $ 7,613 $ 8,235 $ 7,797 $ 9,610 $ 4,413 Total debt $ 42,169 $ 39,890 $ 40,722 $ 39,637 $ 33,209 Total equity $ 18,392 $ 14,424 $ 12,014 $ 22,929 $ 18,984

* Refer to the “GAAP Reconciliation,” on page 63 of the company’s 2014 Annual Report for the reconciliation of non-GAAP financial information for 2013 and 2012. Also see “GAAP Reconciliation,” on pages 48, 49 and 66 for the reconciliation of non- GAAP financial information for 2016, 2015 and 2014.

155

Selected Quarterly Data International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amounts and stock prices)

First Second Third Fourth 2016 Quarter Quarter Quarter Quarter Full Year Revenue $ 18,684 $ 20,238 $ 19,226 $ 21,770 $ 79,919 Gross profit $ 8,686 $ 9,702 $ 9,013 $ 10,893 $ 38,294 Income from continuing operations $ 2,016 $ 2,505 $ 2,854 $ 4,505 $ 11,881 Income/(loss) from discontinued operations, net of tax $ (3) $ 0 $ (1) $ (4) $ (9)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Net income $ 2,014 $ 2,504 $ 2,853 $ 4,501 $ 11,872 Operating (non-GAAP) earnings* $ 2,270 $ 2,835 $ 3,149 $ 4,776 $ 13,031 Earnings per share of common stock** Assuming dilution: Continuing operations $ 2.09 $ 2.61 $ 2.98 $ 4.73 $ 12.39 Discontinued operations $ 0.00 $ 0.00 $ 0.00 $ (0.01) $ (0.01) Total $ 2.09 $ 2.61 $ 2.98 $ 4.72 $ 12.38 Basic: Continuing operations $ 2.09 $ 2.62 $ 2.99 $ 4.75 $ 12.44 Discontinued operations $ 0.00 $ 0.00 $ 0.00 $ (0.01) $ (0.01) Total $ 2.09 $ 2.62 $ 2.99 $ 4.74 $ 12.43 Diluted operating (non-GAAP)* $ 2.35 $ 2.95 $ 3.29 $ 5.01 $ 13.59 Dividends per share of common stock $ 1.30 $ 1.40 $ 1.40 $ 1.40 $ 5.50 Stock prices++ High $ 151.45 $ 155.35 $ 163.53 $ 168.51 Low $ 117.85 $ 143.50 $ 151.68 $ 149.63

($ in millions except per share amounts and stock prices)

First Second Third Fourth 2015 Quarter Quarter Quarter Quarter Full Year Revenue $ 19,590 $ 20,813 $ 19,280 $ 22,059 $ 81,741 Gross profit $ 9,452 $ 10,390 $ 9,436 $ 11,407 $ 40,684 Income from continuing operations $ 2,415 $ 3,526 $ 2,962 $ 4,460 $ 13,364 Income/(loss) from discontinued operations, net of tax $ (88) $ (77) $ (12) $ 3 $ (174) Net income $ 2,328 $ 3,449 $ 2,950 $ 4,463 $ 13,190 Operating (non-GAAP) earnings* $ 2,890 $ 3,790 $ 3,272 $ 4,707 $ 14,659 Earnings per share of common stock** Assuming dilution: Continuing operations $ 2.44 $ 3.58 $ 3.02 $ 4.59 $ 13.60 Discontinued operations $ (0.09) $ (0.08) $ (0.01) $ 0.00 $ (0.18) Total $ 2.35 $ 3.50 $ 3.01 $ 4.59 $ 13.42 Basic: Continuing operations $ 2.45 $ 3.59 $ 3.04 $ 4.60 $ 13.66 Discontinued operations $ (0.09) $ (0.08) $ (0.01) $ 0.00 $ (0.18) Total $ 2.36 $ 3.51 $ 3.03 $ 4.60 $ 13.48 Diluted operating (non-GAAP)* $ 2.91 $ 3.84 $ 3.34 $ 4.84 $ 14.92 Dividends per share of common stock $ 1.10 $ 1.30 $ 1.30 $ 1.30 $ 5.00 Stock prices++ High $ 164.83 $ 174.40 $ 173.22 $ 152.39 Low $ 151.55 $ 159.18 $ 140.96 $ 131.75

* Refer to page 71 of the company’s first-quarter 2016 Form 10-Q filed on April 26, 2016, page 87 of the company’s second- quarter 2016 Form 10-Q filed on July 26, 2016, page 87 of the company’s third-quarter 2016 Form 10-Q filed on October 25, 2016, and page 55 under the heading “GAAP Reconciliation” for the reconciliation of non-GAAP financial information for the quarterly periods of 2016 and 2015. Also see “GAAP Reconciliation,” on pages 48 and 49 for the reconciliation of non-GAAP financial information for full-year 2016 and 2015.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ** Earnings Per Share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters’ EPS does not equal the full-year EPS. ++ The stock prices reflect the high and low prices for IBM’s common stock on the New York Stock Exchange composite tape for the periods presented.

156

Performance Graph International Business Machines Corporation and Subsidiary Companies

Comparison of Five- and Ten-Year Cumulative Total Return for IBM, S&P 500 Stock Index and S&P Information Technology Index

The following graphs compare the five- and ten-year cumulative total returns for IBM common stock with the comparable cumulative return of certain Standard & Poor’s (S&P) indices. Due to the fact that IBM is a company included in the S&P 500 Stock Index, the SEC’s rules require the use of that index for the required five-year graph. Under those rules, the second index used for comparison may be a published industry or line-of-business index. The S&P Information Technology Index is such an index. IBM is also included in this index.

Each graph assumes $100 invested on December 31 (of the initial year shown in the graph) in IBM common stock and $100 invested on the same date in each of the S&P indices. The comparisons assume that all dividends are reinvested.

Five-Year

(U.S. Dollar) 2011 2012 2013 2014 2015 2016 IBM Common Stock $ 100.00 $ 105.93 $ 105.74 $ 92.63 $ 82.06 $ 102.73 S & P 500 Index 100.00 116.00 153.58 174.60 177.01 198.18 S & P Information Technology Index 100.00 114.82 147.47 177.13 187.63 213.61

Ten-Year

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (U.S. Dollar) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 IBM Common Stock $ 100.00 $ 112.84 $ 89.41 $ 141.81 $ 162.07 $ 206.50 $ 218.76 $ 218.36 $ 191.29 $ 169.46 $ 212.15 S & P 500 Index 100.00 105.49 66.46 84.05 96.71 98.75 114.56 151.66 172.42 174.81 195.72 S & P Information Technology Index 100.00 116.31 66.13 106.95 117.85 120.69 138.58 177.98 213.78 226.45 257.81

157

Board of Directors and Senior Leadership International Business Machines Corporation and Subsidiary Companies

BOARD OF DIRECTORS

Kenneth I. Chenault Shirley Ann Jackson Virginia M. Rometty Chairman and Chief Executive Officer President Chairman, President and American Express Company Rensselaer Polytechnic Institute Chief Executive Officer IBM Michael L. Eskew Andrew N. Liveris Retired Chairman and Chairman and Chief Executive Officer Joan E. Spero* Chief Executive Officer The Dow Chemical Company Adjunct Senior Research Scholar United Parcel Service, Inc. Columbia University School of W. James McNerney, Jr. International and Public Affairs David N. Farr Retired Chairman and Chairman and Chief Executive Officer Chief Executive Officer Sidney Taurel Emerson Electric Co. The Boeing Company Chairman Pearson plc Mark Fields Hutham S. Olayan President and Chief Executive Officer President and Chief Executive Officer, Peter R. Voser Ford Motor Company Olayan America, and Principal, Director and Chairman Senior Executive ABB Ltd. Alex Gorsky The Olayan Group Chairman and Chief Executive Officer Johnson & Johnson James W. Owens Retired Chairman and

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Chief Executive Officer Caterpillar Inc.

SENIOR LEADERSHIP

Simon J. Beaumont Martin Jetter Christina M. Montgomery Vice President Senior Vice President Vice President Tax and Treasurer IBM Global Technology Services Assistant General Counsel and Secretary Michelle H. Browdy James J. Kavanaugh Senior Vice President Senior Vice President Robert J. Picciano Legal and Regulatory Affairs, Transformation and Operations Senior Vice President and General Counsel IBM Cognitive Systems John E. Kelly III Erich Clementi Senior Vice President Michael D. Rhodin Senior Vice President IBM Cognitive Solutions Senior Vice President IBM Global Markets and IBM Research IBM Watson Business Development

Robert F. Del Bene David W. Kenny Virginia M. Rometty Vice President and Controller Senior Vice President Chairman, President and IBM Watson and Chief Executive Officer Bruno V. Di Leo Allen IBM Cloud Platform Senior Vice President Thomas W. Rosamilia IBM Global Markets Kenneth M. Keverian Senior Vice President Senior Vice President IBM Systems Mark Foster Corporate Strategy Senior Vice President Martin J. Schroeter IBM Global Business Services Arvind Krishna Senior Vice President and Senior Vice President Chief Financial Officer Diane J. Gherson IBM Hybrid Cloud and Senior Vice President Director of IBM Research Bridget A. van Kralingen Human Resources Senior Vice President Robert J. LeBlanc IBM Industry Platforms Jon C. Iwata Senior Vice President Senior Vice President Marketing and Communications

* Term on the Board ends on April 25, 2017.

158

Stockholder Information International Business Machines Corporation and Subsidiary Companies

IBM Stockholder Services

Stockholders with questions about their accounts should contact:

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rhode Island 02940-3078 (888) IBM-6700

Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.

Stockholders can also reach Computershare Trust Company, N.A. via e-mail at: ibm@computershare.com

Hearing-impaired stockholders with access to a telecommunications device (TDD) can communicate directly with Computershare Trust Company, N.A., by calling (800) 490-1493. Stockholders residing outside the United States, Canada and Puerto Rico should call (781) 575-2694.

IBM on the Internet

Topics featured in this Annual Report can be found online at www.ibm.com. Financial results, news on IBM products, services and other activities can also be found at that website.

IBM files reports with the Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC.

IBM’s website (www.ibm.com/investor) contains a significant amount of information about IBM, including the company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These materials are available free of charge on or through our website.

The public may read and copy any materials the company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Computershare Investment Plan (formerly IBM Investor Services Program)

The Computershare Investment Plan brochure outlines a number of services provided for IBM stockholders and potential IBM investors, including the reinvestment of dividends, direct purchase and the deposit of IBM stock certificates for safekeeping. Call (888) IBM-6700 for a copy of the brochure. Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.

Investors with other requests may write to: IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.

IBM Stock

IBM common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, and outside the United States.

Stockholder Communications

Stockholders can get quarterly financial results, a summary of the Annual Meeting remarks, and voting results from the meeting by calling (914) 499-7777, by sending an e-mail to [email protected], or by writing to IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.

Annual Meeting

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The IBM Annual Meeting of Stockholders will be held on Tuesday, April 25, 2017, at 10 a.m. at the Tampa Marriott Waterside Hotel & Marina, Tampa, Florida.

Literature for IBM Stockholders

The literature mentioned below on IBM is available without charge from:

Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rhode Island 02940-3078 (888) IBM-6700.

Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.

The company’s annual report on Form 10-K and the quarterly reports on Form 10-Q provide additional information on IBM’s business. The 10-K report is released by the end of February; 10-Q reports are released by early May, August and November.

An audio recording of the 2016 Annual Report will be available for sight-impaired stockholders in June 2017.

The IBM Corporate Responsibility Report highlights IBM’s values and its integrated approach to corporate responsibility, including its innovative strategies to transform communities through global citizenship. The full Corporate Responsibility Report is available online at www.ibm.com/responsibility. It is also available in printed form by downloading the report at www.ibm. com/responsibility.

General Information

Stockholders of record can receive account information and answers to frequently asked questions regarding stockholder accounts online at www.ibm.com/investor. Stockholders of record can also consent to receive future IBM Annual Reports and Proxy Statements online through this site.

For answers to general questions about IBM from within the continental United States, call (800) IBM-4YOU. From outside the United States, Canada and Puerto Rico, call (914) 499-1900.

159

International Business Machines Corporation

New Orchard Road, Armonk, New York 10504

(914) 499-1900

AIX, AlchemyAI, Aspera, Blekko, Blue Box, Bluemix, Bluewolf, Clearleap, Cleversafe, Cloudant, Explorys, Gravitant, IBM, IBM Flex Systems, IBM MobilFirst, IBM Watson, Kenexa, Merge Healthcare, OpenPOWER, Phytel, POWER, Power Systems, Resilient, The Weather Company, Silverpop, StrongLoop, Ustream, Watson, Watson Health, Watson IoT, z/OS and z System are trademarks or registered trademarks of International Business Machines Corporation or its wholly owned subsidiaries. GLOBALFOUNDRIES is a registered trademark of GLOBALFOUNDRIES Inc. Lenovo is a trademark of Lenovo Group Limited in the United States, other countries, or both. Linux is a registered trademark of Linus Torvalds in the United States, other countries, or both. UNIX is a registered trademark of the Open Group in the United States and other countries. Other company, product and service names may be trademarks or service marks of others.

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EXHIBIT 21

INTERNATIONAL BUSINESS MACHINES CORPORATION SUBSIDIARIES Subsidiaries—as of December 31, 2016 State or country of Voting percent owned directly or Company Name incorporation or indirectly by registrant organization IBM Argentina Sociedad de Responsabilidad Argentina 100 Limitada IBM Australia Limited Australia 100 IBM Global Financing Australia Limited Australia 100 IBM Oesterreich Internationale Bueromaschinen Austria 100 Gesellschaft m.b.H. IBM Bahamas Limited Bahamas 100 IBM Bahrain SPC Bahrain 100 IBM Bangladesh Private Limited Bangladesh 100 IBM Belgium Financial Services Company sprl/ Belgium 100 bvba International Business Machines of Belgium sprl/ Belgium 100 buba WTC Insurance Corporation, Ltd. Bermuda 100 IBM Brasil—Industria, Maquinas e Servicos Brazil 100 Limitada Banco IBM S.A. Brazil 100 IBM Bulgaria Ltd. Bulgaria 100 IBM Burkina Faso SARL Burkina Faso 100 IBM Canada Limited—IBM Canada Limitee Canada 100 IBM Global Financing Canada Corporation Canada 100 IBM Tchad SARLU Chad 100 IBM de Chile S.A.C. Chile 100 IBM Global Financing de Chile SpA Chile 100 IBM (China) Investment Company Limited China (P.R.C.) 100 IBM (China) Co., Ltd. China (P.R.C.) 100 IBM Factoring (China) Co., Ltd. China (PRC) 100 IBM de Colombia & C.I.A. S.C.A. Colombia 100 IBM Congo SARL Congo 100 IBM RDC Congo Republic 100 IBM Business Transformation Center, S.r.l. Costa Rica 100 IBM Croatia Ltd./IBM Hrvatska d.o.o. Croatia 100 IBM Ceska Republika spol. s.r.o. Czech Republic 100 IBM Danmark ApS Denmark 100 IBM Global Financing Danmark ApS Denmark 100 IBM del Ecuador, C.A. Ecuador 100 IBM Egypt Business Support Services Egypt 100 IBM Eesti Osauhing (IBM Estonia Ou) Estonia 100 IBM Global Financing Finland Oy Finland 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Oy IBM Finland AB Finland 100 Compagnie IBM France, S.A.S. France 100 IBM France Financement, S.A. France 100 International Business Machines Gabon SARL Gabon 100 IBM Deutschland GmbH Germany 100 IBM Deutschland Kreditbank GmbH Germany 100 IBM Global Financing Deutschland GmbH Germany 100 International Business Machines Ghana Limited Ghana 100 IBM Hellas Information Handling Systems S.A. Greece 100 IBM China/Hong Kong Limited Hong Kong 100 IBM Magyarorszagi Kft. Hungary 100 IBM India Private Limited India 100 PT IBM Indonesia Indonesia 100 IBM Ireland Limited Ireland 100 IBM Ireland Product Distribution Limited Ireland 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document State or country of Voting percent owned directly or indirectly Company Name incorporation or by registrant organization IBM Israel Limited Israel 100 IBM Capital Italia S.r.l. Italy 100 IBM Italia Servizi Finanziari S.r.l. Italy 100 IBM Italia S.p.A. Italy 100 IBM Japan Credit LLC Japan 100 IBM Japan, Ltd. Japan 100 IBM East Africa Limited Kenya 100 IBM Global Financing Korea Limited Korea (South) 100 IBM Korea, Inc. Korea (South) 100 IBM Kuwait SPC Kuwait 100 Sabiedriba ar irobezotu atbildibu IBM Latvija Latvia 100 IBM Lietuva Lithuania 100 IBM Services Financial Sector Luxembourg Sarl Luxembourg 100 International Business Machines Madagascar Madagascar 100 SARLU International Information Services Management Malawi 100 Limited IBM CAPITAL MALAYSIA SDN. BHD. Malaysia 100 IBM Malaysia Sdn. Bhd. Malaysia 100 IBM Malta Limited Malta 100 IBM Mauritius Mauritius 100 IBM Capital Mexico I, S. de R.L. de C.V. Mexico 100 IBM de Mexico, S. de R.L. Mexico 100 IBM de Mexico, Comercializacion y Servicios S. Mexico 100 de R.L. de C.V. IBM Maroc Morocco 100 IBM International Group B.V. Netherlands 100 IBM Nederland Financieringen B.V. Netherlands 100 IBM Nederland B.V. Netherlands 100 IBM New Zealand Limited New Zealand 100 IBM Niger SARLU Niger 100 International Business Machines West Africa Nigeria 100 Limited IBM Finans Norge AS Norway 100 International Business Machines AS Norway 100 IBM Capital Peru S.A.C. Peru 100 IBM del Peru, S.A. Peru 100 IBM Philippines, Incorporated Philippines 100 IBM Global Financing Polska Sp.z.o.o. Poland 100 IBM Polska Sp.z.o.o. Poland 100 Companhia IBM Portuguesa, S.A. Portugal 100 IBM Qatar SSC Qatar 100 IBM Romania Srl Romania 100 IBM East Europe/Asia Ltd. Russia 100 International Business Machines Senegal Senegal 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document IBM—International Business Machines d.o.o., Serbia 100 Belgrade International Information Services Management Seychelles 100 Limited IBM Limited Sierra Leone 100 IBM CAPITAL SINGAPORE PTE. LTD. Singapore 100 IBM Singapore Pte. Ltd. Singapore 100 IBM Slovensko spol s.r.o. Slovak Republic 100 IBM Slovenija d.o.o. Slovenia 100 IBM Global Financing South Africa (Pty) Ltd South Africa 100 IBM South Africa (Pty) Ltd. South Africa 100 IBM Global Financing España, S.L.U. Spain 100 IBM Global Services España, S.A. Spain 100 International Business Machines, S.A. Spain 100 IBM Global Financing Sweden AB Sweden 100 IBM Svenska Aktiebolag Sweden 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document State or country of Voting percent owned directly or Company Name incorporation or indirectly by registrant organization IBM Global Financing Schweiz GmbH Switzerland 100 IBM Schweiz AG—IBM Suisse SA—IBM Suizzera Switzerland 100 SA—IBM Switzerland Ltd. IBM Taiwan Corporation Taiwan 100 IBM Tanzania Limited Tanzania 100 IBM Capital (Thailand) Company Limited Thailand 100 IBM Thailand Company Limited Thailand 100 IBM Tunisie Tunisia 100 IBM (International Business Machines) Turk Limited Turkey 100 Sirketi Technology Products and Services Limited Uganda 100 IBM Ukraine Ukraine 100 United Arab IBM Middle East FZ—LLC 100 Emirates IBM United Kingdom Limited United Kingdom 100 IBM United Kingdom Asset Leasing Limited United Kingdom 100 IBM United Kingdom Financial Services Limited United Kingdom 100 IBM del Uruguay, S.A. Uruguay 100 IBM Capital Inc. USA (Delaware) 100 IBM Credit LLC USA (Delaware) 100 IBM International Group Capital LLC USA (Delaware) 100 IBM International Foundation USA (Delaware) 100 IBM World Trade Corporation USA (Delaware) 100 Softlayer Technologies, Inc. USA (Delaware) 100 IBM de Venezuela, S.A. Venezuela 100 IBM Vietnam Company Vietnam 100 International Business Machines Zambia Limited Zambia 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks EXHIBIT 21 INTERNATIONAL BUSINESS MACHINES CORPORATION SUBSIDIARIES

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-77235, 33-29022, 33-33458, 33-34406, 33-53777, 33-60225, 33-60227, 33-60237, 33-60815, 333-01411, 33-52931, 33-33590, 333-76914, 333-87708, 333-09055, 333-23315, 333-31305, 333-41813, 333-44981, 333-48435, 333-81157, 333-87751, 333-87859, 333-87925, 333-30424, 333-33692, 333-36510, 333-102872, 333-102870, 333-103471, 333-104806, 333-114190, 333-131934, 333-138326, 333-138327, 333-148964, 333-170559 and 333-171968, 333-76914 and 333-196722) and the Registration Statements on Form S-3 (Nos. 33-49475(1), 33-31732, 333-03763, 333-27669, 333-32690, 333-101034, 333-212685 and 333-212685-01) of International Business Machines Corporation of our report dated February 28, 2017, relating to the consolidated financial statements and effectiveness of internal control over financial reporting, which appears in the 2016 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 28, 2017, relating to the Financial Statement Schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP New York, New York February 28, 2017

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Exhibit 24.1

POWER OF ATTORNEY OF VIRGINIA M. ROMETTY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Chairman, President and Chief Executive Officer and Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Virginia M. Rometty Virginia M. Rometty Chairman, President and Chief Executive Officer

POWER OF ATTORNEY OF MARTIN J. SCHROETER

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Senior Vice President and Chief Financial Officer of International Business Machines Corporation, a New York corporation, which will file with U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, and Virginia M. Rometty, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Martin J. Schroeter Martin J. Schroeter Senior Vice President and Chief Financial Officer

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document POWER OF ATTORNEY OF ROBERT F. DEL BENE

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Vice President and Controller of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys- in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Robert F. Del Bene Robert F. Del Bene Vice President and Controller

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Kenneth I. Chenault Director

POWER OF ATTORNEY OF IBM DIRECTOR

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Michael L. Eskew Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ David N. Farr Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Mark Fields Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Alex Gorsky Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Shirley Ann Jackson Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Andrew N. Liveris Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document /s/ W. James McNerney, Jr. Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Hutham S. Olayan Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ James W. Owens Director

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Joan E. Spero Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont, Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Sidney Taurel Director

POWER OF ATTORNEY OF IBM DIRECTOR

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of International Business Machines Corporation, a New York corporation, which will file with the U.S. Securities and Exchange Commission, Washington, D.C., under the provisions of the securities laws, an Annual Report for 2016 on Form 10-K, hereby constitutes and appoints Simon J. Beaumont,

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Michelle H. Browdy, Robert F. Del Bene, Christina M. Montgomery, Virginia M. Rometty, and Martin J. Schroeter, as true and lawful attorneys-in-fact and agents for the undersigned, and each of them with full power to act without the others, for the undersigned and in the name, place and stead of the undersigned, in any and all capacities, to sign or cause to be signed electronically said Annual Report on Form 10-K and any and all amendments thereto, and any and all other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof. This Power of Attorney may only be revoked by a written document executed by the undersigned that expressly revokes this power by referring to the date and subject hereof.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 28th day of February 2017.

/s/ Peter R. Voser Director

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RESOLUTION REGARDING

FILING OF THE COMPANY’S 2016 ANNUAL REPORT ON FORM 10-K

RESOLVED, that the Company’s 2016 Annual Report on Form 10-K be, and hereby is, approved and that the Officers of the Company be, and they hereby are, authorized and empowered to execute by powers of attorney the Form 10-K and to make such additions, supplements and changes thereto as in their opinion may be necessary or desirable and to cause such material to be filed with the U.S. Securities and Exchange Commission and other appropriate regulatory agencies.

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Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(a)/15D-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Virginia M. Rometty, certify that: 1. I have reviewed this annual report on Form 10-K of International Business Machines Corporation;

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

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

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

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

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

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

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

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

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

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

Date: February 28, 2017 /s/ VIRGINIA M. ROMETTY Virginia M. Rometty Chairman, President and Chief Executive Officer

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Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(a)/15D-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Martin J. Schroeter, certify that: 1. I have reviewed this annual report on Form 10-K of International Business Machines Corporation;

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

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

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

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

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

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

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

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

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

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

Date: February 28, 2017 /s/ MARTIN J. SCHROETER Martin J. Schroeter Senior Vice President and Chief Financial Officer

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Exhibit 32.1

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of International Business Machines Corporation (the "Company") on Form 10-K for the period ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Virginia M. Rometty, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

/s/ VIRGINIA M. ROMETTY Virginia M. Rometty Chairman, President and Chief Executive Officer February 28, 2017 A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks Exhibit 32.1 INTERNATIONAL BUSINESS MACHINES CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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Exhibit 32.2

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of International Business Machines Corporation (the "Company") on Form 10-K for the period ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Martin J. Schroeter, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

/s/ MARTIN J. SCHROETER Martin J. Schroeter Senior Vice President and Chief Financial Officer February 28, 2017 A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document QuickLinks Exhibit 32.2 INTERNATIONAL BUSINESS MACHINES CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Document and Entity 12 Months Ended Information - USD ($) Feb. 10, Jun. 30, Dec. 31, 2016 $ in Billions 2017 2016 Document and Entity Information Entity Registrant Name INTERNATIONAL BUSINESS MACHINES CORP Entity Central Index Key 0000051143 Document Type 10-K Document Period End Date Dec. 31, 2016 Amendment Flag false Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Voluntary Filers No Entity Current Reporting Status Yes Entity Filer Category Large Accelerated Filer Entity Public Float $ 145.0 Entity Common Stock, Shares 943,212,551 Outstanding Document Fiscal Year Focus 2016 Document Fiscal Period Focus FY Trading Symbol IBM

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of 12 Months Ended Earnings - USD ($) Dec. 31, 2016Dec. 31, 2015 Dec. 31, 2014 $ in Millions Revenue Services $ 51,268 $ 49,911 $ 55,673 Sales 26,942 29,967 35,063 Financing 1,710 1,864 2,057 Total revenue (Note T) 79,919 81,741 92,793 Cost Services 34,021 33,126 36,034 Sales 6,559 6,920 9,312 Financing 1,044 1,011 1,040 Total cost 41,625 41,057 46,386 Gross profit 38,294 40,684 46,407 Expense and other (income) Selling, general and administrative 21,069 20,430 23,180 Research, development and engineering (Note O) 5,751 5,247 5,437 Intellectual property and custom development income (1,631) (682) (742) Other (income) and expense 145 (724) (1,938) Interest expense (Notes D&J) 630 468 484 Total expense and other (income) 25,964 24,740 26,421 Income from continuing operations before income taxes 12,330 15,945 19,986 Provision for income taxes (Note N) 449 2,581 4,234 Income from continuing operations 11,881 13,364 15,751 Loss from discontinued operations, net of tax (Note C) (9) (174) (3,729) Net income $ 11,872 $ 13,190 $ 12,022 Assuming dilution Continuing operations (in dollars per share) (Note P) $ 12.39 $ 13.60 $ 15.59 Discontinued operations (in dollars per share) (Note P) (0.01) (0.18) (3.69) Total (in dollars per share) (Note P) 12.38 13.42 11.90 Basic Continuing operations (in dollars per share) (Note P) 12.44 13.66 15.68 Discontinued operations (in dollars per share) (Note P) (0.01) (0.18) (3.71) Total (in dollars per share) (Note P) $ 12.43 $ 13.48 $ 11.97 Weighted-average number of common shares outstanding Assuming dilution (in shares) 958,714,097 982,700,267 1,010,000,480 Basic (in shares) 955,422,530 978,744,523 1,004,272,584

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of 12 Months Ended Comprehensive Income - Dec. 31, Dec. 31, Dec. 31, USD ($) 2016 2015 2014 $ in Millions Consolidated Statement of Comprehensive Income Net income $ 11,872 $ 13,190 $ 12,022 Other comprehensive income/(loss), before tax Foreign currency translation adjustments (Note L) (20) (1,379) (1,636) Net changes related to available-for-sale securities (Note L) Unrealized gains/(losses) arising during the period (38) (54) (29) Reclassification of (gains)/losses to net income 34 86 5 Total net changes related to available-for-sale securities (3) 32 (24) Unrealized gains/(losses) on cash flow hedges (Note L) Unrealized gains/(losses) arising during the period 243 618 958 Reclassification of (gains)/losses to net income 102 (1,072) (97) Total unrealized gains/(losses) on cash flow hedges 345 (454) 861 Retirement-related benefit plans (Note L) Prior service costs/(credits) 6 1 Net (losses)/gains arising during the period (2,490) (2,963) (9,799) Curtailments and settlements (16) 33 24 Amortization of prior service (credits)/costs (107) (100) (114) Amortization of net (gains)/losses 2,764 3,304 2,531 Total retirement-related benefit plans 150 279 (7,357) Other comprehensive income/(loss), before tax (Note L) 472 (1,523) (8,156) Income tax (expense)/benefit related to items of other comprehensive (263) (208) 1,883 income (Note L) Other comprehensive income/(loss) (Note L) 209 (1,731) (6,274) Total comprehensive income/(loss) $ 12,081 $ 11,459 $ 5,748

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of Dec. 31, Dec. 31, Financial Position - USD ($) 2016 2015 $ in Millions Current assets Cash and cash equivalents $ 7,826 $ 7,686 Marketable securities (Note D) 701 508 Notes and accounts receivable - trade (net of allowances of $290 in 2016 and $367 in 2015) 9,182 8,333 Short-term financing receivables (net of allowances of $337 in 2016 and $490 in 2015) 19,006 19,020 (Note F) Other accounts receivable (net of allowances of $48 in 2016 and $51 in 2015) 1,057 1,201 Inventories (Note E) 1,553 1,551 Prepaid expenses and other current assets 4,564 4,205 Total current assets 43,888 42,504 Property, plant and equipment (Note G) 30,133 29,342 Less: Accumulated depreciation (Note G) 19,303 18,615 Property, plant and equipment - net (Note G) 10,830 10,727 Long-term financing receivables (net of allowances of $101 in 2016 and $118 in 2015) 9,021 10,013 (Note F) Prepaid pension assets (Note S) 3,034 1,734 Deferred taxes (Note N) 5,224 4,822 Goodwill (Note I) 36,199 32,021 Intangible assets - net (Note I) 4,688 3,487 Investments and sundry assets (Note H) 4,585 5,187 Total assets 117,470 110,495 Current liabilities Taxes (Note N) 3,235 2,847 Short-term debt (Notes D&J) 7,513 6,461 Accounts payable 6,209 6,028 Compensation and benefits 3,577 3,560 Deferred income 11,035 11,021 Other accrued expenses and liabilities 4,705 4,353 Total current liabilities 36,275 34,269 Long-term debt (Notes D&J) 34,655 33,428 Retirement and nonpension postretirement benefit obligations (Note S) 17,070 16,504 Deferred income 3,600 3,771 Other liabilities (Note K) 7,477 8,099 Total liabilities 99,078 96,071 Contingencies and commitments (Note M) IBM stockholders' equity Common stock, par value $0.20 per share, and additional paid-in capital; Shares authorized: 53,935 53,262 4,687,500,000 (Shares issued: 2016 - 2,225,116,815; 2015 - 2,221,223,449) Retained earnings 152,759 146,124 Treasury stock, at cost (shares: 2016 - 1,279,249,412; 2015 - 1,255,494,724) (159,050)(155,518) Accumulated other comprehensive income/(loss) (29,398) (29,607)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total IBM stockholders' equity 18,246 14,262 Noncontrolling interests (Note A) 146 162 Total equity 18,392 14,424 Total liabilities and equity $ $ 117,470 110,495

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of Financial Position Dec. 31, 2016 Dec. 31, 2015 (Parenthetical) - USD ($) $ in Millions Consolidated Statement of Financial Position Notes and accounts receivable - trade, allowances $ 290 $ 367 Short-term financing receivables, allowances 337 490 Other accounts receivable, allowances 48 51 Long-term financing receivables, allowances $ 101 $ 118 Common stock, par value (in dollars per share) $ 0.20 $ 0.20 Common stock, Shares authorized (in shares) 4,687,500,0004,687,500,000 Common stock, Shares issued (in shares) 2,225,116,815 2,221,223,449 Treasury stock, shares (in shares) 1,279,249,4121,255,494,724

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of 12 Months Ended Cash Flows - USD ($) Dec. 31, Dec. 31, Dec. 31, $ in Millions 2016 2015 2014 Cash flows from operating activities Net income $ 11,872 $ 13,190 $ 12,022 Adjustments to reconcile net income to cash provided by operating activities Depreciation 2,837 2,662 3,145 Amortization of intangibles 1,544 1,193 1,347 Stock-based compensation 544 468 512 Deferred taxes (1,132) 1,387 (237) Net (gain)/loss on asset sales and other 62 481 (1,535) Loss on microelectronics business disposal 71 3,381 Change in operating assets and liabilities, net of acquisitions/ divestitures Receivables (including financing receivables) 712 812 1,270 Retirement related 54 (22) (655) Inventories (14) 133 (39) Other assets/other liabilities 282 (3,448) (1,886) Accounts payable 197 81 (456) Net cash provided by operating activities 16,958 17,008 16,868 Cash flows from investing activities Payments for property, plant and equipment (3,567) (3,579) (3,740) Proceeds from disposition of property, plant and equipment 424 370 404 Investment in software (583) (572) (443) Purchases of marketable securities and other investments (5,917) (3,073) (2,338) Proceeds from disposition of marketable securities and other investments 5,692 2,842 2,493 Non-operating finance receivables - net (891) (398) (1,078) Acquisition of businesses, net of cash acquired (5,679) (3,349) (656) Divestiture of businesses, net of cash transferred (454) (401) 2,357 Net cash used in investing activities (10,976) (8,159) (3,001) Cash flows from financing activities Proceeds from new debt 9,132 5,540 8,180 Payments to settle debt (6,395) (5,622) (4,644) Short-term borrowings/(repayments) less than 90 days - net 26 101 (1,753) Common stock repurchases (3,502) (4,609) (13,679) Common stock transactions - other 204 322 709 Cash dividends paid (5,256) (4,897) (4,265) Net cash used in financing activities (5,791) (9,166) (15,452) Effect of exchange rate changes on cash and cash equivalents (51) (473) (655) Net change in cash and cash equivalents 140 (790) (2,240) Cash and cash equivalents at beginning of period 7,686 8,476 10,716 Cash and cash equivalents at end of period 7,826 7,686 8,476 Supplemental data

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Income taxes paid - net of refunds received 1,078 2,657 5,748 Interest paid on debt $ 1,158 $ 995 $ 1,061

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Common Accumulated Consolidated Statement of Total IBM Stock and Non- Retained Treasury Other Changes in Equity - USD ($) Stockholders'Additional Controlling Total Earnings Stock Comprehensive $ in Millions Equity Paid-in Interests Income/(Loss) Capital Balance at the Beginning of $ $ $ $ 22,792 $ 51,594 $ (21,602) $ 137 the Period at Dec. 31, 2013 130,042 (137,242) 22,929 Net income plus other comprehensive income/(loss) Net income 12,022 12,022 12,022 Other comprehensive income/ (6,274) (6,274) (6,274) (loss) Total comprehensive income/ 5,748 5,748 (loss) Cash dividends paid - common (4,265) (4,265) (4,265) stock Common stock issued under employee plans (Shares - 3,893,366, 6,013,875 and 977 977 977 7,687,026 for 2016, 2015 and 2014, respectively) Purchases (Shares - 854,365, 1,625,820 and 1,313,569) and sales (Shares - 383,077, 1,155,558 and 1,264,232) of (85) (6) (79) (85) treasury stock under employee plans - net, for 2016, 2015 and 2014, respectively Other treasury shares purchased, not retired (Shares - 23,283,400, 30,338,647 and (13,395) (13,395) (13,395) 71,504,867 for 2016, 2015 and 2014, respectively) Changes in other equity 95 95 95 Changes in noncontrolling 8 8 interests Balance at the End of the 11,868 52,666 137,793 (150,715)(27,875) 146 12,014 Period at Dec. 31, 2014 Net income plus other comprehensive income/(loss) Net income 13,190 13,190 13,190 Other comprehensive income/ (1,731) (1,731) (1,731) (loss) Total comprehensive income/ 11,459 11,459 (loss) Cash dividends paid - common (4,897) (4,897) (4,897) stock

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Common stock issued under employee plans (Shares - 3,893,366, 6,013,875 and 606 606 606 7,687,026 for 2016, 2015 and 2014, respectively) Purchases (Shares - 854,365, 1,625,820 and 1,313,569) and sales (Shares - 383,077, 1,155,558 and 1,264,232) of (63) 39 (102) (63) treasury stock under employee plans - net, for 2016, 2015 and 2014, respectively Other treasury shares purchased, not retired (Shares - 23,283,400, 30,338,647 and (4,701) (4,701) (4,701) 71,504,867 for 2016, 2015 and 2014, respectively) Changes in other equity (10) (10) (10) Changes in noncontrolling 16 16 interests Balance at the End of the 14,262 53,262 146,124 (155,518)(29,607) 162 14,424 Period at Dec. 31, 2015 Net income plus other comprehensive income/(loss) Net income 11,872 11,872 11,872 Other comprehensive income/ 209 209 209 (loss) Total comprehensive income/ 12,081 12,081 (loss) Cash dividends paid - common (5,256) (5,256) (5,256) stock Common stock issued under employee plans (Shares - 3,893,366, 6,013,875 and 695 695 695 7,687,026 for 2016, 2015 and 2014, respectively) Purchases (Shares - 854,365, 1,625,820 and 1,313,569) and sales (Shares - 383,077, 1,155,558 and 1,264,232) of (59) 18 (77) (59) treasury stock under employee plans - net, for 2016, 2015 and 2014, respectively Other treasury shares purchased, not retired (Shares - 23,283,400, 30,338,647 and (3,455) (3,455) (3,455) 71,504,867 for 2016, 2015 and 2014, respectively) Changes in other equity (22) (22) 0 (22)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Changes in noncontrolling (16) (16) interests Balance at the End of the $ $ $ $ 18,246 $ 53,935 $ (29,398) $ 146 Period at Dec. 31, 2016 152,759 (159,050) 18,392

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Consolidated Statement of 12 Months Ended Changes in Equity Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Parenthetical) - shares Consolidated Statement of Changes in Equity Common stock issued under employee plans (in shares) 3,893,366 6,013,875 7,687,026 Purchases of treasury stock under employee plans (in shares) 854,365 1,625,820 1,313,569 Sales of treasury stock under employee plans (in shares) 383,077 1,155,558 1,264,232 Other treasury shares purchased, not retired (in shares) 23,283,400 30,338,647 71,504,867

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES Dec. 31, 2016 SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT NOTE A. SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING POLICIES Basis of Presentation The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable. On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The transaction closed on July 1, 2015. Refer to note C, “Acquisitions/Divestitures,” for additional information on the transaction. In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments, but did not impact the company’s Consolidated Financial Statements. Refer to note T, “Segment Information,” on pages 150 to 154 for additional information on the changes in reportable segments. Noncontrolling interest amounts of $16 million, $8 million and $6 million, net of tax, for the years ended December 31, 2016, 2015 and 2014, respectively, are included as a reduction within other (income) and expense in the Consolidated Statement of Earnings. Principles of Consolidation The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are primarily majority owned. Any noncontrolling interest in the equity of a subsidiary is reported in Equity in the Consolidated Statement of Financial Position. Net income and losses attributable to the noncontrolling interest is reported as described above in the Consolidated Statement of Earnings. The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in business entities in which the company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method and the company’s proportionate share of income or loss is recorded in other (income) and expense. The accounting policy for other investments in equity securities is on page 98 within “Marketable Securities.” Equity investments in non-publicly traded entities are primarily accounted for using the cost method. All intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) (OCI) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See “Critical Accounting Estimates” on pages 71 to 74 for a discussion of the company’s critical accounting estimates. Revenue The company recognizes revenue when it is realized or realizable and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has: economic substance apart from the company, credit risk, risk of loss to the inventory; and, the fee to the company is not contingent upon resale or payment by the end user, the company has no further obligations related to bringing about resale or delivery and all other revenue recognition criteria have been met. The company reduces revenue for estimated client returns, stock rotation, price protection, rebates and other similar allowances. (See Schedule II, “Valuation and Qualifying Accounts and Reserves” included in the company’s Annual Report on Form 10-K). Revenue is recognized only if these estimates can be reasonably and reliably determined. The company bases its estimates on historical results taking into consideration the type of client, the type of transaction and the specifics of each arrangement. Payments made under cooperative marketing programs are recognized as an expense only if the company receives from the client an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably and reliably estimated. If the company does not receive an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably estimated, such payments are recorded as a reduction of revenue. Revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is a principal to the transaction. Several factors are considered to determine whether the company is an agent or principal, most notably whether the company is the primary obligor to the client, or has inventory risk. Consideration is also given to whether the company adds meaningful value to the vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in establishing the sales price or has credit risk. The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue. Multiple-Deliverable Arrangements The company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of services, software, hardware and/or financing. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements can also include financing provided by the company. These arrangements consist of multiple deliverables, with the hardware and software delivered in one reporting period, and the software support and hardware maintenance services delivered across multiple reporting periods. In another example, a client may outsource the running of its datacenter operations to the company on a long-term, multiple-year basis and periodically purchase servers and/or software products from the company to upgrade or expand its facility. The outsourcing services are provided on a continuous basis across multiple reporting periods, and the hardware and software products are delivered in one reporting period. To the extent that a deliverable in a multiple-deliverable arrangement is subject to specific accounting guidance that deliverable is accounted for in accordance with such specific guidance. Examples of such arrangements may include leased hardware which is subject to specific leasing guidance or software which is subject to specific software revenue recognition guidance on whether and/or how to separate multiple-deliverable arrangements into separate units of accounting (separability) and how to allocate the arrangement consideration among those separate units of accounting (allocation). For all other deliverables in multiple-deliverable arrangements, the guidance below is applied for separability and allocation. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met: · The delivered item(s) has value to the client on a standalone basis; and ·If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document accounting based on each unit’s relative selling price. The following revenue policies are then applied to each unit of accounting, as applicable. Revenue from the company’s cloud, analytics, mobile, security, and cognitive offerings follow the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue depending on the type of offering which can be comprised of services, hardware and/or software. Services The company’s primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services, consulting and systems integration, technology infrastructure and system maintenance, hosting and the design and development of complex IT systems to a client’s specifications (design and build). Many of these services can be delivered entirely or partially through as-a-Service or cloud delivery models. These services are provided on a time-and-material basis, as a fixed-price contract or as a fixed- price per measure of output contract and the contract terms range from less than one year to over 10 years. Revenue from IT datacenter and business process outsourcing contracts is recognized in the period the services are provided using either an objective measure of output or on a straight-line basis over the term of the contract. Under the output method, the amount of revenue recognized is based on the services delivered in the period. Revenue from application management services, technology infrastructure, and system maintenance and hosting contracts is recognized on a straight-line basis over the terms of the contracts. Revenue from time-and-material contracts is recognized as labor hours are delivered and direct expenses are incurred. Revenue related to extended warranty and product maintenance contracts is recognized on a straight-line basis over the delivery period. Revenue from fixed-price design and build contracts is recognized under the percentage-of- completion (POC) method. Under the POC method, revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by the company. The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For non-POC method services contracts, any losses are recorded as incurred. In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of $5,873 million and $6,039 million at December 31, 2016 and 2015, respectively, is included in the Consolidated Statement of Financial Position. In other services contracts, the company performs the services prior to billing the client. Unbilled accounts receivable of $1,611 million and $1,630 million at December 31, 2016 and 2015, respectively, is included in notes and accounts receivable-trade in the Consolidated Statement of Financial Position. Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions. Unbilled receivables are expected to be billed within four months. Hardware The company’s hardware offerings include the sale or lease of system servers and storage solutions. The company also offers installation services for its more complex hardware products. Revenue from hardware sales and sales-type leases is recognized when risk of loss has transferred to the client and there are no unfulfilled company obligations that affect the client’s final acceptance of the arrangement. Any cost of standard warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease. Software

Revenue from perpetual (one-time charge) license software is recognized at the inception of the license term if all revenue recognition criteria have been met. Revenue from post-contract

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document support, which may include unspecified upgrades on a when-and-if-available basis, is recognized on a straight-line basis over the period such items are delivered. Revenue from software hosting or Software-as-a-Service arrangements is recognized as the service is delivered. In software hosting arrangements, the rights provided to the customer (e.g., ownership of a license, contract termination provisions and the feasibility of the customer to operate the software) are considered in determining whether the arrangement includes a license. In arrangements which include a software license, the associated revenue is recognized according to whether the license is perpetual or term. Revenue from term (recurring license charge) license software is recognized on a straight-line basis over the period that the client is entitled to use the license. In multiple-deliverable arrangements that include software that is more than incidental to the products or services as a whole (software multiple-deliverable arrangements), software and software-related elements are accounted for in accordance with software revenue recognition guidance. Software-related elements include software products and services for which a software deliverable is essential to its functionality. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are not within the scope of software revenue recognition guidance and are accounted for based on other applicable revenue recognition guidance. A software multiple-deliverable arrangement is separated into more than one unit of accounting if all of the following criteria are met:

·The functionality of the delivered element(s) is not dependent on the undelivered element(s); ·There is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s). VSOE of fair value is based on the price charged when the deliverable is sold separately by the company on a regular basis and not as part of the multiple-deliverable arrangement; and ·Delivery of the delivered element(s) represents the culmination of the earnings process for that element(s). If any one of these criteria is not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is VSOE of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative VSOE of fair value. There may be cases, however, in which there is VSOE of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate VSOE of fair value of the undelivered elements. The company’s multiple-deliverable arrangements may have a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-deliverable arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy: VSOE, third-party evidence (TPE) or best estimate of selling price (BESP). In circumstances where the company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, BESP is used for the purpose of performing this allocation. Financing Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease. Best Estimate of Selling Price In certain instances, the company is not able to establish VSOE for all elements in a multiple- deliverable arrangement. When VSOE cannot be established, the company attempts to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. When the company is unable to establish selling price using VSOE or TPE, the company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the company would transact a sale if the product or service were sold on a stand- alone basis. BESP may be used, for example, if a product is not sold on a stand-alone basis or when the company sells a new product, for which VSOE and TPE does not yet exist, in a multiple-deliverable arrangement prior to selling the new product on a stand-alone basis.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company determines BESP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. The determination of BESP is a formal process that includes review and approval by the company’s management. In addition, the company regularly reviews VSOE and TPE for its products and services, in addition to BESP. Services Costs Recurring operating costs for services contracts, including costs related to bid and proposal activities, are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the POC method are deferred and recognized based on the labor costs incurred to date, as a percentage of the total estimated labor costs to fulfill the contract. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts are deferred and subsequently amortized. These costs consist of transition and setup costs related to the installation of systems and processes and are amortized on a straight-line basis over the expected period of benefit, not to exceed the term of the contract. Additionally, fixed assets associated with outsourcing contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit not to exceed the term of the contract. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the estimated minimum remaining undiscounted cash flows of a contract to the unamortized contract costs. If such minimum undiscounted cash flows are not sufficient to recover the unamortized costs, an impairment loss is recognized. Deferred services transition and setup costs were $2,072 million and $2,144 million at December 31, 2016 and 2015, respectively. Amortization of deferred services transition and setup costs was estimated at December 31, 2016 to be $590 million in 2017, $515 million in 2018, $374 million in 2019, $248 million in 2020 and $344 million thereafter. Deferred amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements were $160 million and $184 million at December 31, 2016 and 2015, respectively. Amortization of deferred amounts paid to clients in excess of the fair value of acquired assets is recorded as an offset of revenue and was estimated at December 31, 2016 to be $53 million in 2017, $46 million in 2018, $28 million in 2019, $20 million in 2020 and $13 million thereafter. In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services. Software Costs Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up to three years and are recorded in software cost within cost of sales. The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to software cost within cost of sales as incurred. The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software programs, including software coding, installation, testing and certain data conversions. These capitalized costs are amortized on a straight-line basis over periods ranging up to three years and are recorded in selling, general and administrative expense. Product Warranties The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. The company estimates its warranty costs standard to the deliverable based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period. Changes in deferred income for extended warranty contracts, and in the warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Statement of Financial Position, are presented in the following tables: Standard Warranty Liability ($ in millions)

2016 2015 Balance at January 1 $ 181 $ 197 Current period accruals 145 173 Accrual adjustments to reflect experience (6) 7 Charges incurred (164) (196) Balance at December 31 $ 156 $ 181

Extended Warranty Liability (Deferred Income) ($ in millions)

2016 2015 Balance at January 1 $ 538 $ 536 Revenue deferred for new extended warranty contracts 263 286 Amortization of deferred revenue (267) (253) Other* (4) (31) Balance at December 31 $ 531 $ 538 Current portion $ 264 $ 238 Noncurrent portion $ 267 $ 300

* Other consists primarily of foreign currency translation adjustments. Shipping and Handling Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Statement of Earnings. Expense and Other Income Selling, General and Administrative Selling, general and administrative (SG&A) expense is charged to income as incurred. Expenses of promoting and selling products and services are classified as selling expense and include such items as compensation, advertising, sales commissions and travel. General and administrative expense includes such items as compensation, legal costs, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative expense includes other operating items such as an allowance for credit losses, workforce rebalancing charges for contractually obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations, amortization of certain intangible assets and environmental remediation costs. Advertising and Promotional Expense The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from vendors are recorded net of advertising and promotional expense in the period in which the related advertising and promotional expense is incurred. Advertising and promotional expense, which includes media, agency and promotional expense, was $1,327 million, $1,290 million and $1,307 million in 2016, 2015 and 2014, respectively, and is recorded in SG&A expense in the Consolidated Statement of Earnings. Research, Development and Engineering Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Intellectual Property and Custom Development Income The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how. Certain IP transactions to

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document third parties are licensing/royalty-based and others are transaction-based sales/other transfers. Income from licensing arrangements is recognized at the inception of the perpetual license term if all revenue recognition criteria have been met. Income from royalty-based fee arrangements is recognized over time or as the licensee sells future related products (i.e., variable royalty, based upon licensee’s revenue). The company also enters into cross-licensing arrangements of patents, and income from these arrangements is recognized when earned. In addition, the company earns income from certain custom development projects for strategic technology partners and specific clients. The company records the income from these projects if the fee is not refundable, is not dependent upon the success of the project and when all revenue recognition have been met. Other (Income) and Expense Other (income) and expense includes interest income (other than from Global Financing external transactions), gains and losses on certain derivative instruments, gains and losses from securities and other investments, gains and losses from certain real estate transactions, foreign currency transaction gains and losses, gains and losses from the sale of businesses, other than reported as discontinued operations, and amounts related to accretion of asset retirement obligations. Business Combinations and Intangible Assets Including Goodwill The company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of completed technology is recorded in Cost, and amortization of all other intangible assets is recorded in SG&A expense. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date. Impairment Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values. Goodwill and indefinite-lived intangible assets are tested at least annually, in the fourth quarter, for impairment and whenever changes in circumstances indicate an impairment may exist. Goodwill is tested at the reporting unit level which is the operating segment, or a business, which is one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the segment level. Components are aggregated as a single reporting unit if they have similar economic characteristics. Depreciation and Amortization Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 20 years; and computer equipment, 1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years. Capitalized software costs incurred or acquired after technological feasibility has been established are amortized over periods ranging up to 3 years. Capitalized costs for internal-use software are amortized on a straight-line basis over periods ranging up to 3 years. Other intangible assets are amortized over periods between 1 and 7 years. Environmental The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the company accrues remediation costs for known environmental liabilities. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts are recorded for environmental liabilities that are not probable or estimable. Asset Retirement Obligations

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Asset retirement obligations (ARO) are legal obligations associated with the retirement of long- lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets. Defined Benefit Pension and Nonpension Postretirement Benefit Plans The funded status of the company’s defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. For the nonpension postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held in an irrevocable trust fund, held for the sole benefit of participants, which are invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess. The current portion of the retirement and nonpension postretirement benefit obligations represents the actuarial present value of benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is recorded in compensation and benefits in the Consolidated Statement of Financial Position. Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses previously recognized as a component of OCI and amortization of the net transition asset remaining in accumulated other comprehensive income/(loss) (AOCI). Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Certain events, such as changes in the employee base, plan amendments and changes in actuarial assumptions, result in a change in the benefit obligation and the corresponding change in OCI. The result of these events is amortized as a component of net periodic cost/(income) over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets. Net periodic cost/(income) is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions. (Gains)/losses and prior service costs/(credits) not recognized as a component of net periodic cost/(income) in the Consolidated Statement of Earnings as they arise are recognized as a component of OCI in the Consolidated Statement of Comprehensive Income. Those (gains)/ losses and prior service costs/(credits) are subsequently recognized as a component of net periodic cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service costs/(credits) represent the cost of benefit changes attributable to prior service granted in plan amendments. The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the company’s management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. Defined Contribution Plans The company’s contribution for defined contribution plans is recorded when the employee renders service to the company. The charge is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions.

Stock-Based Compensation

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. The company grants its employees Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs) and Performance Share Units (PSUs) and periodically grants stock options. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year period. The fair value of the awards is determined and fixed on the grant date based on the company’s stock price, adjusted for the exclusion of dividend equivalents. The company estimates the fair value of stock options using a Black-Scholes valuation model. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions. The company records deferred tax assets for awards that result in deductions on the company’s income tax returns, based on the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statement of Earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards). Income Taxes

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When the company changes its determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The company recognizes tax liabilities when, despite the company’s belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in taxes and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Statement of Financial Position. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. Translation of Non-U.S. Currency Amounts Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to United States (U.S.) dollars at year-end exchange rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange prevailing during the year. Inventories, property, plant and equipment—net and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other (income) and expense. Income and expense items are translated at the weighted-average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in which exchange rates change. Derivative Financial Instruments Derivatives are recognized in the Consolidated Statement of Financial Position at fair value and are reported in prepaid expenses and other current assets, investments and sundry assets, other accrued expenses and liabilities or other liabilities. Classification of each derivative as current or noncurrent is based upon whether the maturity of the instrument is less than or greater than 12 months. To qualify for hedge accounting, the company requires that the instruments be effective in reducing the risk exposure that they are designated to hedge. For instruments that hedge cash

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document flows, hedge designation criteria also require that it be probable that the underlying transaction will occur. Instruments that meet established accounting criteria are formally designated as hedges. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception. The company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated hedge period. Where the company applies hedge accounting, the company designates each derivative as a hedge of: (1) the fair value of a recognized financial asset or liability, or of an unrecognized firm commitment (fair value hedge attributable to interest rate or foreign currency risk); (2) the variability of anticipated cash flows of a forecasted transaction, or the cash flows to be received or paid related to a recognized financial asset or liability (cash flow hedge attributable to interest rate or foreign currency risk); or (3) a hedge of a long-term investment (net investment hedge) in a foreign operation. In addition, the company may enter into derivative contracts that economically hedge certain of its risks, even though hedge accounting does not apply or the company elects not to apply hedge accounting. In these cases, there exists a natural hedging relationship in which changes in the fair value of the derivative, which are recognized currently in net income, act as an economic offset to changes in the fair value of the underlying hedged item(s). Changes in the fair value of a derivative that is designated as a fair value hedge, along with offsetting changes in the fair value of the underlying hedged exposure, are recorded in earnings each period. For hedges of interest rate risk, the fair value adjustments are recorded as adjustments to interest expense and cost of financing in the Consolidated Statement of Earnings. For hedges of currency risk associated with recorded financial assets or liabilities, derivative fair value adjustments are recognized in other (income) and expense in the Consolidated Statement of Earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded, net of applicable taxes, in OCI, in the Consolidated Statement of Comprehensive Income. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in AOCI is released to net income and reported in interest expense, cost, SG&A expense or other (income) and expense in the Consolidated Statement of Earnings based on the nature of the underlying cash flow hedged. Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. The effective portion of changes in the fair value of net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded as foreign currency translation adjustments in AOCI. Changes in the fair value of the portion of a net investment hedging derivative excluded from the effectiveness assessment are recorded in interest expense. If the underlying hedged item in a fair value hedge ceases to exist, all changes in the fair value of the derivative are included in net income each period until the instrument matures. When the derivative transaction ceases to exist, a hedged asset or liability is no longer adjusted for changes in its fair value except as required under other relevant accounting standards. Derivatives that are not designated as hedges, as well as changes in the fair value of derivatives that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (collectively, “ineffectiveness”), are recorded in earnings for each period and are primarily reported in other (income) and expense. When a cash flow hedging relationship is discontinued, the net gain or loss in AOCI must generally remain in AOCI until the item that was hedged affects earnings. However, when it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two- month period thereafter, the net gain or loss in AOCI must be reclassified into earnings immediately. The company reports cash flows arising from derivative financial instruments designated as fair value or cash flow hedges consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as fair value or cash flow hedges are classified in cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and derivatives that do not qualify as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. For currency swaps designated as hedges of foreign currency denominated debt (included in the company’s debt risk management program as addressed in note D, “Financial Instruments,” on pages 110 through 114), cash flows directly associated with the settlement of the principal element of these swaps are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement of Cash Flows. Financial Instruments

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. See note D, “Financial Instruments,” on pages 109 to 110 for further information. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Fair Value Measurement Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

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

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

· Level 3—Unobservable inputs for the asset or liability. The guidance requires the use of observable market data if such data is available without undue cost and effort.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

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

·Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market. As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial instrument, fair value is measured using a model described above. Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities. Cash Equivalents

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents. Marketable Securities Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt securities that are not expected to be realized in cash within one year and alliance equity securities are included in investments and sundry assets. Debt and marketable equity securities are considered available for sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in OCI. The realized gains and losses for available-for-sale securities are included in other (income) and expense in the Consolidated Statement of Earnings. Realized gains and losses are calculated based on the specific identification method. In determining whether an other-than-temporary decline in market value has occurred, the company considers the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and near-term prospects of the issuer or underlying collateral of a security; and the company’s intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity and debt securities that the company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other (income) and expense in the period in which the loss occurs. For debt securities that the company has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in other (income) and expense, while the remaining loss is recognized in OCI. The credit loss component recognized in other (income) and expense is identified as the amount of the principal cash flows not expected to be received over the remaining term of the debt security as projected using the company’s cash flow projections. Inventories Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash provided by operating activities in the Consolidated Statement of Cash Flows. Allowance for Credit Losses Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. A reasonable estimate of probable net losses on the value of customer receivables is recognized by establishing an allowance for credit losses. Notes and Accounts Receivable—Trade An allowance for uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts. Financing Receivables Financing receivables include sales-type leases, direct financing leases and loans. Leases are accounted for in accordance with lease accounting standards. Loan receivables are financial assets recorded at amortized cost which approximates fair value. The company determines its allowances for credit losses on financing receivables based on two portfolio segments: lease receivables and loan receivables. The company further segments the portfolio into two classes: major markets and growth markets. When calculating the allowances, the company considers its ability to mitigate a potential loss by repossessing leased equipment and by considering the current fair market value of any other collateral. The value of the equipment is the net realizable value. The allowance for credit losses for capital leases, installment sales and customer loans includes an assessment of the entire balance of the capital lease or loan, including amounts not yet due. The methodologies that the company uses to calculate its receivables reserves, which are applied consistently to its different portfolios, are as follows: Individually Evaluated—The company reviews all financing receivables considered at risk on a quarterly basis. The review primarily consists of an analysis based upon current information available about the client, such as financial statements, news reports, published credit ratings, current market-implied credit analysis, as well as the current economic environment, collateral net of repossession cost and prior collection history. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when foreclosure is probable. Using this information, the company determines the expected cash flow for the receivable and calculates

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. Collectively Evaluated—The company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Factors that could result in actual receivable losses that are materially different from the estimated reserve include sharp changes in the economy, or a significant change in the economic health of a particular client that represents a concentration in the company’s receivables portfolio. Other Credit-Related Policies Past Due—The company views receivables as past due when payment has not been received after 90 days, measured from the original billing date. Non-Accrual—Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables (impaired loans or nonperforming leases) with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables may be removed from non-accrual status, if appropriate, based upon changes in client circumstances. Impaired Loans—As stated above, the company evaluates all financing receivables considered at-risk, including loans, for impairment on a quarterly basis. The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status as appropriate. Client loans are primarily for software and services and are unsecured. These loans are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation. Write Off—Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that the customer is no longer in operation and/or, there is no reasonable expectation of additional collections or repossession. The company’s assessments factor in the history of collections and write-offs in specific countries and across the portfolio. Estimated Residual Values of Lease Assets The recorded residual values of lease assets are estimated at the inception of the lease to be the expected fair value of the assets at the end of the lease term. The company periodically reassesses the realizable value of its lease residual values. Any anticipated increases in specific future residual values are not recognized before realization through remarketing efforts. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct-financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to financing income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing income. Common Stock Common stock refers to the $.20 par value per share capital stock as designated in the company’s Certificate of Incorporation. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis. Earnings Per Share of Common Stock Earnings per share (EPS) is computed using the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings. Basic EPS of common stock is computed by dividing net income by the weighted- average number of common shares outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock awards, convertible notes and stock options.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended ACCOUNTING CHANGES Dec. 31, 2016 ACCOUNTING CHANGES

ACCOUNTING CHANGES NOTE B. ACCOUNTING CHANGES New Standards to be Implemented In January 2017, the Financial Accounting Standards Board (FASB) issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance is effective January 1, 2018 and early adoption is permitted. The guidance will be applied prospectively to any transactions occurring within the period of adoption. The company adopted the guidance effective January 1, 2017 and does not expect a material impact in the consolidated financial statements. In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments in sundry assets and prepaid and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $102 million. In January 2017, the company had a transaction generating approximately $400 million to $500 million benefit to income tax expense, income from continuing operations and net income for the three months ended March 31, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope. In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance. In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective January 1, 2017 and upon transition did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share- based awards compared to grant date, however these impacts are not expected to be material. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. Prior to adoption, the company reported this activity as an operating cash outflow. For the years ended December 31, 2016 and 2015, respectively, the amounts for this activity that were recorded as operating cash outflows were $126 million and $248 million. This provision of the guidance requires retrospective application upon adoption on January 1, 2017. In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company will adopt the guidance as of the effective date of January 1, 2019. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The company’s operating lease commitments were $6.9 billion at December 31, 2016. In 2016, the use of third-party residual value guarantee insurance resulted in the company recognizing $220 million of sales-type lease revenue that would otherwise have been recognized over the lease period as operating lease revenue. In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to have a material impact in the consolidated financial results. The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has since made significant progress, including identification of changes to policy, processes, systems and controls. The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements. Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements in the year of adoption. There will be no impact to cash flows. The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change. Standards Implemented In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The guidance was a change in financial presentation only. In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. The guidance did not have a material impact in the consolidated financial results. In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance was effective January 1, 2016. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results.

In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted it on a prospective basis. The guidance did not have a material impact in the consolidated financial results. In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company had debt issuance costs of $82 million and $74 million at December 31, 2016 and 2015, respectively. Debt issuance costs were previously included in investments and sundry assets in the Consolidated Statement of Financial Position.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months Ended DIVESTITURES Dec. 31, 2016 ACQUISITIONS/ DIVESTITURES ACQUISITIONS/ NOTE C. ACQUISITIONS/DIVESTITURES DIVESTITURES Acquisitions Purchase price consideration for all acquisitions, as reflected in the tables in this note, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents. 2016 In 2016, the company completed fifteen acquisitions at an aggregate cost of $5,899 million. The Weather Company (TWC)—On January 29, 2016, the company completed the acquisition of TWC’s B2B, mobile and cloud-based Web-properties, weather.com, Weather Underground, The Weather Company brand and WSI, its global business-to-business brand, for cash consideration of $2,278 million. The cable television segment was not acquired by IBM, but is licensing weather forecast data and analytics from IBM under a long-term contract. TWC was a privately held business. Goodwill of $1,717 million has been assigned to the Cognitive Solutions segment. It is expected that none of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years. Truven Health Analytics, Inc. (Truven)—On April 8, 2016, the company completed the acquisition of 100 percent of Truven, a leading provider of healthcare analytics solutions, for cash consideration of $2,612 million, of which $200 million will be paid in July 2017. Truven has developed proprietary analytic methods and assembled analytic content assets, creating extensive national healthcare utilization, performance, quality and cost data. Truven was a privately held business. Goodwill of $1,933 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 15 percent of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years. Other Acquisitions—The Technology Services & Cloud Platforms segment completed acquisitions of four businesses: in the first quarter: Ustream, Inc. (Ustream), a privately held business, and AT&T’s application and hosting services business; in the third quarter, G4S’s cash solutions business; and in the fourth quarter, Sanovi Technologies Private Limited (Sanovi), a privately held business. Global Business Services (GBS) completed acquisitions of six privately held businesses: in the first quarter, Resource/Ammirati, ecx International AG (ecx.io) and Optevia Limited (Optevia); in the second quarter, Aperto AG (Aperto) and Bluewolf Group, LLC (Bluewolf); and in the fourth quarter, Fluid, Inc.’s Expert Personal Shopper (XPS) business. The Cognitive Solutions segment completed acquisitions of three privately held businesses: in the second quarter, Resilient Systems, Inc. (Resilient) and EZ Legacy, Ltd. (EZSource); and in the fourth quarter, Promontory Financial Group, LLC (Promontory). Each acquisition is expected to enhance the company’s portfolio of product and services capabilities. Ustream provides cloud-based video streaming to enterprises and broadcasters. The acquisition of AT&T’s application and hosting services business strengthens the company’s cloud portfolio. The acquisition of G4S’s cash solutions business brings together the engineering skills of G4S with the company’s analytics and remote technology capabilities to expand delivery solutions. Sanovi provides hybrid cloud recovery, cloud migration and business continuity software for enterprise data centers and cloud infrastructure. Resource/Ammirati is a leading U.S. based digital marketing and creative agency, addressing the rising demand from businesses seeking to reinvent themselves for the digital economy. Ecx.io enhances GBS’ IBM Interactive Experience (IBM iX) with new digital marketing, commerce and platform skills to accelerate clients’ digital transformations. Optevia is a Software-as-a Service systems integrator specializing in CRM solutions for public sector organizations. Aperto also joined IBM iX, supporting the company’s growth in Europe, with expertise in digital strategy projects, including website and application development. Bluewolf extends the company’s analytics, experience design and industry consulting leadership with one of the world’s leading Salesforce consulting practices to deliver differentiated, consumer-grade experiences via the cloud. Fluid, Inc.’s Expert Personal Shopper business extends the company’s portfolio of SaaS offerings and services, helping clients conduct commerce and engage with their customers. Resilient, a provider of incident response solutions, automates and orchestrates the many processes needed when dealing with cyber incidents from breaches to lost devices. EZSource helps developers quickly and easily understand

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document and change mainframe code based on data displayed through dashboards and other visualizations. Promontory, a global market-leading risk management and regulatory compliance consulting firm, helps address clients’ escalating regulations and risk management requirements. All of these Other Acquisitions were for 100 percent of the acquired businesses. The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2016. 2016 Acquisitions ($ in millions)

Amortization The Truven Life Weather Health Other (in Years) Company Analytics Acquisitions Current assets $ 76 $ 171 $ 153 Fixed assets/noncurrent assets 123 127 110 Intangible assets Goodwill N/A 1,717 1,933 593 Completed technology 1–7 160 338 96 Client relationships 3–7 313 516 226 Patents/trademarks 1–7 349 54 42 Total assets acquired 2,738 3,141 1,220 Current liabilities (88) (148) (96) Noncurrent liabilities (372) (381) (76) Total liabilities assumed (460) (529) (171) Bargain purchase gain — — (40)* Total purchase price $ 2,278 $ 2,612 $ 1,009

N/A—Not applicable. * Bargain purchase gain relating to AT&T’s application and hosting services business was recognized in selling, general and administrative expense in the Consolidated Statement of Earnings in the three months ended March 31, 2016. The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired businesses and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. For the Other Acquisitions, the overall weighted-average life of the identified amortizable intangible assets acquired is 6.3 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $119 million has been assigned to the Technology Services & Cloud Platforms segment, goodwill of $303 million has been assigned to the GBS segment and goodwill of $171 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 55 percent of the goodwill will be deductible for tax purposes. On February 3, 2017, the company announced that it had acquired Agile 3 Solutions, LLC (Agile 3 Solutions), a privately held business based in San Francisco, California. Agile 3 Solutions is a developer of software used by the C-Suite and senior executives to better visualize, understand and manage risks associated with the protection of sensitive data. The business will be integrated within the Technology Services & Cloud Platforms segment. At the date of issuance of the financial statements, the initial purchase accounting was not complete for this acquisition. 2015 In 2015, the company completed fourteen acquisitions at an aggregate cost of $3,555 million. Merge Healthcare, Inc. (Merge)—On October 13, 2015, the company completed the acquisition of 100 percent of Merge, a publicly held business and a leading provider of medical image handling and processing, interoperability and clinical systems designed to advance healthcare quality and efficiency, for cash consideration of $1,036 million. Merge joined the company’s Watson Health business unit, bolstering clients’ ability to analyze and cross-reference medical

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document images against billions of data points already in the Watson Health Cloud. Goodwill of $695 million was assigned to the Cognitive Solutions ($502 million) and Technology Services & Cloud Platforms ($193 million) segments. It was expected that none of the goodwill would be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired was 7.0 years. Cleversafe, Inc. (Cleversafe)—On November 6, 2015, the company completed the acquisition of 100 percent of Cleversafe, a privately held business and a leading developer and manufacturer of object-based storage software and appliances, for cash consideration of $1,309 million. Cleversafe’s integration into the company’s Cloud business gives clients strategic data flexibility, simplified management and consistency with on-premise, cloud and hybrid cloud deployment options. Goodwill of $1,000 million was assigned to the Technology Services & Cloud Platforms ($590 million) and Systems ($410 million) segments. It was expected that none of the goodwill would be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired was 6.9 years. Other Acquisitions—The Cognitive Solutions segment completed acquisitions of six privately held businesses: in the first quarter, AlchemyAI, Inc. (AlchemyAI) and Blekko, Inc. (Blekko); in the second quarter, Explorys, Inc. (Explorys) and Phytel, Inc. (Phytel); in the third quarter, Compose, Inc. (Compose); and in the fourth quarter, IRIS Analytics GmbH (IRIS Analytics). The Technology Services & Cloud Platforms segment completed acquisitions of four privately held businesses: in the second quarter, Blue Box Group, Inc. (Blue Box); in the third quarter, StrongLoop, Inc. (StrongLoop); and in the fourth quarter, Gravitant, Inc. (Gravitant) and Clearleap, Inc. (Clearleap). GBS completed acquisitions of two privately held businesses in the fourth quarter, Advanced Application Corporation (AAC) and Meteorix, LLC. (Meteorix). AlchemyAI provides scalable cognitive computing application program interface services and computing applications. Blekko technology provides advanced Web-crawling, categorization and intelligent filtering. Explorys provides secure cloud-based solutions for clinical integration, at- risk population management, cost of care measurement and pay-for-performance. Phytel’s SaaS- based population health management offerings help providers identify patients at risk for care gaps and engage the patient to begin appropriate preventative care. Blue Box provides hosted, managed, OpenStack-based production-grade private clouds for the enterprise and service provider markets. Compose offers auto-scaling, production-ready databases to help software development teams deploy data services efficiently. StrongLoop provides application development software that enables software developers to build applications using application programming interfaces. AAC engages in system integration application development, software support and services. AAC was an affiliate of JBCC Holdings Inc. and IBM Japan Ltd. The company acquired all the shares of AAC which became a wholly owned subsidiary as of October 1, 2015. Gravitant develops cloud-based software to enable organizations to easily plan, buy and manage, or “broker,” software and computing services from multiple suppliers across hybrid clouds. Meteorix offers consulting, deployment, integration and ongoing post-production services for Workday Financial Management and Human Capital Management applications. Clearleap provides cloud-based video services. IRIS Analytics provides technology and consultancy services to the payments industry to detect electronic payment fraud. All of these Other Acquisitions were for 100 percent of the acquired businesses with the exception of the AAC acquisition. The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2015. 2015 Acquisitions ($ in millions)

Amortization Life (in Other Years) Merge Cleversafe Acquisitions Current assets $ 94 $ 23 $ 60 Fixed assets/noncurrent assets 128 63 82 Intangible assets Goodwill N/A 695 1,000 895 Completed technology 5–7 133 364 163 Client relationships 5–7 145 23 95 Patents/trademarks 2–7 54 11 23 Total assets acquired 1,248 1,484 1,318 Current liabilities (73) (15) (34)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Noncurrent liabilities (139) (160) (73) Total liabilities assumed (212) (175) (107) Total purchase price $ 1,036 $ 1,309 $ 1,210

N/A—Not applicable For the “Other Acquisitions,” the overall weighted-average life of the identified intangible assets acquired was 6.4 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $518 million was assigned to the Cognitive Solutions segment, $303 million was assigned to the Technology Services & Cloud Platforms segment, and $74 million was assigned to the GBS segment. It was expected that 7 percent of the goodwill would be deductible for tax purposes. 2014 In 2014, the company completed six acquisitions at an aggregate cost of $608 million. The Cognitive Solutions segment completed acquisitions of four privately held businesses: in the first quarter, Cloudant, Inc. (Cloudant); in the second quarter, Silverpop Systems, Inc. (Silverpop) and Cognea Group Pty LTD (Cognea); and in the third quarter, CrossIdeas s.p.a. (CrossIdeas). Technology Services & Cloud Platforms completed acquisitions of two privately held businesses: in the first quarter, Aspera, Inc. (Aspera); and in the third quarter, Lighthouse Security Group, LLC (Lighthouse). Aspera’s technology helps make cloud computing faster, more predictable and more cost effective for big data transfers such as enterprise storage, sharing virtual images or accessing the cloud for increased computing capacity. Cloudant extends the company’s mobile and cloud platform by enabling developers to easily and quickly create next-generation mobile and Web-based applications. Silverpop is a provider of cloud-based capabilities that deliver personalized customer engagements in highly scalable environments. Cognea offers personalized artificial intelligence capabilities designed to serve as an intuitive interface between human users and data- driven information. CrossIdeas delivers next generation identity and access governance capabilities to help mitigate access risks and segregation of duty violations. Lighthouse provides cloud-enabled managed identity and access management solutions. All acquisitions were for 100 percent of the acquired businesses. The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2014. 2014 Acquisitions ($ in millions)

Amortization Total Life (in Years) Acquisitions Current assets $ 56 Fixed assets/noncurrent assets 39 Intangible assets Goodwill N/A 442 Completed technology 5–7 68 Client relationships 7 77 Patents/trademarks 1–7 18 Total assets acquired 701 Current liabilities (26) Noncurrent liabilities (67) Total liabilities assumed (93) Total purchase price $ 608

N/A—Not applicable The overall weighted-average life of the identified amortizable intangible assets acquired was 6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $442 million was assigned to the Cognitive Solutions ($311 million) and Technology Services & Cloud Platforms ($131 million) segments. It was expected that approximately 1 percent of the goodwill would be deductible for tax purposes.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Divestitures Microelectronics—On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would acquire the company’s Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The transaction closed on July 1, 2015. The transaction includes a 10-year exclusive manufacturing sourcing agreement in which GLOBALFOUNDRIES will provide server processor semiconductor technology for use in IBM Systems. The agreement provides the company with capacity and market-based pricing for current semiconductor nodes in production and progression to nodes in the future for both development and production needs. As part of the transaction, the company will provide GLOBALFOUNDRIES with certain transition services, including IT, supply chain, packaging and test services and lab services. The initial term for these transition services was one to three years, with GLOBALFOUNDRIES having the ability to renew. In the third quarter of 2014, the company recorded a pre-tax charge of $4.7 billion related to the sale of the Microelectronics disposal group, which was part of the Systems reportable segment. The pre-tax charge reflected the fair value less the estimated cost of selling the disposal group including an impairment to the semiconductor long-lived assets of $2.4 billion, $1.5 billion representing the cash consideration expected to be transferred to GLOBALFOUNDRIES and $0.8 billion of other related costs. Additional pre-tax charges of $116 million were recorded during 2015 related to the disposal, and pre-tax charges of less than $1 million were recorded during the year ended December 31, 2016. The cumulative pre-tax charge was $4.8 billion as of December 31, 2016. Any additional charges that may be recorded in future periods are expected to be immaterial. Reporting the related assets and liabilities initially as held for sale at September 30, 2014 was based on meeting all of the criteria for such reporting in the applicable accounting guidance. While the company met certain criteria for held for sale reporting in prior periods, it did not meet all of the criteria until September 30, 2014. In addition, at September 30, 2014, the company concluded that the Microelectronics business met the criteria for discontinued operations reporting. The disposal group constituted a component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging and test services. These cash flows are not direct cash flows as they are not significant and the company has no significant continuing involvement. All assets and liabilities of the business, classified as held for sale at June 30, 2015, were transferred at closing. The company transferred $515 million of net cash to GLOBALFOUNDRIES in the third quarter of 2015. This amount included $750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIES and other miscellaneous items. A second cash payment in the amount of $500 million was transferred in December 2016. The remaining cash consideration of $250 million is expected to be transferred in December 2017. Summarized financial information for discontinued operations is shown below. ($ in millions)

For the year ended December 31: 2016 2015 2014 Total revenue $ 0 $ 720 $ 1,335 Loss from discontinued operations, before tax (11) (175) (619) Loss on disposal, before tax 0 (116) (4,726) Total loss from discontinued operations, before income taxes (11) (291) (5,346) Provision/(benefit) for income taxes (2) (117) (1,617) Loss from discontinued operations, net of tax $ (9) $ (174) $ (3,729)

Industry Standard Server—On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the company’s industry standard server portfolio (System x) for an adjusted purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. The company sold to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. As of March 31, 2016, all Lenovo common stock was sold. IBM and Lenovo entered into a strategic relationship which included a global OEM and reseller agreement for sales of IBM’s industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software, including Systems Director and Platform Computing solutions. Effective with the initial closing of the transaction, Lenovo assumed related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovo’s behalf for an extended period of time. In addition, as part of the transaction agreement, the company is providing Lenovo with certain transition services, including IT and supply chain services. The initial term for these transition services ranged from less than one year to three years. Certain services could be renewed by Lenovo for an additional year. The initial closing was completed on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of pre-tax gains of $63 million and $57 million in 2015 and 2016, respectively. Overall, the company expects to recognize a total pre-tax gain on the sale of approximately $1.6 billion, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain was approximately $1.3 billion, of which the cumulative gain recorded as of December 31, 2016 is $1.2 billion. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement. Customer Care—On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX would acquire the company’s worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX common stock, which represented less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and Concentrix, SYNNEX’s outsourcing business, became an IBM strategic business partner for global customer care business process outsourcing services. The initial closing was completed on January 31, 2014, with subsequent closings occurring during 2014. For the full year of 2014, the company recorded a pre-tax gain of $202 million related to this transaction. In the second quarter of 2015, resolution of the final balance sheet adjustments was concluded. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of a pre-tax gain of $7 million in 2015. Through December 31, 2016, the cumulative pre-tax gain attributed to this transaction was $213 million. Others—In addition to those above, the company completed the following divestitures: 2016—In the first quarter of 2016, the company completed four software product-related divestitures. In the fourth quarter of 2016, the company completed the divestiture of one service- related offering. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $42 million related to these transactions in 2016. 2015—In the first quarter of 2015, the company completed two software product-related divestitures and in the second quarter, the company completed one software product-related divestiture and the divestiture of one Global Business Services’ offering. In the fourth quarter of 2015, the company completed three software product-related divestitures. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $81 million related to these transactions in 2015. 2014—In the second quarter of 2014, the company completed one software product-related divestiture and the divestiture of one Global Business Services’ offering. In the third quarter, the company completed four software product-related divestitures. In the fourth quarter of 2014, the company completed two software product-related divestitures. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $132 million related to these transactions in 2014.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 12 Months Ended INSTRUMENTS Dec. 31, 2016 FINANCIAL INSTRUMENTS FINANCIAL NOTE D. FINANCIAL INSTRUMENTS INSTRUMENTS Fair Value Measurements Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at December 31, 2016 and 2015. ($ in millions)

At December 31, 2016: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit $ — $ 3,629 $ — $ 3,629 Money market funds 1,204 — — 1,204 Total 1,204 3,629 — 4,832 (6) Debt securities—current (2) — 699 — 699 (6) Debt securities—noncurrent (3) 1 6 — 8 Available-for-sale equity investments (3) 7 — — 7 Derivative assets (4) Interest rate contracts — 555 — 555 Foreign exchange contracts — 560 — 560 Equity contracts — 11 — 11 Total — 1,126 — 1,126 (7) Total assets $ 1,212 $ 5,460 $ — $ 6,672 (7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 188 $ — $ 188 Equity contracts — 10 — 10 Interest rate contracts — 8 — 8 Total liabilities $ — $ 206 $ — $ 206 (7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2)U.S. government securities reported as marketable securities in the Consolidated Statement of Financial Position (3)Included within investments and sundry assets in the Consolidated Statement of Financial Position (4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2016 were $532 million and $594 million, respectively (5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2016 were $145 million and $61 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $116 million. ($ in millions)

At December 31, 2015: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Time deposits and certificates of deposit $ — $ 2,856 $ — $ 2,856 Money market funds 2,069 — — 2,069 Other securities — 18 — 18 Total 2,069 2,874 — 4,943 (6) Debt securities—current (2) — 506 — 506 (6) Debt securities—noncurrent (3) 1 6 — 8 Trading security investments (3) 28 — — 28 Available-for-sale equity investments (3) 192 — — 192 Derivative assets (4) Interest rate contracts — 656 — 656 Foreign exchange contracts — 332 — 332 Equity contracts — 6 — 6 Total — 994 — 994 (7) Total assets $ 2,290 $ 4,381 $ — $ 6,671 (7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 164 $ — $ 164 Equity contracts — 19 — 19 Interest rate contracts — 3 — 3 Total liabilities $ — $ 186 $ — $ 186 (7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2)Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position (3)Included within investments and sundry assets in the Consolidated Statement of Financial Position (4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2015 were $292 million and $702 million, respectively (5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2015 were $164 million and $22 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $139 million each. There were no transfers between Levels 1 and 2 for the years ended December 31, 2016 and 2015. Financial Assets and Liabilities Not Measured at Fair Value Short-Term Receivables and Payables Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Loans and Long-Term Receivables Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At December 31, 2016 and 2015, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Long-Term Debt Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt is $34,655 million and $33,428 million and the estimated fair value is $36,838 million and $35,220 million at December 31, 2016 and 2015, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy. Debt and Marketable Equity Securities The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position. The following tables summarize the company’s noncurrent debt and marketable equity securities which are also considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position. ($ in millions)

Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2016: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 3 $ 5 $ 0 $ 7

(1)Included within investments and sundry assets in the Consolidated Statement of Financial Position ($ in millions)

Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2015: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 186 $ 6 $ 0 $ 192

(1)Included within investments and sundry assets in the Consolidated Statement of Financial Position During the fourth quarter of 2014, the company acquired equity securities in conjunction with the sale of the System x business which were classified as available-for-sale securities. Based on an evaluation of available evidence as of December 31, 2015, the company recorded an other-than- temporary impairment loss of $86 million resulting in an adjusted cost basis of $185 million as of December 31, 2015. In the first quarter of 2016, the company recorded a gross realized loss of $37 million (before taxes) related to the sale of all the outstanding shares. The loss on this sale was recorded in other (income) and expense in the Consolidated Statement of Earnings. Sales of debt and available-for-sale equity investments during the period were as follows: ($ in millions)

For the year ended December 31: 2016 2015 2014 Proceeds $ 151 $ 8 $ 21 Gross realized gains (before taxes) 3 1 0 Gross realized losses (before taxes) 37 1 5

The after-tax net unrealized gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) and the after-tax net (gains)/ losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows: ($ in millions)

For the year ended December 31: 2016 2015 Net unrealized gains/(losses) arising during the period $ (23) $ (33) Net unrealized (gains)/losses reclassified to net income* 21 53

* Includes pre-tax writedowns of $86 million in 2015. There were no writedowns in 2016.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The contractual maturities of substantially all available-for-sale debt securities are less than one year at December 31, 2016. Derivative Financial Instruments The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations. As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default. The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at December 31, 2016 and 2015 was $11 million and $28 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions as of December 31, 2016 and 2015 was $1,126 million and $994 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $116 million and $139 million at December 31, 2016 and 2015, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at December 31, 2016 and 2015, this exposure was reduced by $141 million and $90 million of cash collateral and $35 million and $40 million of non-cash collateral in U.S. Treasury securities, respectively, received by the company. At December 31, 2016 and 2015, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $834 million and $726 million, respectively. At December 31, 2016 and 2015, the net exposure related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $90 million and $47 million, respectively. In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at December 31, 2016 and 2015 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $141 million and $90 million at December 31, 2016 and 2015, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. No amount was rehypothecated at December 31, 2016 and 2015. The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis, and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments. A brief description of the major hedging programs, categorized by underlying risk, follows. Interest Rate Risk Fixed and Variable Rate Borrowings The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At December 31, 2016 and 2015, the total notional amount of the company’s interest rate swaps was $7.3 billion at both periods. The weighted-average remaining maturity of these instruments at December 31, 2016 and 2015 was approximately 6.2 years and 7.2 years, respectively. Forecasted Debt Issuance The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward-starting interest rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at December 31, 2016 and 2015. At December 31, 2016 and 2015, net gains of less than $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, less than $1 million of gains, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions. Foreign Exchange Risk Long-Term Investments in Foreign Subsidiaries (Net Investment) A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At December 31, 2016 and 2015, the total notional amount of derivative instruments designated as net investment hedges was $6.7 billion and $5.5 billion, respectively. The weighted-average remaining maturity of these instruments at December 31, 2016 and 2015 was approximately 0.2 years at both periods. Anticipated Royalties and Cost Transactions The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At December 31, 2016 and 2015, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.3 billion and $8.2 billion, respectively, with a weighted-average remaining maturity of 0.7 years at both periods. At December 31, 2016 and 2015, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $462 million and net gains of $147 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $397 million of gains and $121 million of gains, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions. Foreign Currency Denominated Borrowings The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately nine years. At December 31, 2016, the total notional amount of cross currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.4 billion. At December 31, 2015, no amounts were outstanding under this program. At December 31, 2016 and 2015, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gains of $29 million and net losses of $2 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $27 million of gains and less than $1 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure. Subsidiary Cash and Foreign Currency Asset/Liability Management The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At December 31, 2016 and 2015, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $12.7 billion and $11.7 billion, respectively. Equity Risk Management The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At December 31, 2016 and 2015, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion at both periods. Other Risks The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at December 31, 2016 and 2015. The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at December 31, 2016 and 2015. The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At December 31, 2016, the company did not have any derivative instruments relating to this program outstanding. At December 31, 2015, the total notional amount of derivative instruments in economic hedges of investment securities was less than $0.1 billion. The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity as of December 31, 2016 and 2015, as well as for the years ended December 31, 2016, 2015 and 2014, respectively. Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Fair Value of Derivative Assets Fair Value of Derivative Liabilities Balance Sheet Balance Sheet At December 31: Classification 2016 2015 Classification 2016 2015 Designated as hedging instruments Prepaid expenses Other accrued Interest rate and other current expenses and contracts assets $ — $ — liabilities $ — $ — Investments and sundry assets 555 656 Other liabilities 8 3 Foreign Prepaid expenses Other accrued exchange and other current expenses and contracts assets 421 197 liabilities 46 70 Investments and sundry assets 17 5 Other liabilities 35 19 Fair value of Fair value of derivative derivative assets $ 993 $858 liabilities $ 89 $ 92 Not designated as hedging instruments Foreign Prepaid expenses Other accrued exchange and other current expenses and contracts assets $ 100 $ 90 liabilities $ 89 $ 75 Investments and sundry assets 22 40 Other liabilities 18 — Prepaid expenses Other accrued and other current expenses and Equity contracts assets 11 6 liabilities 10 19 Investments and sundry assets — — Other liabilities — — Fair value of Fair value of derivative derivative assets $ 133 $136 liabilities $ 117 $ 94 Total debt designated as hedging instruments Short-term debt N/A N/A $1,125 $ — Long-term debt N/A N/A $7,844 $7,945 Total $1,126 $994 $9,175 $8,131

N/A—Not applicable

The Effect of Derivative Instruments in the Consolidated Statement of Earnings ($ in millions)

Gain/(Loss) Recognized in Earnings Consolidated Statement of Attributable to Risk Earnings Line Recognized on Derivatives Being Hedged (2) For the year ended December 31: Item 2016 2015 2014 2016 2015 2014 Derivative instruments in fair value hedges (1) (5) Interest rate contracts Cost of financing $ 28 $ 108 $ 231 $ 58 $ (1) $(127) Interest expense 31 94 206 63 (1) (114) Derivative instruments not designated as hedging instruments

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Foreign exchange contracts Other (income) and expense (189) 127 (776) N/A N/A N/A Interest rate contracts Other (income) and expense 0 (1) 34 N/A N/A N/A Equity contracts SG&A expense 112 (27) 51 N/A N/A N/A Other (income) and expense (1) (9) (9) N/A N/A N/A Total $ (18) $ 291 $ (263) $121 $ (1) $(241)

($ in millions)

Gain/(Loss) Recognized in Earnings and Other Comprehensive Income Consolidated Ineffectiveness and Effective Portion Statement of Effective Portion Amounts Excluded from For the year ended Recognized in OCI Earnings Line Reclassified from AOCI Effectiveness Testing (3) December 31: 2016 2015 2014 Item 2016 2015 2014 2016 2015 2014 Derivative instruments in cash flow hedges Interest rate Interest contracts $ — $ — $ — expense $ (24) $ 0 $ (1) $ — $ — $ — Foreign Other exchange (income) and contracts 243 618 958 expense (68) 731 98 (3) 5 (1) Cost (13) 192 (15) — — — SG&A expense 4 149 15 — — — Instruments in net investment hedges (4) Foreign exchange Interest contracts 311 889 1,136 expense — — — 77 13 0 Total $ 555 $ 1,507 $ 2,095 $ (102) $ 1,072 $ 97 $ 74 $ 18 $ (1)

(1)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. (2)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. (3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships. (4) Instruments in net investment hedges include derivative and non-derivative instruments. (5)For the years ended December 31, 2016, 2015 and 2014, fair value hedges resulted in a loss of $4 million, a loss of $2 million and a gain of $4 million in ineffectiveness, respectively.

N/A—Not applicable For the 12 months ending December 31, 2016, 2015 and 2014, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended INVENTORIES Dec. 31, 2016 INVENTORIES INVENTORIES NOTE E. INVENTORIES ($ in millions)

At December 31: 2016 2015 Finished goods $ 358 $ 352 Work in process and raw materials 1,195 1,199 Total $ 1,553 $ 1,551

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING 12 Months Ended RECEIVABLES Dec. 31, 2016 FINANCING RECEIVABLES FINANCING RECEIVABLES NOTE F. FINANCING RECEIVABLES The following table presents financing receivables, net of allowances for credit losses, including residual values. ($ in millions)

At December 31: 2016 2015 Current Net investment in sales-type and direct financing leases $ 2,909 $ 3,057 Commercial financing receivables 9,706 8,948 Client loan and installment payment receivables (loans) 6,390 7,015 Total $ 19,006 $ 19,020 Noncurrent Net investment in sales-type and direct financing leases $ 3,950 $ 4,501 Client loan and installment payment receivables (loans) 5,071 5,512 Total $ 9,021 $ 10,013

Net investment in sales-type and direct financing leases relates principally to the company’s systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $585 million and $645 million at December 31, 2016 and 2015, respectively, and is reflected net of unearned income of $513 million and $536 million, and net of the allowance for credit losses of $133 million and $213 million at those dates, respectively. Scheduled maturities of minimum lease payments outstanding at December 31, 2016, expressed as a percentage of the total, are approximately: 2017, 46 percent; 2018, 29 percent; 2019, 16 percent; 2020, 6 percent; and 2021 and beyond, 2 percent. Commercial financing receivables, net of allowance for credit losses of $28 million and $19 million at December 31, 2016 and 2015, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days. Client loan and installment payment receivables (loans), net of allowance for credit losses of $276 million and $377 million at December 31, 2016 and 2015, respectively, are loans that are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Client loan and installment payment financing contracts are priced independently at competitive market rates. The company has a history of enforcing these financing agreements. The allowance for credit losses at December 31, 2016 reflects a write-off in the fourth quarter of $188 million of previously reserved customer accounts as a result of recent experience and history across the portfolio, particularly in China. Of this total, $41 million was in major markets and $147 million in growth markets and $73 million and $115 million was in lease receivables and loan receivables, respectively. The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $689 million and $545 million at December 31, 2016 and 2015, respectively. These borrowings are included in note J, “Borrowings,” on pages 120 to 122.

The company did not have any financing receivables held for sale as of December 31, 2016 and 2015. Financing Receivables by Portfolio Segment The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document financing receivables and other miscellaneous current financing receivables at December 31, 2016 and 2015. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. ($ in millions)

Major Growth At December 31, 2016: Markets Markets Total Financing receivables Lease receivables $ 5,013 $ 1,323 $ 6,336 Loan receivables 9,148 2,589 11,737 Ending balance $ 14,161 $ 3,912 $ 18,073 Collectively evaluated for impairment $ 14,119 $ 3,646 $ 17,765 Individually evaluated for impairment $ 43 $ 266 $ 309 Allowance for credit losses Beginning balance at January 1, 2016 Lease receivables $ 25 $ 188 $ 213 Loan receivables 83 293 377 Total $ 109 $ 481 $ 590 Write-offs (59) (176) (235) Provision 7 51 58 Other 0 (3) (3) Ending balance at December 31, 2016 $ 57 $ 353 $ 410 Lease receivables $ 6 $ 127 $ 133 Loan receivables $ 51 $ 225 $ 276 Collectively evaluated for impairment $ 30 $ 98 $ 128 Individually evaluated for impairment $ 27 $ 255 $ 281

($ in millions)

Major Growth At December 31, 2015: Markets Markets Total Financing receivables Lease receivables $ 5,517 $ 1,524 $ 7,041 Loan receivables 9,739 3,165 12,904 Ending balance $ 15,256 $ 4,689 $ 19,945 Collectively evaluated for impairment $ 15,180 $ 4,227 $ 19,406 Individually evaluated for impairment $ 76 $ 462 $ 539 Allowance for credit losses Beginning balance at January 1, 2015 Lease receivables $ 32 $ 133 $ 165 Loan receivables 79 317 396 Total $ 111 $ 450 $ 561 Write-offs (14) (48) (62) Provision 20 122 141 Other (8) (43) (51) Ending balance at December 31, 2015 $ 109 $ 481 $ 590 Lease receivables $ 25 $ 188 $ 213 Loan receivables $ 83 $ 293 $ 377 Collectively evaluated for impairment $ 43 $ 36 $ 79 Individually evaluated for impairment $ 65 $ 445 $ 511

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

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Financing Receivables on Non-Accrual Status The following table presents the recorded investment in financing receivables which were on non-accrual status at December 31, 2016 and 2015. ($ in millions)

At December 31: 2016 2015 Major markets $ 2 $ 2 Growth markets 38 63 Total lease receivables $ 40 $ 65 Major markets $ 19 $ 13 Growth markets 127 91 Total loan receivables $ 145 $ 104 Total receivables $ 185 $ 168

Impaired Loans The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on a non-accrual status. The following tables present impaired client loan receivables at December 31, 2016 and 2015. ($ in millions)

Recorded Related At December 31, 2016: Investment Allowance Major markets $ 31 $ 28 Growth markets 191 185 Total $ 223 $ 213

($ in millions)

Recorded Related At December 31, 2015: Investment Allowance Major markets $ 50 $ 47 Growth markets 297 284 Total $ 347 $ 331

($ in millions)

Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2016: Investment Recognized Basis Major markets $ 55 $ 0 $ — Growth markets 284 0 — Total $ 339 $ 0 $ —

($ in millions)

Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2015: Investment Recognized Basis Major markets $ 51 $ 0 $ — Growth markets 315 0 — Total $ 367 $ 0 $ —

Credit Quality Indicators

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit rating. The tables present the net recorded investment for each class of receivables, by credit quality indicator, at December 31, 2016 and 2015. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties. Lease Receivables ($ in millions)

Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 496 $ 44 A1 – A3 1,162 181 Baa1 – Baa3 1,381 140 Ba1 – Ba2 1,144 246 Ba3 – B1 566 313 B2 – B3 271 163 Caa – D 26 69 Total $ 5,047 $ 1,156

Loan Receivables ($ in millions)

Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 904 $ 87 A1 – A3 2,117 355 Baa1 – Baa3 2,515 274 Ba1 – Ba2 2,084 483 Ba3 – B1 1,031 613 B2 – B3 494 320 Caa – D 48 135 Total $ 9,193 $ 2,268

At December 31, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (34 percent), Government (14 percent), Manufacturing (13 percent), Services (12 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent). Lease Receivables ($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 535 $ 34 A1 – A3 1,318 142 Baa1 – Baa3 1,486 343 Ba1 – Ba2 1,208 309 Ba3 – B1 510 243 B2 – B3 401 189 Caa – D 33 76

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total $ 5,492 $ 1,336

* Reclassified to conform to 2016 presentation Loan Receivables ($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 941 $ 73 A1 – A3 2,318 305 Baa1 – Baa3 2,613 738 Ba1 – Ba2 2,125 664 Ba3 – B1 897 522 B2 – B3 705 406 Caa – D 58 164 Total $ 9,656 $ 2,872

* Reclassified to conform to 2016 presentation At December 31, 2015, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (36 percent), Manufacturing (14 percent), Government (11 percent), Services (11 percent), Retail (9 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent). Past Due Financing Receivables ($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and At December 31, 2016: > 90 Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 8 $ 11 $ 4,994 $ 5,013 $ 34 Growth markets 23 78 1,222 1,323 77 Total lease receivables $ 31 $ 89 $ 6,216 $ 6,336 $ 111 Major markets $ 15 $ 5 $ 9,129 $ 9,148 $ 62 Growth markets 16 177 2,396 2,589 80 Total loan receivables $ 31 $ 182 $ 11,524 $ 11,737 $ 141 Total $ 62 $ 271 $ 17,740 $ 18,073 $ 253

(1)Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved. (2)At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days ($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and > 90 At December 31, 2015:* Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 5 $ 33 $ 5,479 $ 5,517 $ 108 Growth markets 30 140 1,355 1,524 60 Total lease receivables $ 35 $ 173 $ 6,834 $ 7,041 $ 168 Major markets $ 7 $ 35 $ 9,696 $ 9,739 $ 134 Growth markets 31 309 2,825 3,165 86 Total loan receivables $ 38 $ 344 $ 12,521 $ 12,904 $ 220 Total $ 73 $ 517 $ 19,355 $ 19,945 $ 388

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (1)Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved. (2)At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days * Reclassified to conform to 2016 presentation Troubled Debt Restructurings The company assessed all restructurings that occurred on or after January 1, 2015 and determined that there were no significant troubled debt restructurings for the years ended December 31, 2016 and 2015.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PROPERTY, PLANT AND 12 Months Ended EQUIPMENT Dec. 31, 2016 PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND NOTE G. PROPERTY, PLANT AND EQUIPMENT EQUIPMENT ($ in millions)

At December 31: 2016 2015 Land and land improvements $ 506 $ 558 Buildings and building improvements 6,326 6,552 Plant, laboratory and office equipment 22,318 21,116 Plant and other property—gross 29,150 28,226 Less: Accumulated depreciation 18,842 18,051 Plant and other property—net 10,308 10,176 Rental machines 984 1,115 Less: Accumulated depreciation 461 565 Rental machines—net 523 551 Total—net $ 10,830 $ 10,727

In 2016, the company recorded a pre-tax impairment charge related to certain property, plant and equipment of $215 million. The remaining fair value of these assets is not material. There were no material pre-tax impairment charges related to property, plant and equipment in 2015.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INVESTMENTS AND 12 Months Ended SUNDRY ASSETS Dec. 31, 2016 INVESTMENTS AND SUNDRY ASSETS INVESTMENTS AND NOTE H. INVESTMENTS AND SUNDRY ASSETS SUNDRY ASSETS ($ in millions)

At December 31: 2016 2015 Deferred transition and setup costs and other deferred arrangements* $ 1,497 $ 1,624 Derivatives—noncurrent 594 702 Alliance investments Equity method 85 82 Non-equity method 19 393 Prepaid software 230 273 Long-term deposits 267 256 Other receivables 416 516 Employee benefit-related 272 273 Prepaid income taxes 477 496 Other assets 729 571 Total $ 4,585 $ 5,187

*Deferred transition and setup costs and other deferred arrangements are related to services client arrangements. Refer to note A, “Significant Accounting Policies,” on page 93 for additional information.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS 12 Months Ended INCLUDING GOODWILL Dec. 31, 2016 INTANGIBLE ASSETS INCLUDING GOODWILL INTANGIBLE ASSETS NOTE I. INTANGIBLE ASSETS INCLUDING GOODWILL INCLUDING GOODWILL Intangible Assets The following table details the company’s intangible asset balances by major asset class. ($ in millions)

Gross Net Carrying Accumulated Carrying At December 31, 2016: Amount Amortization Amount Intangible asset class Capitalized software $ 1,537 $ (661) $ 876 Client relationships 2,831 (1,228) 1,602 Completed technology 3,322 (1,668) 1,654 Patents/trademarks 730 (205) 525 Other* 46 (15) 31 Total $ 8,466 $ (3,778) $ 4,688

*Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems. ($ in millions)

Gross Net Carrying Accumulated Carrying At December 31, 2015: Amount Amortization Amount Intangible asset class Capitalized software $ 1,348 $ (581) $ 767 Client relationships 1,856 (927) 929 Completed technology 2,960 (1,397) 1,563 Patents/trademarks 335 (142) 193 Other* 44 (10) 35 Total $ 6,543 $ (3,057) $ 3,487

*Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems. The net carrying amount of intangible assets increased $1,201 million during the year ended December 31, 2016, primarily due to intangible asset additions resulting from acquisitions, partially offset by amortization. There was no impairment of intangible assets recorded in 2016 and 2015. The aggregate intangible amortization expense was $1,544 million and $1,193 million for the years ended December 31, 2016 and 2015, respectively. In addition, in 2016 and 2015, respectively, the company retired $817 million and $1,809 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at December 31, 2016: ($ in millions)

Capitalized Acquired Software Intangibles Total 2017 $ 494 $ 957 $ 1,450 2018 300 809 1,109 2019 83 646 729

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2020 — 547 547 2021 — 435 435

Goodwill As described in note T, “Segment Information,” the company changed its reportable segments in January 2016. Goodwill was assigned to the new reportable segments on a fair value allocation basis. The changes in the goodwill balances by reportable segment, for the years ended December 31, 2016 and 2015, are as follows: ($ in millions)

Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2016 Additions Adjustments Divestitures Adjustments* 31, 2016 Cognitive Solutions $ 15,621 $ 3,821 $ 5 $ (12) $ 48 $ 19,484 Global Business Services 4,396 303 4 (1) (95) 4,607 Technology Services & Cloud Platforms 10,156 119 (12) (5) (1) 10,258 Systems 1,848 — (4) — 5 1,850 Total $ 32,021 $ 4,244 $ (7) $ (18) $ (42) $ 36,199

* Primarily driven by foreign currency translation ($ in millions)

Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2015 Additions Adjustments Divestitures Adjustments* 31, 2015 Cognitive Solutions $ 15,156 $ 1,020 $ (2) $ (18) $ (535) $ 15,621 Global Business Services 4,555 74 0 (1) (232) 4,396 Technology Services & Cloud Platforms 9,373 1,087 (1) (7) (296) 10,156 Systems 1,472 410 0 — (33) 1,848 Total $ 30,556 $ 2,590 $ (3) $ (26) $ (1,096) $ 32,021

* Primarily driven by foreign currency translation There were no goodwill impairment losses recorded during the full year of 2016 or 2015 and the company has no accumulated impairment losses. Purchase price adjustments recorded in 2016 and 2015 were related to acquisitions that were completed on or prior to September 30, 2016 or December 31, 2014, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments of $7 million were recorded during 2016 with the primary drivers being deferred tax assets, accounts receivable, deferred income, inventory and other current liabilities.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended BORROWINGS Dec. 31, 2016 BORROWINGS BORROWINGS NOTE J. BORROWINGS Short-Term Debt ($ in millions)

At December 31: 2016 2015 Commercial paper $ 899 $ 600 Short-term loans 375 590 Long-term debt—current maturities 6,239 5,271 Total $ 7,513 $ 6,461

The weighted-average interest rate for commercial paper at December 31, 2016 and 2015 was 0.7 percent and 0.4 percent, respectively. The weighted-average interest rates for short-term loans were 9.5 percent and 5.2 percent at December 31, 2016 and 2015, respectively.

Long-Term Debt Pre-Swap Borrowing ($ in millions)

At December 31: Maturities 2016 2015 U.S. dollar notes and debentures (average interest rate at December 31, 2016): 3.98% 2017 $ 5,104 $ 9,351 3.21% 2018–2019 8,856 7,591 1.84% 2020–2021 4,941 3,717 2.35% 2022 1,901 1,900 3.38% 2023 1,500 1,500 3.63% 2024 2,000 2,000 7.00% 2025 600 600 3.45% 2026 1,350 — 6.22% 2027 469 469 6.50% 2028 313 313 5.88% 2032 600 600 8.00% 2038 83 83 5.60% 2039 745 745 4.00% 2042 1,107 1,107 7.00% 2045 27 27 4.70% 2046 650 — 7.13% 2096 316 316 30,563 30,319 Other currencies (average interest rate at December 31, 2016, in parentheses): Euros (1.6%) 2019–2028 7,122 4,892 Pound sterling (2.7%) 2020–2022 1,296 1,555 Japanese yen (0.9%) 2017–2026 1,576 1,180 Swiss francs (6.3%) 2020 7 9 Canadian (2.2%) 2017 373 360 Other (11.0%) 2017–2020 208 506 41,145 38,820 Less: net unamortized discount 839 838 Less: net unamortized debt issuance costs 82 74 Add: fair value adjustment* 669 790

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 40,893 38,699 Less: current maturities 6,239 5,271 Total $ 34,655 $ 33,428

*The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value plus a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent. The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with all of its significant debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable. Post-Swap Borrowing (Long-Term Debt, Including Current Portion) ($ in millions)

2016 2015 For the year ended December 31: Amount Average Rate Amount Average Rate Fixed-rate debt $ 27,414 3.18 % $ 25,499 3.41 % Floating-rate debt* 13,480 1.59 % 13,199 0.96 % Total $ 40,893 $ 38,699

*Includes $7,338 million in 2016 and 2015 of notional interest rate swaps that effectively convert fixed-rate long-term debt into floating-rate debt (See note D, “Financial Instruments,” on pages 110 through 114.) Pre-swap annual contractual maturities of long-term debt outstanding at December 31, 2016, are as follows: ($ in millions)

Total 2017 $ 6,239 2018 4,918 2019 5,196 2020 4,593 2021 3,914 2022 and beyond 16,284 Total $ 41,145

Interest on Debt ($ in millions)

For the year ended December 31: 2016 2015 2014 Cost of financing $ 576 $ 540 $ 542 Interest expense 706 481 484 Net investment derivative activity (77) (13) 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Interest capitalized 2 0 4 Total interest paid and accrued $ 1,208 $ 1,008 $ 1,030

Refer to the related discussion on page 152 in note T, “Segment Information,” for total interest expense of the Global Financing segment. See note D, “Financial Instruments,” on pages 110 through 114 for a discussion of the use of currency and interest rate swaps in the company’s debt risk management program. Lines of Credit In 2016, the company increased the size of its five-year Credit Agreement (the “Credit Agreement”) to $10.25 billion and extended the term by one year to November 10, 2021. The total expense recorded by the company related to this global credit facility was $5.5 million in 2016, $5.3 million in 2015 and $5.4 million in 2014. The Credit Agreement permits the company and its Subsidiary Borrowers to borrow up to $10.25 billion on a revolving basis. Borrowings of the Subsidiary Borrowers will be unconditionally backed by the company. The company may also, upon the agreement of either existing lenders, or of the additional banks not currently party to the Credit Agreement, increase the commitments under the Credit Agreement up to an additional $1.75 billion. Subject to certain terms of the Credit Agreement, the company and Subsidiary Borrowers may borrow, prepay and reborrow amounts under the Credit Agreement at any time during the Credit Agreement. Interest rates on borrowings under the Credit Agreement will be based on prevailing market interest rates, as further described in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants, events of default, and indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of default, as specified in the Credit Agreement, are remote. As of December 31, 2016, there were no borrowings by the company, or its subsidiaries, under the Credit Agreement. The company also has other committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended OTHER LIABILITIES Dec. 31, 2016 OTHER LIABILITIES OTHER LIABILITIES NOTE K. OTHER LIABILITIES ($ in millions)

At December 31: 2016 2015 Income tax reserves $ 2,621 $ 3,150 Excess 401(k) Plus Plan 1,494 1,445 Disability benefits 538 590 Derivative liabilities 61 22 Special restructuring actions 358 362 Workforce reductions 424 407 Deferred taxes 424 253 Other taxes payable 90 89 Environmental accruals 262 270 Warranty accruals 68 83 Asset retirement obligations 142 134 Acquisition related 111 200 Divestiture related* 270 575 Other 613 519 Total $ 7,477 $ 8,099

* Primarily related to the divestiture of the Microelectronics business In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost competitiveness and to rebalance skills. The noncurrent contractually obligated future payments associated with these activities are reflected in the workforce reductions caption in the previous table. In addition, the company executed certain special restructuring-related actions prior to 2006. The previous table provides the noncurrent liabilities associated with these special actions. Current liabilities are included in other accrued expenses and liabilities in the Consolidated Statement of Financial Position and were immaterial at December 31, 2016. The noncurrent liabilities are workforce accruals related to terminated employees who are no longer working for the company who were granted annual payments to supplement their incomes in certain countries. Depending on the individual country’s legal requirements, these required payments will continue until the former employee begins receiving pension benefits or passes away. The company employs extensive internal environmental protection programs that primarily are preventive in nature. The company also participates in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned facilities and Superfund sites. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts have been recorded for non-ARO environmental liabilities that are not probable or estimable. The total amounts accrued for non-ARO environmental liabilities, including amounts classified as current in the Consolidated Statement of Financial Position, that do not reflect actual or anticipated insurance recoveries, were $272 million and $283 million at December 31, 2016 and 2015, respectively. Estimated environmental costs are not expected to materially affect the consolidated financial position or consolidated results of the company’s operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing environmental remediation regulations. As of December 31, 2016, the company was unable to estimate the range of settlement dates and the related probabilities for certain asbestos remediation AROs. These conditional AROs are primarily related to the encapsulated structural fireproofing that is not subject to abatement unless the buildings are demolished and non-encapsulated asbestos that the company would remediate only if it performed major renovations of certain existing buildings. Because these conditional obligations have indeterminate settlement dates, the company could not develop a reasonable estimate of their fair values. The company will continue to assess its ability to estimate fair values at each future reporting date. The related liability will be recognized once sufficient additional

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document information becomes available. The total amounts accrued for ARO liabilities, including amounts classified as current in the Consolidated Statement of Financial Position were $173 million and $166 million at December 31, 2016 and 2015, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended EQUITY ACTIVITY Dec. 31, 2016 EQUITY ACTIVITY EQUITY ACTIVITY NOTE L. EQUITY ACTIVITY The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which 945,867,403 shares were outstanding at December 31, 2016 and 150,000,000 shares of preferred stock with a $.01 per share par value, none of which were outstanding at December 31, 2016. Stock Repurchases The Board of Directors authorizes the company to repurchase IBM common stock. The company repurchased 23,283,400 common shares at a cost of $3,455 million, 30,338,647 common shares at a cost of $4,701 million and 71,504,867 common shares at a cost of $13,395 million in 2016, 2015 and 2014, respectively. These amounts reflect transactions executed through December 31 of each year. Actual cash disbursements for repurchased shares may differ due to varying settlement dates for these transactions. At December 31, 2016, $5,109 million of Board common stock repurchase authorization was available. The company plans to purchase shares on the open market or in private transactions from time to time, depending on market conditions. Other Stock Transactions The company issued the following shares of common stock as part of its stock-based compensation plans and employees stock purchase plan: 3,893,366 shares in 2016, 6,013,875 shares in 2015, and 7,687,026 shares in 2014. The company issued 383,077 treasury shares in 2016, 1,155,558 treasury shares in 2015 and 1,264,232 treasury shares in 2014, as a result of restricted stock unit releases and exercises of stock options by employees of certain acquired businesses and by non-U.S. employees. Also, as part of the company’s stock-based compensation plans, 854,365 common shares at a cost of $126 million, 1,625,820 common shares at a cost of $248 million, and 1,313,569 common shares at a cost of $236 million in 2016, 2015 and 2014, respectively, were remitted by employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the treasury stock balance in the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity. Reclassifications and Taxes Related to Items of Other Comprehensive Income ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2016: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (20) $ (120) $ (140) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (38) $ 14 $ (23) Reclassification of (gains)/losses to other (income) and expense 34 (13) 21 Total net changes related to available-for-sale securities $ (3) $ 1 $ (2) Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 243 $ (80) $ 163 Reclassification of (gains)/losses to: Cost of sales 13 (8) 6 SG&A expense (4) (2) (7) Other (income) and expense 68 (26) 42 Interest expense 24 (9) 15 Total unrealized gains/(losses) on cash flow hedges $ 345 $ (126) $ 219 Retirement-related benefit plans (1)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Net (losses)/gains arising during the period $ (2,490) $ 924 $ (1,566) Curtailments and settlements (16) 1 (15) Amortization of prior service (credits)/costs (107) 34 (74) Amortization of net (gains)/losses 2,764 (976) 1,788 Total retirement-related benefit plans $ 150 $ (19) $ 132 Other comprehensive income/(loss) $ 472 $ (263) $ 209

(1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2015: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,379) $ (342) $ (1,721) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (54) $ 21 $ (33) Reclassification of (gains)/losses to other (income) and expense 86 (33) 53 Total net changes related to available-for-sale securities $ 32 $ (12) $ 20 Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 618 $ (218) $ 399 Reclassification of (gains)/losses to: Cost of sales (192) 57 (135) SG&A expense (149) 43 (105) Other (income) and expense (731) 281 (451) Interest expense 0 0 0 Total unrealized gains/(losses) on cash flow hedges $ (454) $ 162 $ (292) Retirement-related benefit plans (1) Prior service costs/(credits) $ 6 $ (2) $ 4 Net (losses)/gains arising during the period (2,963) 1,039 (1,925) Curtailments and settlements 33 (9) 24 Amortization of prior service (credits)/costs (100) 36 (65) Amortization of net (gains)/losses 3,304 (1,080) 2,223 Total retirement-related benefit plans $ 279 $ (17) $ 262 Other comprehensive income/(loss) $ (1,523) $ (208) $ (1,731)

(1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2014: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,636) $ (438) $ (2,074) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (29) $ 11 $ (18) Reclassification of (gains)/losses to other (income) and expense 5 (2) 3 Total net changes related to available-for-sale securities $ (24) $ 9 $ (15) Unrealized gains/(losses) on cash flow hedges

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Unrealized gains/(losses) arising during the period $ 958 $ (341) $ 618 Reclassification of (gains)/losses to: Cost of sales 15 (7) 9 SG&A expense (15) 6 (9) Other (income) and expense (98) 38 (60) Interest expense 1 0 0 Total unrealized gains/(losses) on cash flow hedges $ 861 $ (304) $ 557 Retirement-related benefit plans (1) Prior service costs/(credits) $ 1 $ 0 $ 1 Net (losses)/gains arising during the period (9,799) 3,433 (6,366) Curtailments and settlements 24 (7) 17 Amortization of prior service (credits)/costs (114) 41 (73) Amortization of net (gains)/losses 2,531 (852) 1,678 Total retirement-related benefit plans $ (7,357) $ 2,615 $ (4,742) Other comprehensive income/(loss) $ (8,156) $ 1,883 $ (6,274)

(1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) Accumulated Other Comprehensive Income/(Loss) (net of tax) ($ in millions)

Net Change Net Unrealized Net Unrealized Foreign Retirement- Gains/(Losses) Accumulated Gains/(Losses) Currency Related on Available- Other on CashFlow Translation Benefit For-Sale Comprehensive Hedges Adjustments* Plans Securities Income/(Loss) December 31, 2013 $ (165) $ 332 $ (21,767) $ (1) $ (21,602) Other comprehensive income before reclassifications 618 (2,074) (6,348) (18) (7,822) Amount reclassified from accumulated other comprehensive income (60) 0 1,605 3 1,548 Total change for the period 557 (2,074) (4,742) (15) (6,274) December 31, 2014 392 (1,742) (26,509) (15) (27,875) Other comprehensive income before reclassifications 399 (1,721) (1,897) (33) (3,252) Amount reclassified from accumulated other comprehensive income (691) 0 2,158 53 1,520 Total change for the period (292) (1,721) 262 20 (1,731) December 31, 2015 100 (3,463) (26,248) 5 (29,607) Other comprehensive income before reclassifications 163 (140) (1,581) (23) (1,581) Amount reclassified from accumulated other comprehensive income 56 0 1,714 21 1,791 Total change for the period 219 (140) 132 (2) 209 December 31, 2016 $ 319 $ (3,603) $ (26,116) $ 2 $ (29,398)

*Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document CONTINGENCIES AND 12 Months Ended COMMITMENTS Dec. 31, 2016 CONTINGENCIES AND COMMITMENTS CONTINGENCIES AND NOTE M. CONTINGENCIES AND COMMITMENTS COMMITMENTS Contingencies As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise. The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the years ended December 31, 2016, 2015 and 2014 were not material to the Consolidated Financial Statements. In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations. With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter. Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters. The following is a summary of the more significant legal matters involving the company. The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and in March 2016, SCO filed a notice of appeal to the Tenth Circuit Court of Appeals. On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court. On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claims damages for lost profits. Iusacell’s complaint relates to a contractual dispute in Mexico, which is the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement. On November 14, 2014, the District Court in the Southern District of New York granted IBM’s motion to stay Iusacell’s action against the company pending the arbitration in Mexico between Iusacell and IBM Mexico. IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK is seeking a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. Proceedings to determine remedies were held in July 2014, and in February 2015 the High Court held that for IBM to make changes to accruals under the plan would require a new consultation of the participants, but other changes (including to early retirement policy) would not require such consultation. IBM UK has appealed both the breach and remedies judgments. If the appeal is unsuccessful, the Court’s rulings would require IBM to reverse the changes made to the UK defined benefit plans retroactive to their effective dates. This could result in an estimated non- operating one-time pre-tax charge of approximately $290 million, plus ongoing defined benefit related accruals. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK. In March 2011, the company announced that it had agreed to settle a civil enforcement action with the Securities and Exchange Commission (SEC) relating to alleged violations of the Foreign Corrupt Practices Act of 1977 (FCPA). On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. The two-year period expired in July 2015. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti- Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter. In March 2015, putative class action litigation was commenced in the United States District Court for the Southern District of New York related to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business. The company and three of its officers were named as defendants. Plaintiffs allege that defendants violated Sections 20(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In May 2015, a related putative class action was also commenced in the United States District Court for the Southern District of New York based on the same underlying facts, alleging violations of the Employee Retirement Income Security Act (“ERISA”). The company, management’s Retirement Plans Committee, and three current or former IBM executives were named as defendants. On September 7, 2016, the Court granted the company’s motions to dismiss the plaintiffs’ claims in both actions. On October 21, 2016, the ERISA plaintiffs filed an amended complaint, dropping the company as a defendant. The matter remains pending in the United States District Court. In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company is cooperating with the SEC in this matter. The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites. The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. In 2016, the company also received new non-income tax assessments from the municipality of Rio de Janeiro. The total potential amount related to all these matters for all applicable years is approximately $980 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability. Commitments The company’s extended lines of credit to third-party entities include unused amounts of $6,542 million and $5,477 million at December 31, 2016 and 2015, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $2,463 million and $2,097 million at December 31, 2016 and 2015, respectively. The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor. The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain IP rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations. In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $34 million and $34 million at December 31, 2016 and 2015, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position was immaterial.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended TAXES Dec. 31, 2016 TAXES TAXES NOTE N. TAXES ($ in millions)

For the year ended December 31: 2016 2015 2014 Income from continuing operations before income taxes U.S. operations $ 3,650 $ 5,915 $ 7,509 Non-U.S. operations 8,680 10,030 12,477 Total income from continuing operations before income taxes $ 12,330 $ 15,945 $ 19,986

The income from continuing operations provision for income taxes by geographic operations is as follows: ($ in millions)

For the year ended December 31: 2016 2015 2014 U.S. operations $ 38 $ 849 $ 2,093 Non-U.S. operations 411 1,732 2,141 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234

The components of the income from continuing operations provision for income taxes by taxing jurisdiction are as follows: ($ in millions)

For the year ended December 31: 2016 2015 2014 U.S. federal Current $ 186 $ (321) $ 1,134 Deferred (746) 553 105 $ (560) $ 232 $ 1,239 U.S. state and local Current $ 244 $ 128 $ 541 Deferred (44) 116 (105) $ 200 $ 244 $ 436 Non-U.S. Current $ 988 $ 2,101 $ 2,825 Deferred (179) 4 (266) $ 809 $ 2,105 $ 2,559 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234 Discontinued operations provision for income taxes (2) (117) (1,617) Provision for social security, real estate, personal property and other taxes 3,417 3,497 4,068 Total taxes included in net income $ 3,864 $ 5,961 $ 6,685

A reconciliation of the statutory U.S. federal tax rate to the company’s effective tax rate from continuing operations is as follows:

For the year ended December 31: 2016 2015 2014 Statutory rate % % %

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 35 35 35 Foreign tax differential (21) (17) (14) Japan resolution (10) 0 0 State and local 1 1 1 Domestic incentives (1) (2) (2) Other 0 (1) 1 Effective rate 4% 16% 21%

Percentages rounded for disclosure purposes. The significant components reflected within the tax rate reconciliation labeled “Foreign tax differential” include the effects of foreign subsidiaries’ earnings taxed at rates other than the U.S. statutory rate, foreign export incentives, the U.S. tax impacts of non-U.S. earnings repatriation and any net impacts of intercompany transactions. These items also reflect audit settlements, excluding Japan, or changes in the amount of unrecognized tax benefits associated with each of these items. In 2016, the company favorably settled the remaining open items on the company’s U.S. income tax returns for 2011 and 2012 resulting in no further adjustments. In April 2010, the company appealed the determination of the Japanese Tax Authorities with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1.0 billion adjusted for currency, had been included in unrecognized tax benefits as of December 2015. In April 2011, the company received notification that the appeal was denied, and in June 2011, the company filed a lawsuit challenging this decision. In May 2014, the Tokyo District Court ruled in favor of the company. The Japanese government appealed the ruling to the Tokyo High Court. On March 25, 2015, the Tokyo High Court ruled in favor of IBM and, on April 7, 2015, the Japanese government appealed the ruling to the Japan Supreme Court. On February 18, 2016, the Supreme Court denied the government appeal thereby upholding the Tokyo High Court’s decision in favor of the company as the final judgment in this matter. This led to a refund of the taxes previously paid of $1.0 billion, which the company received in the first-quarter 2016 and included in the effective tax rate. Interest of $0.2 billion was also received. The 2016 continuing operations effective tax rate decreased 12.5 points from 2015 driven by: the favorable resolution of the Japan tax matter described above (9.5 points), a benefit due to the year-to-year decrease in tax charges related to intercompany payments made by foreign subsidiaries and the intercompany licensing of certain IP (5.7 points), and a benefit from the geographic mix of pre-tax earnings year over year. These benefits were partially offset by a reduced benefit year to year related to audit settlements (2.3 points) and a decreased benefit year to year in the utilization of foreign tax credits (0.6 points). The effect of tax law changes on deferred tax assets and liabilities did not have a material impact on the company’s effective tax rate. The significant components of deferred tax assets and liabilities recorded in the Consolidated Statement of Financial Position were: Deferred Tax Assets ($ in millions)

At December 31: 2016 2015* Retirement benefits $ 4,671 $ 4,621 Share-based and other compensation 1,132 963 Domestic tax loss/credit carryforwards 1,676 1,055 Deferred income 741 762 Foreign tax loss/credit carryforwards 816 767 Bad debt, inventory and warranty reserves 473 528 Depreciation 270 329 Accruals 624 904 Other 1,503 1,000 Gross deferred tax assets 11,906 10,929 Less: valuation allowance 916 740 Net deferred tax assets $ 10,990 $ 10,189

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document * Reclassified to conform to 2016 presentation Deferred Tax Liabilities ($ in millions)

At December 31: 2016 2015 Depreciation $ 856 $ 919 Retirement benefits 406 252 Goodwill and intangible assets 1,800 1,407 Leases 651 916 Software development costs 672 554 Deferred transition costs 351 395 Other 1,455 1,177 Gross deferred tax liabilities $ 6,191 $ 5,620

For income tax return purposes, the company has foreign and domestic loss carryforwards, the tax effect of which is $855 million, as well as domestic and foreign credit carryforwards of $1,982 million. Substantially all of these carryforwards are available for at least two years and the majority are available for 10 years or more. The valuation allowances as of December 31, 2016, 2015 and 2014 were $916 million, $740 million and $646 million, respectively. The amounts principally apply to certain foreign, state and local loss carryforwards and credits. In the opinion of management, it is more likely than not that these assets will not be realized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense. The amount of unrecognized tax benefits at December 31, 2016 decreased by $834 million in 2016 to $3,740 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: ($ in millions)

2016 2015 2014 Balance at January 1 $ 4,574 $ 5,104 $ 4,458 Additions based on tax positions related to the current year 560 464 697 Additions for tax positions of prior years 334 569 586 Reductions for tax positions of prior years (including impacts due to a lapse in statute) (1,443) (1,348) (579) Settlements (285) (215) (58) Balance at December 31 $ 3,740 $ 4,574 $ 5,104

The additions to unrecognized tax benefits related to the current and prior years are primarily attributable to non-U.S. issues, certain tax incentives and credits and state issues. The settlements and reductions to unrecognized tax benefits for tax positions of prior years are primarily attributable to the favorable resolution of the Japan tax matter, currency, non-U.S. audits and impacts due to lapses in statutes of limitation. The liability at December 31, 2016 of $3,740 million can be reduced by $775 million of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, U.S. tax credits, state income taxes and timing adjustments. The net amount of $2,965 million, if recognized, would favorably affect the company’s effective tax rate. The net amounts at December 31, 2015 and 2014 were $3,724 million and $4,229 million, respectively. Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2016, the company recognized $62 million in interest expense and penalties; in 2015, the company recognized $141 million in interest expense and penalties; and, in 2014, the company recognized $216 million in interest expense and penalties. The company has $625 million for the payment of interest and penalties accrued at December 31, 2016, and had $613 million accrued at December 31, 2015. Within the next 12 months, the company believes it is reasonably possible that the total amount of unrecognized tax benefits associated with certain positions may be reduced. The potential decrease in the amount of unrecognized tax benefits is associated with the anticipated resolution

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document of the company’s U.S. income tax audit for 2013 and 2014, as well as various non-U.S. audits. The company estimates that the unrecognized tax benefits at December 31, 2016 could be reduced by $966 million. The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2012. With limited exception, the company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations related to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any significant adjustments that are expected to result for these years. In the fourth quarter of 2013, the company received a draft tax assessment notice for approximately $866 million (approximately $789 million at 2016 year-end currency rates) from the Indian Tax Authorities for 2009. In July 2016, the Karnataka High Court in Bangalore set aside this assessment by way of court order and the company reached a mutual agreement with the Income Tax Department for a new assessment, which will take place over an 18 month period. At December 31, 2016, the company has recorded $568 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the Indian Tax Authorities. The company believes it will prevail on these matters.

In the first quarter of 2016, the U.S. Internal Revenue Service commenced its audit of the company’s U.S. tax returns for 2013 and 2014. The company anticipates that this audit will be completed by the end of 2017. The company has not provided deferred taxes on $71.4 billion of undistributed earnings of non- U.S. subsidiaries at December 31, 2016, as it is the company’s policy to indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RESEARCH, 12 Months Ended DEVELOPMENT AND Dec. 31, 2016 ENGINEERING RESEARCH, DEVELOPMENT AND ENGINEERING RESEARCH, NOTE O. RESEARCH, DEVELOPMENT AND ENGINEERING DEVELOPMENT AND ENGINEERING RD&E expense was $5,751 million in 2016, $5,247 million in 2015 and $5,437 million in 2014. In addition, RD&E expense included in discontinued operations was $1 million in 2016, $197 million in 2015 and $368 million in 2014. The company incurred total expense of $5,421 million, $5,178 million and $5,595 million in 2016, 2015 and 2014, respectively, for scientific research and the application of scientific advances to the development of new and improved products and their uses, as well as services and their application. Within these amounts, software-related expense was $3,470 million, $3,064 million and $3,064 million in 2016, 2015 and 2014, respectively.

Expense for product-related engineering was $332 million, $267 million and $211 million in 2016, 2015 and 2014, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EARNINGS PER SHARE 12 Months Ended OF COMMON STOCK Dec. 31, 2016 EARNINGS PER SHARE OF COMMON STOCK EARNINGS PER SHARE OF NOTE P. EARNINGS PER SHARE OF COMMON STOCK COMMON STOCK The following table presents the computation of basic and diluted earnings per share of common stock. ($ in millions except per share amounts)

For the year ended December 31: 2016 2015 2014 Weighted-average number of shares on which earnings per share calculations are based Basic 955,422,530 978,744,523 1,004,272,584 Add—incremental shares under stock-based compensation plans 2,416,940 3,037,001 4,332,155 Add—incremental shares associated with contingently issuable shares 874,626 918,744 1,395,741 Assuming dilution 958,714,097 982,700,267 1,010,000,480 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Loss from discontinued operations, net of tax (9) (174) (3,729) Net income on which basic earnings per share is calculated $ 11,872 $ 13,190 $ 12,022 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Net income applicable to contingently issuable shares 0 (1) (3) Income from continuing operations on which diluted earnings per share is calculated $ 11,881 $ 13,363 $ 15,749 Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (9) (174) (3,729) Net income on which diluted earnings per share is calculated $ 11,872 $ 13,189 $ 12,020 Earnings/(loss) per share of common stock Assuming dilution Continuing operations $ 12.39 $ 13.60 $ 15.59 Discontinued operations (0.01) (0.18) (3.69) Total $ 12.38 $ 13.42 $ 11.90 Basic Continuing operations $ 12.44 $ 13.66 $ 15.68 Discontinued operations (0.01) (0.18) (3.71) Total $ 12.43 $ 13.48 $ 11.97

Weighted-average stock options to purchase 405,552 common shares in 2016, 41,380 common shares in 2015 and 17,420 common shares in 2014 were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common shares for the full year, and therefore, the effect would have been antidilutive.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RENTAL EXPENSE AND 12 Months Ended LEASE COMMITMENTS Dec. 31, 2016 RENTAL EXPENSE AND LEASE COMMITMENTS RENTAL EXPENSE AND NOTE Q. RENTAL EXPENSE AND LEASE COMMITMENTS LEASE COMMITMENTS Rental expense, including amounts charged to inventories and fixed assets, and excluding amounts previously reserved, was $1,508 million in 2016, $1,474 million in 2015 and $1,592 million in 2014. Within these amounts, rental expense reflected in discontinued operations was $29 million and $95 million, in 2015 and 2014, respectively. Rental expense in agreements with rent holidays and scheduled rent increases is recorded on a straight-line basis over the lease term. Contingent rentals are included in the determination of rental expense as accruable. The table below depicts gross minimum rental commitments under noncancelable leases, amounts related to vacant space associated with workforce transformation, sublease income commitments and capital lease commitments. These amounts reflect activities primarily related to office space, as well as data centers. ($ in millions)

2017 2018 2019 2020 2021 Beyond 2021 Operating lease commitments Gross minimum rental commitments (including vacant space below) $1,414 $1,328 $1,218 $1,016 $796 $ 1,111 Vacant space $ 42 $ 29 $ 20 $ 15 $ 11 $ 9 Sublease income commitments $ 12 $ 8 $ 6 $ 3 $ — $ — Capital lease commitments $ 1 $ 2 $ 2 $ 2 $ — $ —

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION Dec. 31, 2016 STOCK-BASED COMPENSATION

STOCK-BASED NOTE R. STOCK-BASED COMPENSATION COMPENSATION The following table presents total stock-based compensation cost included in income from continuing operations. ($ in millions)

For the year ended December 31: 2016 2015 2014 Cost $ 88 $ 100 $ 121 Selling, general and administrative 401 322 350 Research, development and engineering 55 51 54 Other (income) and expense* — (6) (13) Pre-tax stock-based compensation cost 544 468 512 Income tax benefits (179) (156) (174) Net stock-based compensation cost $ 364 $ 312 $ 338

* Reflects the one-time effects related to divestitures The amount of stock-based compensation cost included in discontinued operations, net of tax, was immaterial in all periods. Total unrecognized compensation cost related to non-vested awards at December 31, 2016 and 2015 was $934 million and $871 million, respectively. The amount at December 31, 2016 is expected to be recognized over a weighted-average period of approximately 2.6 years. There was no significant capitalized stock-based compensation cost at December 31, 2016, 2015, and 2014. Incentive Awards Stock-based incentive awards are provided to employees under the terms of the company’s long- term performance plans (the “Plans”). The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the “Committee”). Awards available under the Plans principally include restricted stock units, performance share units, stock options or any combination thereof. The amount of shares originally authorized to be issued under the company’s existing Plans was 273 million at December 31, 2016. In addition, certain incentive awards granted under previous plans, if and when those awards were canceled, could be reissued under the company’s existing Plans. As such, 66.2 million additional shares were considered authorized to be issued under the company’s existing Plans as of December 31, 2016. There were 106.7 million unused shares available to be granted under the Plans as of December 31, 2016. Under the company’s long-standing practices and policies, all awards are approved prior to or on the date of grant. The awards approval process specifies the individual receiving the grant, the number of options or the value of the award, the exercise price or formula for determining the exercise price and the date of grant. All awards for senior management are approved by the Committee. All awards for employees other than senior management are approved by senior management pursuant to a series of delegations that were approved by the Committee, and the grants made pursuant to these delegations are reviewed periodically with the Committee. Awards that are given as part of annual total compensation for senior management and other employees are made on specific cycle dates scheduled in advance. With respect to awards given in connection with promotions or new hires, the company’s policy requires approval of such awards prior to the grant date, which is typically the date of the promotion or the date of hire. Stock Awards Stock awards are made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs), or Performance Share Units (PSUs).

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The tables below summarize RSU and PSU activity under the Plans during the years ended December 31, 2016, 2015 and 2014. RSUs

2016 2015 2014 Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units Balance at January 1 $ 159 7,527,341 $ 171 7,734,277 $ 166 8,635,317 RSUs granted 140 3,985,870 143 4,230,186 172 2,525,947 RSUs released 174 (1,860,660) 164 (3,567,495) 157 (2,401,761) RSUs canceled/ forfeited 158 (753,459) 167 (869,627) 167 (1,025,226) Balance at December 31 $ 147 8,899,092 $ 159 7,527,341 $ 171 7,734,277

PSUs

2016 2015 2014 Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units Balance at January 1 $ 173 2,928,932 $ 185 3,140,707 $ 178 2,824,294 PSUs granted at target 140 990,336 153 1,137,242 180 1,430,098 Performance adjustments* 194 (387,457) 185 (168,055) 157 29,960 PSUs released 194 (419,759) 185 (840,552) 157 (1,027,181) PSUs canceled/forfeited 174 (237,294) 184 (340,410) 187 (116,464) Balance at December 31** $ 155 2,874,758 $ 173 2,928,932 $ 185 3,140,707

* Represents the change in shares issued to employees after vesting of PSUs because final performance metrics were above or below specified targets ** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued will depend on final performance against specified targets over the vesting period. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year period. For RSUs, dividend equivalents are not paid. The fair value of such RSUs is determined and fixed on the grant date based on the company’s stock price adjusted for the exclusion of dividend equivalents. The remaining weighted-average contractual term of RSUs at December 31, 2016, 2015 and 2014 is the same as the period over which the remaining cost of the awards will be recognized, which is approximately three years. The fair value of RSUs granted during the years ended December 31, 2016, 2015 and 2014 was $557 million, $606 million and $434 million, respectively. The total fair value of RSUs vested and released during the years ended December 31, 2016, 2015 and 2014 was $323 million, $583 million and $378 million, respectively. As of December 31, 2016, 2015 and 2014, there was $814 million, $800 million and $754 million, respectively, of unrecognized compensation cost related to non-vested RSUs. The company received no cash from employees as a result of employee vesting and release of RSUs for the years ended December 31, 2016, 2015 and 2014. PSUs are stock awards where the number of shares ultimately received by the employee depends on the company’s performance against specified targets and typically vest over a three-year period. For PSUs, dividend equivalents are not paid. The fair value of each PSU is determined on the grant date, based on the company’s stock price, adjusted for the exclusion of dividend equivalents, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets. The fair value of PSUs granted at target during the years ended December 31, 2016, 2015 and 2014 was $138 million, $174 million and $257 million, respectively. Total fair value of PSUs vested and released during the years ended December 31, 2016, 2015 and 2014 was $81 million, $156 million and $161 million, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31, 2016, 2015 and 2014 were $118 million, $228 million and $222 million, respectively. Stock Options During the years ended December 31, 2015 and 2014, the company did not grant stock options. During the year ended December 31, 2016, the company made one grant of 1.5 million premium- priced stock options. The option award cliff vests in three years and has a contractual term of 10 years. The total compensation cost to be recognized over the three-year vesting period is expected to be $12 million. The company estimates the fair value of stock options at the date of grant using the Black- Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company. The following table summarizes option activity under the Plans during the years ended December 31, 2016, 2015 and 2014.

2016 2015 2014 Weighted- Weighted- Weighted- Average Number of Average Number of Average Number of Exercise Shares Exercise Shares Exercise Shares Price Under Option Price Under Option Price Under Option Balance at January 1 $ 94 479,774 $ 97 1,750,949 $ 97 5,622,951 Options granted 140 1,500,000 — — — — Options exercised 91 (361,088) 98 (1,214,109) 97 (3,740,252) Options canceled/ expired 86 (4,763) 100 (57,066) 95 (131,750) Balance at December 31 $ 137 1,613,923 $ 94 479,774 $ 97 1,750,949 Exercisable at December 31 $ 103 113,923 $ 94 479,774 $ 97 1,750,949

The shares under option at December 31, 2016 were in the following exercise price ranges:

Options Outstanding Weighted- Weighted- Average Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $ 7,198,794 0.3 $129 – $154 140 1,500,000 39,236,250 9.1 $ 137 1,613,923 $46,435,044 8.5

Options Exercisable Weighted- Weighted- Average Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $7,198,794 0.3

Exercises of Employee Stock Options The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $20 million, $74 million and $323 million, respectively. The total cash received from employees as a result of employee stock option exercises for the years ended December 31, 2016, 2015 and 2014 was approximately $33 million, $119 million and $364 million, respectively. In connection with these exercises, the tax benefits realized by the company for the years ended December 31, 2016, 2015 and 2014 were $7 million, $26 million and $107 million, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury shares. Total treasury shares held at December 31, 2016 and 2015 were approximately 1,279 million and 1,255 million shares, respectively. Acquisitions In connection with various acquisition transactions, there was an additional 0.6 million options outstanding at December 31, 2016, as a result of the company’s conversion of stock-based awards previously granted by the acquired entities. The weighted-average exercise price of these awards was $33 per share. IBM Employees Stock Purchase Plan The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to purchase full or fractional shares of IBM common stock at a 5 percent discount off the average market price on the day of purchase through payroll deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee during the year. The ESPP provides for offering periods during which shares may be purchased and continues as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering period. Employees purchased 1.2 million, 1.3 million and 1.3 million shares under the ESPP during the years ended December 31, 2016, 2015 and 2014, respectively. Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased through the ESPP. Dividends are paid on full and fractional shares and can be reinvested. The company stock purchased through the ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share. In July 2014, the “2014 ESPP Reserve” became effective and 25 million additional shares of authorized common stock were reserved and approved for issuance. The 2014 ESPP provides for semi-annual offerings commencing July 1, 2014, and continuing as long as shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Approximately 21.8 million, 23.1 million and 24.4 million shares were available for purchase under the ESPP at December 31, 2016, 2015 and 2014, respectively.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS Dec. 31, 2016 RETIREMENT-RELATED BENEFITS

RETIREMENT-RELATED NOTE S. RETIREMENT-RELATED BENEFITS BENEFITS Description of Plans IBM sponsors defined benefit pension plans and defined contribution plans that cover eligible regular employees, a supplemental retention plan that covers certain U.S. executives and nonpension postretirement benefit plans primarily consisting of retiree medical and dental benefits for eligible retirees and dependents. U.S. Plans Defined Benefit Pension Plans IBM Personal Pension Plan IBM provides U.S. regular, full-time and part-time employees hired prior to January 1, 2005 with noncontributory defined benefit pension benefits via the IBM Personal Pension Plan. Prior to 2008, the IBM Personal Pension Plan consisted of a tax qualified (qualified) plan and a non-tax qualified (nonqualified) plan. Effective January 1, 2008, the nonqualified plan was renamed the Excess Personal Pension Plan (Excess PPP) and the qualified plan is now referred to as the Qualified PPP. The combined plan is now referred to as the PPP. The Qualified PPP is funded by company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The Excess PPP, which is unfunded, provides benefits in excess of IRS limitations for qualified plans. Benefits provided to the PPP participants are calculated using benefit formulas that vary based on the participant. The first method uses a five-year, final pay formula that determines benefits based on salary, years of service, mortality and other participant-specific factors. The second method is a cash balance formula that calculates benefits using a percentage of employees’ annual salary, as well as an interest crediting rate. Benefit accruals under the IBM Personal Pension Plan ceased December 31, 2007 for all participants. U.S. Supplemental Executive Retention Plan The company also sponsors a nonqualified U.S. Supplemental Executive Retention Plan (Retention Plan). The Retention Plan, which is unfunded, provides benefits to eligible U.S. executives based on average earnings, years of service and age at termination of employment. Benefit accruals under the Retention Plan ceased December 31, 2007 for all participants. Defined Contribution Plans IBM 401(k) Plus Plan U.S. regular, full-time and part-time employees are eligible to participate in the IBM 401(k) Plus Plan, which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Under the IBM 401(k) Plus Plan, eligible employees receive a dollar-for-dollar match of their contributions generally up to 6 percent of eligible compensation for those hired prior to January 1, 2005, and, generally up to 5 percent of eligible compensation for those hired on or after January 1, 2005. In addition, eligible employees generally receive automatic contributions from the company equal to 1, 2 or 4 percent of eligible compensation based on their eligibility to participate in the PPP as of December 31, 2007. Employees generally receive automatic contributions and matching contributions after the completion of one year of service. All contributions, including the company match, are made in cash and invested in accordance with participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments. Matching and automatic contributions are made once annually at the end of the year. In order to receive such contributions each year, a participant must be employed on December 15 of the plan year. However, matching and automatic contributions can be made for certain types of separations that occur prior to December 15, including, for example, if the participant has completed certain service and/or age requirements at separation. The company’s matching

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document contributions vest immediately and participants are always fully vested in their own contributions. IBM Excess 401(k) Plus Plan The IBM Excess 401(k) Plus Plan (Excess 401(k)) is an unfunded, nonqualified defined contribution plan. Employees whose eligible compensation is expected to exceed the IRS compensation limit for qualified plans are eligible to participate in the Excess 401(k). The purpose of the Excess 401(k) is to provide benefits that would be provided under the qualified IBM 401(k) Plus Plan if the compensation limits did not apply. Amounts deferred into the Excess 401(k) are record-keeping (notional) accounts and are not held in trust for the participants. Participants in the Excess 401(k) may invest their notional accounts in investments which mirror the primary investment options available under the 401(k) Plus Plan. Participants in the Excess 401(k) are also eligible to receive company match and automatic contributions (at the same rate as under the 401(k) Plus Plan) on eligible compensation deferred into the Excess 401(k) and on compensation earned in excess of the Internal Revenue Code pay limit once they have completed one year of service. Amounts deferred into the Excess 401(k), including company contributions are recorded as liabilities in the Consolidated Statement of Financial Position. Matching and automatic contributions are made once annually at the end of the year. In order to receive such contributions each year, a participant must be employed on December 15 of the plan year. However, matching and automatic contributions can be made for certain types of separations that occur prior to December 15, including, for example, if the participant has completed certain service and/or age requirements at separation. Nonpension Postretirement Benefit Plan U.S. Nonpension Postretirement Plan The company sponsors a defined benefit nonpension postretirement benefit plan that provides medical and dental benefits to eligible U.S. retirees and eligible dependents, as well as life insurance for eligible U.S. retirees. Effective July 1, 1999, the company established a Future Health Account (FHA) for employees who were more than five years from retirement eligibility. Employees who were within five years of retirement eligibility are covered under the company’s prior retiree health benefits arrangements. Under either the FHA or the prior retiree health benefit arrangements, there is a maximum cost to the company for retiree health benefits. Effective January 1, 2014, the company amended the plan to establish a Health Reimbursement Arrangement (HRA) for each Medicare-eligible plan retiree, surviving spouse and long-term disability plan participant who is eligible for company-subsidized coverage and who enrolls in an individual plan under the Medicare Exchange. The company also amended its life insurance plan. Employees retiring on or after January 1, 2015 are not eligible for life insurance. Since January 1, 2004, new hires, as of that date or later, are not eligible for company-subsidized nonpension postretirement benefits. Non-U.S. Plans Certain subsidiaries and branches outside the United States sponsor defined benefit and/or defined contribution plans that cover eligible regular employees. The company deposits funds under various fiduciary-type arrangements, purchases annuities under group contracts or provides reserves for these plans. Benefits under the defined benefit plans are typically based either on years of service and the employee’s compensation (generally during a fixed number of years immediately before retirement) or on annual credits. The range of assumptions that are used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries. In addition, certain of the company’s non-U.S. subsidiaries sponsor nonpension postretirement benefit plans that provide medical and dental benefits to eligible non-U.S. retirees and eligible dependents, as well as life insurance for certain eligible non-U.S. retirees. However, most non- U.S. retirees are covered by local government sponsored and administered programs. Plan Financial Information Summary of Financial Information The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the Consolidated Statement of Earnings.

($ in millions)

U.S. Plans Non-U.S. Plans Total

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For the year ended December 31: 2016 2015 2014 2016 2015 2014 2016 2015 2014 Defined benefit pension plans $(334)$(284)$(833)$1,039 $1,421 $1,267 $ 705 $1,137 $ 434 Retention Plan 17 23 15 — — — 17 23 15 Total defined benefit pension plans (income)/ cost $(317)$(261)$(818)$1,039 $1,421 $1,267 $ 722 $1,160 $ 449 IBM 401(k) Plus Plan and non-U.S. plans $ 626 $ 676 $ 713 $ 420 $ 442 $ 526 $1,046 $1,117 $1,239 Excess 401(k) 24 21 14 — — — 24 21 14 Total defined contribution plans cost $ 650 $ 697 $ 727 $ 420 $ 442 $ 526 $1,070 $1,138 $1,253 Nonpension postretirement benefit plans cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66 $ 211 $ 273 $ 272 Total retirement-related benefits net periodic cost $ 527 $ 654 $ 115 $1,475 $1,918 $1,859 $2,003 $2,572 $1,974

The following table presents a summary of the total PBO for defined benefit pension plans, APBO for nonpension postretirement benefit plans, fair value of plan assets and the associated funded status recorded in the Consolidated Statement of Financial Position.

($ in millions)

Benefit Obligations Fair Value of Plan Assets Funded Status* At December 31: 2016 2015 2016 2015 2016 2015 U.S. Plans Overfunded plans Qualified PPP $ 50,403 $ 51,287 $ 51,405 $ 51,716 $ 1,002 $ 429 Underfunded plans Excess PPP $ 1,509 $ 1,522 $ — $ — $ (1,509) $ (1,522) Retention Plan 307 312 — — (307) (312) Nonpension postretirement benefit plan 4,470 4,652 26 71 (4,444) (4,582) Total underfunded U.S. plans $ 6,286 $ 6,486 $ 26 $ 71 $ (6,260) $ (6,415) Non-U.S. Plans Overfunded plans Qualified defined benefit pension plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Nonpension postretirement benefit plans 0 0 0 0 0 0 Total overfunded non- U.S. plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Underfunded plans Qualified defined benefit pension plans $ 21,447 $ 22,039 $ 16,374 $ 17,677 $ (5,074) $ (4,362) Nonqualified defined benefit pension plans 5,919 5,911 — — (5,919) (5,911) Nonpension postretirement benefit plans 692 618 71 59 (622) (558) Total underfunded non- U.S. plans $ 28,059 $ 28,568 $ 16,445 $ 17,737 $ (11,614) $ (10,832) Total overfunded plans $ 68,017 $ 68,053 $ 71,051 $ 69,786 $ 3,034 $ 1,734 Total underfunded plans $ 34,344 $ 35,054 $ 16,470 $ 17,807 $ (17,874) $ (17,247)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document *Funded status is recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as prepaid pension assets; (Liability) amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability). At December 31, 2016, the company’s qualified defined benefit pension plans worldwide were 98 percent funded compared to the benefit obligations, with the U.S. Qualified PPP 102 percent funded. Overall, including nonqualified plans, the company’s defined benefit pension plans worldwide were 90 percent funded. Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information The following tables to page 142 represent financial information for the company’s retirement- related benefit plans, excluding defined contribution plans. The defined benefit pension plans under U.S. Plans consists of the Qualified PPP, the Excess PPP and the Retention Plan. The defined benefit pension plans and the nonpension postretirement benefit plans under non-U.S. Plans consists of all plans sponsored by the company’s subsidiaries. The nonpension postretirement benefit plan under U.S. Plan consists of only the U.S. Nonpension Postretirement Benefit Plan. The tables below present the components of net periodic (income)/cost of the retirement-related benefit plans recognized in the Consolidated Statement of Earnings, excluding defined contribution plans.

($ in millions)

Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ — $ — $ — $ 420 $ 454 $ 449 Interest cost 2,048 2,028 2,211 1,035 1,075 1,533 Expected return on plan assets (3,689) (3,953) (4,096) (1,867) (1,919) (2,247) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) 10 10 10 (106) (98) (111) Recognized actuarial losses 1,314 1,654 1,056 1,408 1,581 1,400 Curtailments and settlements — — — 22 35 26 Multi-employer plans/other costs* — — — 126 293 217 Total net periodic (income)/cost $ (317) $ (261) $ (818) $ 1,039 $ 1,421 $ 1,267

($ in millions)

Nonpension Postretirement Benefit Plans U.S. Plan Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ 17 $ 24 $ 26 $ 5 $ 7 $ 7 Interest cost 165 163 187 51 50 63 Expected return on plan assets 0 0 0 (6) (7) (9) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) (7) (7) (7) (5) (5) (5) Recognized actuarial losses 20 39 0 9 10 11 Curtailments and settlements — — — (38) 0 0 Total net periodic cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document *The non-U.S. plans amount includes $56 million, $233 million and $148 million related to the IBM Spain pension litigation for 2016, 2015 and 2014, respectively. See page 142 for additional information. The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans, excluding defined contribution plans.

($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 Change in benefit obligation Benefit obligation at January 1 $53,120 $56,643 $44,717 $49,834 $ 4,652 $ 5,053 $ 618 $ 817 Service cost — — 420 454 17 24 5 7 Interest cost 2,048 2,028 1,035 1,075 165 163 51 50 Plan participants’ contributions — — 30 34 50 52 — — Acquisitions/ divestitures, net — — (63) 39 0 (8) 0 0 Actuarial losses/ (gains) 602 (1,920) 3,217 (861) 16 (204) 16 (52) Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Direct benefit payments (123) (117) (381) (402) (30) (23) (27) (26) Foreign exchange impact — — (2,222) (3,907) — — 35 (174) Medicare/ Government subsidies — — — — — 1 — — Amendments/ curtailments/ settlements/other — — 20 235 — 0 0 0 Benefit obligation at December 31 $52,218 $53,120 $44,981 $44,717 $ 4,470 $ 4,652 $ 692 $ 618 Change in plan assets Fair value of plan assets at January 1 $51,716 $55,772 $35,748 $39,543 $ 71 $ 16 $ 59 $ 84 Actual return on plan assets 3,118 (542) 3,828 417 0 0 8 7 Employer contributions — — 464 474 305 409 0 0 Acquisitions/ divestitures, net — — (73) 53 0 0 0 0 Plan participants’ contributions — — 30 34 50 52 — — Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Foreign exchange impact — — (2,175) (3,004) — — 9 (26) Amendments/ curtailments/ settlements/other — — (10)* 14* — — 0 (1) Fair value of plan assets at December 31 $51,405 $51,716 $36,020 $35,748 $ 26 $ 71 $ 71 $ 59 Funded status at December 31 $ (814) $ (1,405) $ (8,960) $ (8,969) $ (4,444) $(4,582) $ (622) $ (558)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Accumulated benefit obligation** $52,218 $53,120 $44,514 $44,071 N/A N/A N/A N/A

* Includes the reinstatement of certain plan assets in Brazil due to government rulings in 2011 and 2013 allowing certain previously restricted plan assets to be returned to IBM. Return of assets to IBM over a three-year period began June 2011 and September 2013 respectively, with approximately $23 million returned in 2016 and $33 million returned during 2015. The remaining surplus in Brazil at December 31, 2016 is excluded from total plan assets due to continued restrictions imposed by the government on the use of those plan assets. ** Represents the benefit obligation assuming no future participant compensation increases N/A—Not applicable The following table presents the net funded status recognized in the Consolidated Statement of Financial Position.

($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans At December 31: 2016 2015 2016 2015 2016 2015 2016 2015 Prepaid pension assets $ 1,002 $ 429 $ 2,032 $ 1,304 $ 0 $ 0 $ 0 $ 0 Current liabilities— compensation and benefits (118) (116) (303) (297) (368) (320) (15) (11) Noncurrent liabilities— retirement and nonpension postretirement benefit obligations (1,698) (1,718) (10,689) (9,976) (4,076) (4,262) (607) (547) Funded status—net $ (814) $(1,405) $(8,960) $(8,969) $(4,444) $(4,582) $ (622) $ (558)

The following table presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in OCI and the changes in the pre-tax net loss, prior service costs/ (credits) and transition (assets)/liabilities recognized in AOCI for the retirement-related benefit plans.

($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 Net loss at January 1 $19,363 $18,442 $20,724 $21,676 $ 609 $ 852 $ 128 $ 189 Current period loss/(gain) 1,173 2,576 1,251 661 16 (204) 14 (51) Curtailments and settlements — — (22) (33) — — 20 0 Amortization of net loss included in net periodic (income)/cost (1,314) (1,654) (1,408) (1,581) (20) (39) (9) (10) Net loss at December 31 $19,222 $19,363 $20,544 $20,724 $ 605 $ 609 $ 154 $ 128 Prior service costs/(credits) at January 1 $ 101 $ 110 $ (294) $ (386) $ 30 $ 23 $ (21) $ (26)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Current period prior service costs/(credits) — — — (6) — — — 0 Curtailments and Settlements — — 0 — — — 18 — Amortization of prior service (costs)/credits included in net periodic (income)/cost (10) (10) 106 98 7 7 5 5 Prior service costs/(credits) at December 31 $ 90 $ 101 $ (188) $ (294) $ 37 $ 30 $ 1 $ (21) Transition (assets)/ liabilities at January 1 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Amortization of transition assets/ (liabilities) included in net periodic (income)/cost — — 0 0 — — 0 0 Transition (assets)/ liabilities at December 31 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Total loss recognized in accumulated other comprehensive income/ (loss)* $19,313 $19,464 $20,356 $20,429 $ 642 $ 639 $ 154 $ 106

*See note L, “Equity Activity,” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans. The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/ liabilities of the retirement-related benefit plans that will be amortized from AOCI into net periodic (income)/cost in 2017. ($ in millions)

Defined Benefit Nonpension Postretirement Pension Plans Benefit Plans Non- Non- U.S. Plans U.S. Plans U.S. Plan U.S. Plans Net loss $ 1,348 $ 1,434 $ 21 $ 6 Prior service costs/(credits) 16 (93) (7) 0 Transition (assets)/liabilities — 0 — 0

On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contribution plans. During the fourth quarter of 2016, an arbitration ruling related to the defined contribution plan resulted in an additional charge of $56 million. For the years ended December 31, 2016, 2015 and 2014, the company recorded pre-tax retirement-related obligations of $56 million, $233 million and $148 million, respectively, in selling, general and administrative expense in the Consolidated Statement of Earnings. These obligations are reflected in “Non-U.S. Plans— Multi-employer plans/other costs” in the table on page 139. Assumptions Used to Determine Plan Financial Information Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document valuations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary. The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for retirement-related benefit plans.

Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31 Discount rate 4.00 % 3.70 % 4.50 % 2.40 % 2.34 % 3.32 % Expected long-term returns on plan assets 7.00 % 7.50 % 8.00 % 5.53 % 5.67 % 6.08 % Rate of compensation increase N/A N/A N/A 2.40 % 2.49 % 2.52 % Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.80 % 4.00 % 3.70 % 1.80 % 2.40 % 2.34 % Rate of compensation increase N/A N/A N/A 2.45 % 2.40 % 2.49 %

N/A—Not applicable

Nonpension Postretirement Benefit Plans U.S. Plan Non-U.S. Plans 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic cost for the year ended December 31 Discount rate 3.70 % 3.40 % 4.10 % 7.06 % 7.51 % 7.78 % Expected long-term returns on plan assets N/A N/A N/A 9.95 % 10.17 % 10.22 % Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.60 % 3.70 % 3.40 % 8.26 % 7.06 % 7.51 %

N/A—Not applicable Discount Rate The discount rate assumptions used for retirement-related benefit plans accounting reflect the yields available on high-quality, fixed-income debt instruments at the measurement date. For the U.S. and certain non-U.S. countries, a portfolio of high-quality corporate bonds is used to construct a yield curve. The cash flows from the company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. In other non-U.S. countries, where the markets for high-quality long-term bonds are not generally as well developed, a portfolio of long-term government bonds is used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates. For the U.S. defined benefit pension plans, the changes in the discount rate assumptions impacted the net periodic (income)/ cost and the PBO. The changes in the discount rate assumptions

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document resulted in an increase in 2016 net periodic income of $103 million, a decrease in 2015 net periodic income of $286 million and an increase in 2014 net periodic income of $275 million. The changes in the discount rate assumptions resulted in an increase in the PBO of $998 million and a decrease of $1,621 million at December 31, 2016 and 2015, respectively. For the U.S. nonpension postretirement benefit plans, the changes in the discount rate assumptions had no material impact on net periodic cost for the years ended December 31, 2016, 2015 and 2014, and resulted in an increase in the APBO of $33 million and a decrease of $109 million at December 31, 2016 and 2015, respectively. For all of the company’s retirement-related benefit plans, the change in the discount rate assumptions resulted in an increase in the benefit obligation of approximately $4.8 billion at December 31, 2016 and a decrease of approximately $2.4 billion at December 31, 2015. Expected Long-Term Returns on Plan Assets Expected returns on plan assets, a component of net periodic (income)/cost, represent the expected long-term returns on plan assets based on the calculated market-related value of plan assets. Expected long-term returns on plan assets take into account long-term expectations for future returns and the investment policies and strategies as described on page 144. These rates of return are developed by the company and are tested for reasonableness against historical returns. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a pattern of income and cost recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized as a component of net loss or gain in AOCI, which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic (income)/cost. For the U.S. defined benefit pension plan, the expected long-term rate of return on plan assets for the years ended December 31, 2016, 2015 and 2014 was 7.0 percent, 7.5 percent and 8 percent, respectively. The change in the rate in 2016 resulted in a decrease in 2016 net periodic income of $268 million. For the year ended December 31, 2015, the change in the rate resulted in a decrease in net periodic income of $264 million. There was no impact on net periodic income for the year ended December 31, 2014 as the rate was flat at 8 percent compared to the prior year. For 2017, the projected long-term rate of return on plan assets is 5.75 percent. The 125 basis point year-to- year decline is primarily driven by a change in investment strategy. For the U.S. nonpension postretirement benefit plans, the company maintains a highly liquid trust fund balance to ensure timely payments are made. As a result, for the years ended December 31, 2016, 2015 and 2014, the expected long-term return on plan assets and the actual return on those assets were not material. Rate of Compensation Increases and Mortality Rate The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. The rate of compensation increase is not applicable to the U.S. defined benefit pension plans as benefit accruals ceased December 31, 2007 for all participants. Mortality rate assumptions are based on life expectancy and death rates for different types of participants. Mortality rates are periodically updated based on actual experience. In the U.S., the Society of Actuaries released new mortality tables in 2014 and updated them in 2015 and 2016. The company utilized these tables in its plan remeasurements at December 31, 2016 and 2015. For the U.S. retirement-related plans, the change in mortality assumptions resulted in a decrease to the plan benefit obligations of $0.6 billion and a decrease of $0.7 billion at December 31, 2016 and 2015, respectively. Interest Crediting Rate Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the PBO. This assumption provides a basis for projecting the expected interest rate that participants will earn on the benefits that they are expected to receive in the following year and is based on the average from August to October of the one-year U.S. Treasury Constant Maturity yield plus one percent.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For the PPP, the change in the interest crediting rate to 1.3 percent for the year ended December 31, 2016 from 1.1 percent for the year ended December 31, 2015 resulted in a decrease in 2016 net periodic income of $7 million. The interest crediting rate of 1.1 percent for the year ended December 31, 2015, was unchanged from December 31, 2014 and therefore, had no impact on the decrease in 2015 net periodic income. The change in the interest crediting rate to 1.1 percent for the year ended December 31, 2014, from 1.2 percent for the year ended December 31, 2013, resulted in an increase in 2014 net periodic income of $8 million. Healthcare Cost Trend Rate For nonpension postretirement benefit plan accounting, the company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates. However, the healthcare cost trend rate has an insignificant effect on plan costs and obligations as a result of the terms of the plan which limit the company’s obligation to the participants. The company assumes that the healthcare cost trend rate for 2017 will be 6.75 percent. In addition, the company assumes that the same trend rate will decrease to 5 percent over the next seven years. A one percentage point increase or decrease in the assumed healthcare cost trend rate would not have had a material effect on 2016, 2015 and 2014 net periodic cost or the benefit obligations as of December 31, 2016 and 2015. Plan Assets Retirement-related benefit plan assets are recognized and measured at fair value. Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions. Investment Policies and Strategies The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors described on pages 142 through 143. The Qualified PPP portfolio’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. In 2016, the company changed its investment strategy, modifying the target asset allocation, primarily by reducing equity securities and increasing debt securities. This change was designed to reduce the potential negative impact that equity markets might have on the funded status of the plan. The Qualified PPP portfolio’s target allocation is 70 percent fixed-income securities, 20 percent equity securities, 5 percent real estate and 5 percent other investments. The assets are managed by professional investment firms and investment professionals who are employees of the company. They are bound by investment mandates determined by the company’s management and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies. Market liquidity risks are tightly controlled, with $5,010 million of the Qualified PPP portfolio as of December 31, 2016 invested in private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded securities. In addition, the Qualified PPP portfolio had $2,142 million in commitments for future investments in private markets to be made over a number of years. These commitments are expected to be funded from plan assets. Derivatives are used as an effective means to achieve investment objectives and/or as a component of the plan’s risk management strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management and credit exposure, cash equitization and to manage currency and commodity strategies. Outside the U.S., the investment objectives are similar to those described above, subject to local regulations. The weighted-average target allocation for the non-U.S. plans is 25 percent equity securities, 60 percent fixed-income securities, 3 percent real estate and 12 percent other investments, which is consistent with the allocation decisions made by the company’s management. In some countries, a higher percentage allocation to fixed income is required to

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document manage solvency and funding risks. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. plans do not invest in illiquid assets and their use of derivatives is consistent with the U.S. plan and mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies. The company’s nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a nominal, highly liquid trust fund balance to ensure timely benefit payments. Defined Benefit Pension Plan Assets The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2016. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries. ($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $5,778 $ 1 $ — $ 5,779 $4,080 $ 0 $ — $ 4,080 Equity mutual funds (2) 93 — — 93 35 — — 35 Fixed income Government and related (3) — 14,897 — 14,897 — 7,577 16 7,593 Corporate bonds (4) — 18,063 101 18,164 — 2,045 1 2,045 Mortgage and asset- backed securities — 652 5 656 — 4 — 4 Fixed income mutual funds (5) 359 — — 359 22 — — 22 Insurance contracts — — — — — 1,137 — 1,137 Cash and short-term investments (6) 55 1,927 — 1,982 294 707 — 1,001 Real estate — — — — — — 294 294 Derivatives (7) 18 20 — 38 43 752 — 796 Other mutual funds (8) — — — — 114 — — 114 Subtotal 6,303 35,560 106 41,969 4,589 12,223 310 17,122 Investments measured at net asset value using the NAV practical expedient (9) — — — 9,641 — — — 18,946 Other (10) — — — (205) — — — (48) Fair value of plan assets $6,303 $35,560 $ 106 $51,405 $4,589 $12,223 $ 310 $36,020

(1)Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $28 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $15 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4)The U.S. Plan includes IBM corporate bonds of $4 million, representing 0.01 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.003 percent of the non-U.S. Plan assets. (5) Invests predominantly in fixed income securities (6) Includes cash, cash equivalents and short-term marketable securities (7)Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives (8) Invests in both equity and fixed-income securities

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (9)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets The U.S. nonpension postretirement benefit plan assets of $26 million were invested in cash, categorized as Level 1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $71 million, primarily in Brazil, and, to a lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds, categorized as Level 2 in the fair value hierarchy. The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2015. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries. In the following table, some Level 2 and Level 3 assets have been reclassified to reflect the FASB guidance removing investments using NAV as a practical expedient from the fair value hierarchy. The December 31, 2015 Level 3 reconciliation tables have also been reclassified to reflect this change. Refer to note B, “Accounting Changes,” for additional information. ($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $11,210 $ 1 $ — $11,211 $4,631 $ 0 $ — $ 4,631 Equity mutual funds (2) 99 — — 99 90 — — 90 Fixed income Government and related (3) — 9,854 — 9,854 — 7,482 16 7,499 Corporate bonds (4) — 17,088 2 17,090 — 1,896 4 1,899 Mortgage and asset-backed securities — 633 10 643 — 6 — 6 Fixed income mutual funds (5) 313 — — 313 38 — — 38 Insurance contracts — — — — — 1,079 — 1,079 Cash and short-term investments (6) 244 2,305 — 2,549 142 422 — 564 Real estate — — — — — — 411 411 Derivatives (7) (82) 2 — (80) (1) 481 — 480 Other mutual funds (8) — — — — 115 — — 115 Subtotal 11,784 29,884 12 41,680 5,016 11,366 431 16,812 Investments measured at net asset value using the NAV practical expedient (9) — — — 10,179 — — — 18,986 Other (10) — — — (143) — — — (50) Fair value of plan assets $11,784 $29,884 $ 12 $51,716 $5,016 $11,366 $ 431 $35,748

(1)Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $34 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $14 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4)The U.S. Plan includes IBM corporate bonds of $23 million, representing 0.04 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.004 percent of the non-U.S. Plan assets. (5) Invests in predominantly fixed-income securities (6) Includes cash and cash equivalents and short-term marketable securities (7)Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (8) Invests in both equity and fixed-income securities (9)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets The U.S. nonpension postretirement benefit plan assets of $71 million were invested in cash, categorized as Level 1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $59 million, primarily in Brazil, and, to a lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds, categorized as Level 2 in the fair value hierarchy. The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2016 and 2015 for the U.S. Plan. ($ in millions)

Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2016 $ 2 $ 10 $ 12 Return on assets held at end of year (3) 0 (2) Return on assets sold during the year 0 1 1 Purchases, sales and settlements, net 103 (5) 99 Transfers, net (2) (2) (3) Balance at December 31, 2016 $ 101 $ 5 $ 106

($ in millions)

Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2015 $ 4 $ 20 $ 24 Return on assets held at end of year 0 0 0 Return on assets sold during the year 1 0 1 Purchases, sales and settlements, net (5) (2) (7) Transfers, net 2 (8) (6) Balance at December 31, 2015 $ 2 $ 10 $ 12

The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31, 2016 and 2015 for the non-U.S. Plans. ($ in millions)

Government Corporate Real and Related Bonds Estate Total Balance at January 1, 2016 $ 16 $ 4 $ 411 $ 431 Return on assets held at end of year 1 0 (22) (21) Return on assets sold during the year 0 0 35 35 Purchases, sales and settlements, net 0 (3) (68) (72) Transfers, net 0 — — 0 Foreign exchange impact 0 0 (62) (63) Balance at December 31, 2016 $ 16 $ 1 $ 294 $ 310

($ in millions)

Government Corporate and Related Bonds Real Estate Total Balance at January 1, 2015 $ 32 $ 1 $ 411 $ 444 Return on assets held at end of year (2) 0 28 26 Return on assets sold during the year 0 0 42 42 Purchases, sales and settlements, net ) ) )

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (10 3 (51 (58 Transfers, net — — — — Foreign exchange impact (3) 0 (20) (23) Balance at December 31, 2015 $ 16 $ 4 $ 411 $ 431

Valuation Techniques The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation techniques during 2016 and 2015. Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM common stock is valued at the closing price reported on the New York Stock Exchange. Mutual funds are typically valued based on quoted market prices. These assets are generally classified as Level 1. The fair value of fixed-income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded. Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2. Real estate valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data, including appraisals, to determine if the carrying value of these assets should be adjusted. These assets are classified as Level 3. Exchange traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded, while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates. These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices. Certain investments are measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient. These investments, which include commingled funds, hedge funds, private equity and real estate partnerships, are typically valued using the net asset value (NAV) provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. In accordance with FASB guidance, these investments have not been classified in the fair value hierarchy. Refer to note B, “Accounting Changes.” Contributions Defined Benefit Pension Plans It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate. The company contributed $169 million in cash and $295 million in U.S. Treasury Securities to non-U.S. defined benefit pension plans as well as $43 million in cash to multi-employer plans for the year ended December 31, 2016. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows. For the year ended December 31, 2015, the company contributed $474 million in cash to non-U.S. defined benefit pension plans and $40 million in cash to multi-employer plans. The cash contributions to multi- employer plans represent the annual cost included in net periodic (income)/cost recognized in the Consolidated Statement of Earnings. The company’s participation in multi-employer plans has no material impact on the company’s financial statements. In 2017, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year. The Pension Protection Act of 2006 (the Act), enacted into law in 2006, is a comprehensive reform package that, among other provisions, increases pension funding requirements for certain U.S. defined benefit plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes and raises tax deduction limits for contributions to retirement- related benefit plans. The additional funding requirements by the Act apply to plan years beginning after December 31, 2007. The Act was updated by the Worker, Retiree and Employer

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Recovery Act of 2008, which revised the funding requirements in the Act by clarifying that pension plans may smooth the value of pension plans over 24 months. At December 31, 2016, no mandatory contribution was required for 2017. In 2017, the company estimates contributions to its non-U.S. defined benefit and multi-employer plans to be approximately $500 million, the largest of which will be contributed to defined benefit pension plans in the UK, Japan and Spain. This amount represents the legally mandated minimum contributions. Financial market performance in 2017 could increase the legally mandated minimum contribution in certain countries which require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally mandated amount based on market conditions or other factors. Defined Contribution Plans The company contributed $1,046 million and $1,117 million in cash to the defined contribution plans during the years ended December 31, 2016 and 2015, respectively. In 2017, the company estimates cash contributions to the defined contribution plans to be approximately $1.0 billion. Nonpension Postretirement Benefit Plans The company contributed $305 million and $408 million to the nonpension postretirement benefit plans during the years ended December 31, 2016 and 2015, respectively. The $305 million contribution in 2016 consisted of $80 million in cash and $225 million in U.S. Treasury securities. The $408 million contribution in 2015 consisted of $328 million in cash and $80 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows. Expected Benefit Payments Defined Benefit Pension Plan Expected Payments The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2016 and include benefits attributable to estimated future compensation increases, where applicable.

($ in millions)

Total Qualified Nonqualified Qualified Nonqualified Expected Non- Non- U.S. Plan U.S. Plans U.S. Plans U.S. Plans Benefit Payments Payments Payments Payments Payments 2017 $ 3,519 $ 120 $ 1,689 $ 306 $ 5,634 2018 3,519 121 1,705 301 5,646 2019 3,504 121 1,730 312 5,668 2020 3,589 122 1,741 358 5,809 2021 3,525 123 1,783 376 5,806 2022—2026 16,970 594 9,077 2,121 28,762

The 2017 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position. Nonpension Postretirement Benefit Plan Expected Payments The following table reflects the total expected benefit payments to nonpension postretirement benefit plan participants. These payments have been estimated based on the same assumptions used to measure the plans’ APBO at December 31, 2016.

($ in millions)

Total Qualified Nonqualified Expected Non- Non- U.S. Plan U.S. Plans U.S. Plans Benefit Payments Payments Payments Payments

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2017 $ 396 $ 6 $ 30 $ 432 2018 397 6 32 435 2019 403 6 34 443 2020 405 6 37 448 2021 395 7 39 441 2022—2026 1,743 36 219 1,998

The 2017 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets represent a component of compensation and benefits, within current liabilities, in the Consolidated Statement of Financial Position. Other Plan Information The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of plan assets. For a more detailed presentation of the funded status of the company’s defined benefit pension plans, see the table on page 140. ($ in millions)

2016 2015 Benefit Plan Benefit Plan At December 31: Obligation Assets Obligation Assets Plans with PBO in excess of plan assets $ 29,182 $ 16,374 $ 29,784 $ 17,677 Plans with ABO in excess of plan assets 28,770 16,272 29,135 17,492 Plans with assets in excess of PBO 68,017 71,051 68,053 69,786

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION Dec. 31, 2016 SEGMENT INFORMATION SEGMENT INFORMATION NOTE T. SEGMENT INFORMATION In January 2016, the company made a number of changes to its organizational structure and management system consistent with its ongoing transformation to a cognitive solutions and cloud platform business. With these changes, the company updated its reportable segments. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes. The company’s five reportable segments are as follows: The Cognitive Solutions segment includes solutions units that address many of the company’s strategic areas, including analytics, commerce and security, several of the new initiatives around Watson Platform, Watson Health, Watson Internet of Things and Transaction Processing Software. The Technology Services & Cloud Platforms segment includes the company’s cloud infrastructure and platform capabilities, the previously reported Global Technology Services business and Integration Software. Operating Systems Software has been aligned with the underlying hardware platforms in the Systems segment. The Global Business Services and Global Financing segments remain unchanged.

The company also realigned a portion of its software support revenue, which was previously managed and reported in Integrated Technology Services within Global Technology Services, to the underlying software product areas.

The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics.

Information about each segment’s business and the products and services that generate each segment’s revenue is located in the “Description of Business” section on pages 32 to 34, and in the “Segment Details,” on pages 36 to 41 in the Management Discussion.

Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arm’s-length, market-based transfer price. Systems that are used by Technology Services & Cloud Platforms in outsourcing engagements are primarily sourced internally from the Systems segment and software is sourced from various segments. Software used by Technology Services & Cloud Platforms on external engagements is sourced internally through Cognitive Solutions and the Systems segments. For providing IT services that are used internally, Technology Services & Cloud Platforms and Global Business Services recover cost, as well as a reasonable fee, that is intended to reflect the arm’s-length value of providing the services. They enter into arm’s-length loans at prices equivalent to market rates with Global Financing to facilitate the acquisition of equipment and software used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate. The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result, a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, certain marketing functions and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management system, e.g., advertising expense is allocated based on the gross profits of the segments. A portion of the shared expenses, which are recorded in net income, are not allocated to the segments. These expenses are associated with the elimination of internal transactions and other miscellaneous items. The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income from continuing operations. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments. Management System Segment View

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 External revenue $18,187 $16,700 $ 35,337 $ 7,714 $ 1,692 $79,630 Internal revenue 2,630 409 715 750 1,802 6,307 Total revenue $20,817 $17,109 $ 36,052 $ 8,464 $ 3,494 $85,936 Pre-tax income from continuing operations $ 6,352 $ 1,732 $ 4,707 $ 933 $ 1,656 $15,380 Revenue year-to-year change 3.8 % (3.1 )% 0.6 % (18.0 )% (22.0 )% (2.7 )% Pre-tax income year-to-year change (12.3 )% (33.4 )% (17.0 )% (45.8 )% (29.9 )% (21.5 )% Pre-tax income margin 30.5 % 10.1 % 13.1 % 11.0 % 47.4 % 17.9 %

2015 External revenue $17,841 $17,166 $ 35,142 $ 9,547 $ 1,840 $81,535 Internal revenue 2,215 499 698 778 2,637 6,826 Total revenue $20,055 $17,664 $ 35,840 $10,325 $ 4,477 $88,361 Pre-tax income from continuing operations $ 7,245 $ 2,602 $ 5,669 $ 1,722 $ 2,364 $19,602 Revenue year-to-year change (8.4 )% (11.9 )% (9.8 )% (22.4 )% (1.0 )% (11.2 )% Pre-tax income year-to-year change (11.8 )% (22.3 )% (20.0 )% 24.4 % 8.0 % (11.8 )% Pre-tax income margin 36.1 % 14.7 % 15.8 % 16.7 % 52.8 % 22.2 %

2014 External revenue $19,689 $19,512 $ 38,889 $12,294 $ 2,034 $92,418 Internal revenue 2,216 543 840 1,006 2,488 7,093 Total revenue $21,906 $20,055 $ 39,729 $13,300 $ 4,522 $99,512 Pre-tax income from continuing operations $ 8,215 $ 3,347 $ 7,084 $ 1,384 $ 2,189 $22,219 Revenue year-to-year change (0.1 )% (8.5 )% (0.9 )% (19.8 )% 5.1 % (5.1 )% Pre-tax income year-to-year change (5.2 )% (2.9 )% (7.3 )% (21.5 )% 0.8 % (6.2 )% Pre-tax income margin 37.5 % 16.7 % 17.8 % 10.4 % 48.4 % 22.3 %

Reconciliations of IBM as Reported

($ in millions)

For the year ended December 31: 2016 2015 2014 Revenue Total reportable segments $ 85,936 $ 88,361 $ 99,512 Other revenue 289 206 374 Elimination of internal transactions (6,307) (6,826) (7,093) Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

($ in millions)

For the year ended December 31: 2016 2015** 2014** Pre-tax income from continuing operations: Total reportable segments $ 15,380 $ 19,602 $ 22,219 Amortization of acquired intangible assets (998) (677) (791) Acquisition-related charges (5) (26) (12) Non-operating retirement- related (costs)/income (598) (1,050) (353) Elimination of internal transactions (1,160) (1,675) (1,746) Unallocated corporate amounts* ) )

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (290 (230 688 Total pre-tax income from continuing operations $ 12,330 $ 15,945 $ 19,986

* The 2014 amount includes the gain related to the Retail Store Solutions divestiture and the net gain related to the System x business divestiture. ** Reclassified to conform to 2016 presentation.

Immaterial Items Investment in Equity Alliances and Equity Alliances Gains/(Losses) The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments did not have a material effect on the financial position or the financial results of the segments. Segment Assets and Other Items Cognitive Solutions assets are mainly goodwill, acquired intangible assets and accounts receivable. Global Business Services assets are primarily goodwill and accounts receivable. Technology Services & Cloud Platforms assets are primarily goodwill, plant, property and equipment including the assets associated with the outsourcing business, deferred services arrangement transition costs, accounts receivable and acquired intangible assets. Systems assets are primarily goodwill, plant, property and equipment, and manufacturing inventory. Global Financing assets are primarily financing receivables, cash and marketable securities, and fixed assets under operating leases.

To ensure the efficient use of the company’s space and equipment, several segments may share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each user segment. This is consistent with the company’s management system and is reflected accordingly in the table on page 153. In those cases, there will not be a precise correlation between segment pre-tax income and segment assets.

Similarly, the depreciation amounts reported by each segment are based on the assigned landlord ownership and may not be consistent with the amounts that are included in the segments’ pre-tax income. The amounts that are included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures that are reported by each segment also are consistent with the landlord ownership basis of asset assignment.

Global Financing amounts for interest income and interest expense reflect the interest income and interest expense associated with the Global Financing business, including the intercompany financing activities discussed on page 34, as well as the income from investment in cash and marketable securities. The explanation of the difference between cost of financing and interest expense for segment presentation versus presentation in the Consolidated Statement of Earnings is included on page 80 of the Management Discussion.

Management System Segment View ($ in millions)

Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 Assets $ 25,517 $ 8,628 $ 24,085 $ 3,812 $ 36,492 $ 98,534 Depreciation/amortization of intangibles* 1,228 104 2,224 375 317 4,248 Capital expenditures/ investments in intangibles 495 55 2,382 453 380 3,764 Interest income — — — — 1,547 1,547 Interest expense — — — — 371 371

2015 Assets $ 20,017 $ 8,327 $ 23,530 $ 3,967 $ 36,157 $ 91,999 Depreciation/amortization of intangibles* 921 81 1,944 321 343 3,610

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Capital expenditures/ investments in intangibles 448 86 2,619 321 356 3,830 Interest income — — — — 1,720 1,720 Interest expense — — — — 469 469

2014 Assets $ 19,525 $ 8,831 $ 22,512 $ 4,219 $ 38,845 $ 93,933 Depreciation/amortization of intangibles* 1,040 98 1,982 734 455 4,308 Capital expenditures/ investments in intangibles 413 79 2,321 627 482 3,921 Interest income — — — — 1,951 1,951 Interest expense — — — — 518 518

*Segment pre-tax income from continuing operations does not include the amortization of intangible assets. Reconciliations of IBM as Reported ($ in millions)

At December 31: 2016 2015 2014 Assets Total reportable segments $ 98,534 $ 91,999 $ 93,933 Elimination of internal transactions (5,670) (4,709) (5,193) Unallocated amounts Cash and marketable securities 6,752 6,634 7,182 Notes and accounts receivable 2,660 2,333 4,253 Deferred tax assets 5,078 4,693 6,465 Plant, other property and equipment 2,656 2,650 2,169 Pension assets 3,034 1,734 2,160 Other 4,425 5,161 6,303 Total IBM consolidated assets $ 117,470 $ 110,495 $ 117,271

Major Clients

No single client represented 10 percent or more of the company’s total revenue in 2016, 2015 or 2014.

Geographic Information

The following provides information for those countries that are 10 percent or more of the specific category.

Revenue*

($ in millions)

For the year ended December 31: 2016 2015 2014 United States $ 30,194 $ 30,514 $ 32,021 Japan 8,339 7,544 8,382 Other countries 41,386 43,683 52,390 Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

* Revenues are attributed to countries based on the location of the client. Plant and Other Property—Net ($ in millions)

At December 31: 2016 2015 2014 United States $ 4,701 $ 4,644 $ 4,388 Other countries 5,607 5,532 5,690 Total $ 10,308 $ 10,176 $ 10,078

Revenue by Classes of Similar Products or Services

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The following table presents external revenue for similar classes of products or services within the company’s reportable segments. Client solutions often include IBM software and systems and other suppliers’ products if the client solution requires it. For each of the segments that include services; Software-as-a-Service, consulting, education, training and other product-related services are included as services. For each of these segments, software includes product license charges and ongoing subscriptions. ($ in millions)

For the year ended December 31: 2016 2015 2014 Cognitive Solutions Software $ 13,969 $ 14,557 $ 16,502 Services 4,111 3,175 3,143 Systems 107 108 44 Global Business Services Services $ 16,399 $ 16,851 $ 19,202 Software 179 164 186 Systems 121 151 124 Technology Services & Cloud Platforms Services $ 24,311 $ 23,947 $ 26,462 Maintenance 5,862 6,085 6,790 Software 3,818 3,907 4,332 Systems 1,346 1,203 1,304 Systems Servers $ 3,567 $ 5,032 $ 7,177 Storage 2,083 2,325 2,641 Software 1,586 1,749 2,053 Services 478 442 423 Global Financing Financing $ 1,231 $ 1,386 $ 1,543 Used equipment sales 461 454 491

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended SUBSEQUENT EVENTS Dec. 31, 2016 SUBSEQUENT EVENTS SUBSEQUENT EVENTS NOTE U. SUBSEQUENT EVENTS On January 31, 2017, the company announced that the Board of Directors approved a quarterly dividend of $1.40 per common share. The dividend is payable March 10, 2017 to shareholders of record on February 10, 2017. On January 24, 2017, the company issued $2.75 billion in bonds as follows: $500 million of 3-year floating-rate bonds priced at LIBOR plus 23 basis points, $750 million of 3-year fixed-rate bonds with a 1.9 percent coupon, $1.0 billion of 5-year fixed-rate bonds with a 2.5 percent coupon and $500 million of 10-year fixed-rate bonds with a 3.3 percent coupon.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SCHEDULE II 12 Months Ended VALUATION AND QUALIFYING ACCOUNTS Dec. 31, 2016 AND RESERVES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II VALUATION AND QUALIFYING SCHEDULE II ACCOUNTS AND INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES RESERVES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions)

Balance at Balance at Beginning End of Description of Period Additions* Write-offs** Other*** Period Allowance For Credit Losses 2016 —Current $ 909 $ 87 $ (307)$ (13)$ 675 —Noncurrent $ 118 $ (2)$ (7)$ (8)$ 101 2015 —Current $ 829 $ 226 $ (92)$ (55)$ 909 —Noncurrent $ 126 $ 8 $ (1)$ (14)$ 118 2014 —Current $ 636 $ 276 $ (48)$ (35)$ 829 —Noncurrent $ 80 $ 57 $ (4)$ (7)$ 126 Allowance For Inventory Losses 2016 $ 483 $ 178 $ (150)$ 14 $ 525 2015 $ 564 $ 165 $ (230)$ (15)$ 483 2014 $ 623 $ 211 $ (232)$ (38)$ 564 Revenue Based Provisions 2016 $ 505 $ 1,377 $ (1,392)$ (9)$ 481 2015 $ 616 $ 1,658 $ (1,741)$ (28)$ 505 2014 $ 827 $ 2,519 $ (2,693)$ (37)$ 616

* Additions for Allowance for Credit Losses and Allowance for Inventory Losses are charged to expense and cost accounts, respectively, while Revenue Based Provisions are charged to revenue accounts.

** See Note A, "Significant Accounting Policies," on Exhibit 13 to Form 10-K, page 98 in the Notes to the Consolidated Financial Statements for additional information regarding allowance for credit loss write-offs.

*** Primarily comprises currency translation adjustments.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES Dec. 31, 2016 (Policies) SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Basis of Presentation The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable. On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The transaction closed on July 1, 2015. Refer to note C, “Acquisitions/Divestitures,” for additional information on the transaction. In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments, but did not impact the company’s Consolidated Financial Statements. Refer to note T, “Segment Information,” on pages 150 to 154 for additional information on the changes in reportable segments. Noncontrolling interest amounts of $16 million, $8 million and $6 million, net of tax, for the years ended December 31, 2016, 2015 and 2014, respectively, are included as a reduction within other (income) and expense in the Consolidated Statement of Earnings. Principles of Consolidation Principles of Consolidation The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are primarily majority owned. Any noncontrolling interest in the equity of a subsidiary is reported in Equity in the Consolidated Statement of Financial Position. Net income and losses attributable to the noncontrolling interest is reported as described above in the Consolidated Statement of Earnings. The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in business entities in which the company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method and the company’s proportionate share of income or loss is recorded in other (income) and expense. The accounting policy for other investments in equity securities is on page 98 within “Marketable Securities.” Equity investments in non-publicly traded entities are primarily accounted for using the cost method. All intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) (OCI) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See “Critical Accounting Estimates” on pages 71 to 74 for a discussion of the company’s critical accounting estimates. Revenue Revenue The company recognizes revenue when it is realized or realizable and earned. The company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document reasonably assured. Delivery does not occur until products have been shipped or services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved. The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as “resellers”) when the reseller has: economic substance apart from the company, credit risk, risk of loss to the inventory; and, the fee to the company is not contingent upon resale or payment by the end user, the company has no further obligations related to bringing about resale or delivery and all other revenue recognition criteria have been met. The company reduces revenue for estimated client returns, stock rotation, price protection, rebates and other similar allowances. (See Schedule II, “Valuation and Qualifying Accounts and Reserves” included in the company’s Annual Report on Form 10-K). Revenue is recognized only if these estimates can be reasonably and reliably determined. The company bases its estimates on historical results taking into consideration the type of client, the type of transaction and the specifics of each arrangement. Payments made under cooperative marketing programs are recognized as an expense only if the company receives from the client an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably and reliably estimated. If the company does not receive an identifiable benefit sufficiently separable from the product sale whose fair value can be reasonably estimated, such payments are recorded as a reduction of revenue. Revenue from sales of third-party vendor products or services is recorded net of costs when the company is acting as an agent between the client and the vendor, and gross when the company is a principal to the transaction. Several factors are considered to determine whether the company is an agent or principal, most notably whether the company is the primary obligor to the client, or has inventory risk. Consideration is also given to whether the company adds meaningful value to the vendor’s product or service, was involved in the selection of the vendor’s product or service, has latitude in establishing the sales price or has credit risk. The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions. In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue. Multiple-Deliverable Arrangements The company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of services, software, hardware and/or financing. For example, a client may purchase a server that includes operating system software. In addition, the arrangement may include post-contract support for the software and a contract for post-warranty maintenance service for the hardware. These types of arrangements can also include financing provided by the company. These arrangements consist of multiple deliverables, with the hardware and software delivered in one reporting period, and the software support and hardware maintenance services delivered across multiple reporting periods. In another example, a client may outsource the running of its datacenter operations to the company on a long-term, multiple-year basis and periodically purchase servers and/or software products from the company to upgrade or expand its facility. The outsourcing services are provided on a continuous basis across multiple reporting periods, and the hardware and software products are delivered in one reporting period. To the extent that a deliverable in a multiple-deliverable arrangement is subject to specific accounting guidance that deliverable is accounted for in accordance with such specific guidance. Examples of such arrangements may include leased hardware which is subject to specific leasing guidance or software which is subject to specific software revenue recognition guidance on whether and/or how to separate multiple-deliverable arrangements into separate units of accounting (separability) and how to allocate the arrangement consideration among those separate units of accounting (allocation). For all other deliverables in multiple-deliverable arrangements, the guidance below is applied for separability and allocation. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met: · The delivered item(s) has value to the client on a standalone basis; and ·If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price. The following revenue policies are then applied to each unit of accounting, as applicable. Revenue from the company’s cloud, analytics, mobile, security, and cognitive offerings follow the specific revenue recognition policies for multiple-deliverable arrangements and for each major category of revenue depending on the type of offering which can be comprised of services, hardware and/or software. Services The company’s primary services offerings include information technology (IT) datacenter and business process outsourcing, application management services, consulting and systems integration, technology infrastructure and system maintenance, hosting and the design and development of complex IT systems to a client’s specifications (design and build). Many of these services can be delivered entirely or partially through as-a-Service or cloud delivery models. These services are provided on a time-and-material basis, as a fixed-price contract or as a fixed- price per measure of output contract and the contract terms range from less than one year to over 10 years. Revenue from IT datacenter and business process outsourcing contracts is recognized in the period the services are provided using either an objective measure of output or on a straight-line basis over the term of the contract. Under the output method, the amount of revenue recognized is based on the services delivered in the period. Revenue from application management services, technology infrastructure, and system maintenance and hosting contracts is recognized on a straight-line basis over the terms of the contracts. Revenue from time-and-material contracts is recognized as labor hours are delivered and direct expenses are incurred. Revenue related to extended warranty and product maintenance contracts is recognized on a straight-line basis over the delivery period. Revenue from fixed-price design and build contracts is recognized under the percentage-of- completion (POC) method. Under the POC method, revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated labor costs to fulfill the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by the company. The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For non-POC method services contracts, any losses are recorded as incurred. In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of $5,873 million and $6,039 million at December 31, 2016 and 2015, respectively, is included in the Consolidated Statement of Financial Position. In other services contracts, the company performs the services prior to billing the client. Unbilled accounts receivable of $1,611 million and $1,630 million at December 31, 2016 and 2015, respectively, is included in notes and accounts receivable-trade in the Consolidated Statement of Financial Position. Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions. Unbilled receivables are expected to be billed within four months. Hardware The company’s hardware offerings include the sale or lease of system servers and storage solutions. The company also offers installation services for its more complex hardware products. Revenue from hardware sales and sales-type leases is recognized when risk of loss has transferred to the client and there are no unfulfilled company obligations that affect the client’s final acceptance of the arrangement. Any cost of standard warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental or lease.

Software

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Revenue from perpetual (one-time charge) license software is recognized at the inception of the license term if all revenue recognition criteria have been met. Revenue from post-contract support, which may include unspecified upgrades on a when-and-if-available basis, is recognized on a straight-line basis over the period such items are delivered. Revenue from software hosting or Software-as-a-Service arrangements is recognized as the service is delivered. In software hosting arrangements, the rights provided to the customer (e.g., ownership of a license, contract termination provisions and the feasibility of the customer to operate the software) are considered in determining whether the arrangement includes a license. In arrangements which include a software license, the associated revenue is recognized according to whether the license is perpetual or term. Revenue from term (recurring license charge) license software is recognized on a straight-line basis over the period that the client is entitled to use the license. In multiple-deliverable arrangements that include software that is more than incidental to the products or services as a whole (software multiple-deliverable arrangements), software and software-related elements are accounted for in accordance with software revenue recognition guidance. Software-related elements include software products and services for which a software deliverable is essential to its functionality. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are not within the scope of software revenue recognition guidance and are accounted for based on other applicable revenue recognition guidance. A software multiple-deliverable arrangement is separated into more than one unit of accounting if all of the following criteria are met:

·The functionality of the delivered element(s) is not dependent on the undelivered element(s); ·There is vendor-specific objective evidence (VSOE) of fair value of the undelivered element(s). VSOE of fair value is based on the price charged when the deliverable is sold separately by the company on a regular basis and not as part of the multiple-deliverable arrangement; and ·Delivery of the delivered element(s) represents the culmination of the earnings process for that element(s). If any one of these criteria is not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is VSOE of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative VSOE of fair value. There may be cases, however, in which there is VSOE of fair value of the undelivered item(s) but no such evidence for the delivered item(s). In these cases, the residual method is used to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate VSOE of fair value of the undelivered elements. The company’s multiple-deliverable arrangements may have a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-deliverable arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy: VSOE, third-party evidence (TPE) or best estimate of selling price (BESP). In circumstances where the company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, BESP is used for the purpose of performing this allocation. Financing Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease. Best Estimate of Selling Price In certain instances, the company is not able to establish VSOE for all elements in a multiple- deliverable arrangement. When VSOE cannot be established, the company attempts to establish the selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. When the company is unable to establish selling price using VSOE or TPE, the company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the company would transact a sale if the product or service were sold on a stand- alone basis. BESP may be used, for example, if a product is not sold on a stand-alone basis or when the company sells a new product, for which VSOE and TPE does not yet exist, in a multiple-deliverable arrangement prior to selling the new product on a stand-alone basis.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The company determines BESP by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing practices. The determination of BESP is a formal process that includes review and approval by the company’s management. In addition, the company regularly reviews VSOE and TPE for its products and services, in addition to BESP.

Services Costs Services Costs Recurring operating costs for services contracts, including costs related to bid and proposal activities, are recognized as incurred. For fixed-price design and build contracts, the costs of external hardware and software accounted for under the POC method are deferred and recognized based on the labor costs incurred to date, as a percentage of the total estimated labor costs to fulfill the contract. Certain eligible, nonrecurring costs incurred in the initial phases of outsourcing contracts are deferred and subsequently amortized. These costs consist of transition and setup costs related to the installation of systems and processes and are amortized on a straight-line basis over the expected period of benefit, not to exceed the term of the contract. Additionally, fixed assets associated with outsourcing contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the expected period of benefit not to exceed the term of the contract. The company performs periodic reviews to assess the recoverability of deferred contract transition and setup costs. This review is done by comparing the estimated minimum remaining undiscounted cash flows of a contract to the unamortized contract costs. If such minimum undiscounted cash flows are not sufficient to recover the unamortized costs, an impairment loss is recognized. Deferred services transition and setup costs were $2,072 million and $2,144 million at December 31, 2016 and 2015, respectively. Amortization of deferred services transition and setup costs was estimated at December 31, 2016 to be $590 million in 2017, $515 million in 2018, $374 million in 2019, $248 million in 2020 and $344 million thereafter. Deferred amounts paid to clients in excess of the fair value of acquired assets used in outsourcing arrangements were $160 million and $184 million at December 31, 2016 and 2015, respectively. Amortization of deferred amounts paid to clients in excess of the fair value of acquired assets is recorded as an offset of revenue and was estimated at December 31, 2016 to be $53 million in 2017, $46 million in 2018, $28 million in 2019, $20 million in 2020 and $13 million thereafter. In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred costs incurred to purchase specific assets utilized in the delivery of services and to pay any additional costs incurred by the company to transition the services. Software Costs, Licensed Software Costs Software Programs Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up to three years and are recorded in software cost within cost of sales. The company performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to software cost within cost of sales as incurred. Software Costs, Internal-Use Software Costs Software The company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software programs, including software coding, installation, testing and certain data conversions. These capitalized costs are amortized on a straight-line basis over periods ranging up to three years and are recorded in selling, general and administrative expense. Product Warranties, Standard Product Warranties The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or three years. Estimated costs for warranty terms standard to the deliverable are recognized when revenue is recorded for the related deliverable. The company

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document estimates its warranty costs standard to the deliverable based on historical warranty claim experience and estimates of future spending, and applies this estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended warranty contracts, are recognized as incurred.

Product Warranties, Extended Product Warranties Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line basis over the delivery period. Changes in deferred income for extended warranty contracts, and in the warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Statement of Financial Position, are presented in the following tables:

Shipping and Handling Shipping and Handling Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Statement of Earnings.

Selling, General and Selling, General and Administrative Administrative Selling, general and administrative (SG&A) expense is charged to income as incurred. Expenses of promoting and selling products and services are classified as selling expense and include such items as compensation, advertising, sales commissions and travel. General and administrative expense includes such items as compensation, legal costs, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative expense includes other operating items such as an allowance for credit losses, workforce rebalancing charges for contractually obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations, amortization of certain intangible assets and environmental remediation costs.

Advertising and Promotional Advertising and Promotional Expense Expense The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from vendors are recorded net of advertising and promotional expense in the period in which the related advertising and promotional expense is incurred. Advertising and promotional expense, which includes media, agency and promotional expense, was $1,327 million, $1,290 million and $1,307 million in 2016, 2015 and 2014, respectively, and is recorded in SG&A expense in the Consolidated Statement of Earnings.

Research, Development and Research, Development and Engineering Engineering Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset.

Intellectual Property and Intellectual Property and Custom Development Income Custom Development Income The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets and technological know-how. Certain IP transactions to third parties are licensing/royalty-based and others are transaction-based sales/other transfers. Income from licensing arrangements is recognized at the inception of the perpetual license term if all revenue recognition criteria have been met. Income from royalty-based fee arrangements is recognized over time or as the licensee sells future related products (i.e., variable royalty, based upon licensee’s revenue). The company also enters into cross-licensing arrangements of patents, and income from these arrangements is recognized when earned. In addition, the company earns income from certain custom development projects for strategic technology partners and specific clients. The company records the income from these projects if the fee is not refundable, is not dependent upon the success of the project and when all revenue recognition have been met.

Other (Income) and Expense Other (Income) and Expense Other (income) and expense includes interest income (other than from Global Financing external transactions), gains and losses on certain derivative instruments, gains and losses from securities

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document and other investments, gains and losses from certain real estate transactions, foreign currency transaction gains and losses, gains and losses from the sale of businesses, other than reported as discontinued operations, and amounts related to accretion of asset retirement obligations.

Business Combinations and Business Combinations and Intangible Assets Including Goodwill Intangible Assets Including The company accounts for business combinations using the acquisition method and accordingly, Goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of completed technology is recorded in Cost, and amortization of all other intangible assets is recorded in SG&A expense. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.

Impairment Impairment Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows and, if impaired, the asset is written down to fair value based on either discounted cash flows or appraised values. Goodwill and indefinite-lived intangible assets are tested at least annually, in the fourth quarter, for impairment and whenever changes in circumstances indicate an impairment may exist. Goodwill is tested at the reporting unit level which is the operating segment, or a business, which is one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the segment level. Components are aggregated as a single reporting unit if they have similar economic characteristics.

Depreciation and Amortization Depreciation and Amortization Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land improvements, 20 years; plant, laboratory and office equipment, 2 to 20 years; and computer equipment, 1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely exceeding 25 years. Capitalized software costs incurred or acquired after technological feasibility has been established are amortized over periods ranging up to 3 years. Capitalized costs for internal-use software are amortized on a straight-line basis over periods ranging up to 3 years. Other intangible assets are amortized over periods between 1 and 7 years.

Environmental Environmental The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the company accrues remediation costs for known environmental liabilities. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts are recorded for environmental liabilities that are not probable or estimable.

Asset Retirement Obligations Asset Retirement Obligations Asset retirement obligations (ARO) are legal obligations associated with the retirement of long- lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Defined Benefit Pension and Defined Benefit Pension and Nonpension Postretirement Benefit Plans Nonpension Postretirement Benefit Plans The funded status of the company’s defined benefit pension plans and nonpension postretirement benefit plans (retirement-related benefit plans) is recognized in the Consolidated Statement of Financial Position. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. For the nonpension postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets represents the current market value of assets held in an irrevocable trust fund, held for the sole benefit of participants, which are invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess. The current portion of the retirement and nonpension postretirement benefit obligations represents the actuarial present value of benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is recorded in compensation and benefits in the Consolidated Statement of Financial Position. Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Statement of Earnings and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses previously recognized as a component of OCI and amortization of the net transition asset remaining in accumulated other comprehensive income/(loss) (AOCI). Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money cost associated with the passage of time. Certain events, such as changes in the employee base, plan amendments and changes in actuarial assumptions, result in a change in the benefit obligation and the corresponding change in OCI. The result of these events is amortized as a component of net periodic cost/(income) over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets. Net periodic cost/(income) is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions. (Gains)/losses and prior service costs/(credits) not recognized as a component of net periodic cost/(income) in the Consolidated Statement of Earnings as they arise are recognized as a component of OCI in the Consolidated Statement of Comprehensive Income. Those (gains)/ losses and prior service costs/(credits) are subsequently recognized as a component of net periodic cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service costs/(credits) represent the cost of benefit changes attributable to prior service granted in plan amendments. The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the company’s management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. Defined Contribution Plans The company’s contribution for defined contribution plans is recorded when the employee renders service to the company. The charge is recorded in Cost, SG&A and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions. Assumptions Used to Determine Plan Financial Information Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.

Discount Rate

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The discount rate assumptions used for retirement-related benefit plans accounting reflect the yields available on high-quality, fixed-income debt instruments at the measurement date. For the U.S. and certain non-U.S. countries, a portfolio of high-quality corporate bonds is used to construct a yield curve. The cash flows from the company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. In other non-U.S. countries, where the markets for high-quality long-term bonds are not generally as well developed, a portfolio of long-term government bonds is used as a base, to which a credit spread is added to simulate corporate bond yields at these maturities in the jurisdiction of each plan, as the benchmark for developing the respective discount rates. Expected Long-Term Returns on Plan Assets Expected returns on plan assets, a component of net periodic (income)/cost, represent the expected long-term returns on plan assets based on the calculated market-related value of plan assets. Expected long-term returns on plan assets take into account long-term expectations for future returns and the investment policies and strategies as described on page 144. These rates of return are developed by the company and are tested for reasonableness against historical returns. The use of expected long-term returns on plan assets may result in recognized pension income that is greater or less than the actual returns of those plan assets in any given year. Over time, however, the expected long-term returns are designed to approximate the actual long-term returns, and therefore result in a pattern of income and cost recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns are recognized as a component of net loss or gain in AOCI, which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic (income)/cost. Rate of Compensation Increases and Mortality Rate The rate of compensation increases is determined by the company, based upon its long-term plans for such increases. Interest Crediting Rate Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the PBO. This assumption provides a basis for projecting the expected interest rate that participants will earn on the benefits that they are expected to receive in the following year and is based on the average from August to October of the one-year U.S. Treasury Constant Maturity yield plus one percent. Plan Assets Retirement-related benefit plan assets are recognized and measured at fair value. Because of the inherent uncertainty of valuations, these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions. Investment Policies and Strategies The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current economic environment and other pertinent factors described on pages 142 through 143. The Qualified PPP portfolio’s investment strategy balances the requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. In 2016, the company changed its investment strategy, modifying the target asset allocation, primarily by reducing equity securities and increasing debt securities. This change was designed to reduce the potential negative impact that equity markets might have on the funded status of the plan. The Qualified PPP portfolio’s target allocation is 70 percent fixed-income securities, 20 percent equity securities, 5 percent real estate and 5 percent other investments.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The assets are managed by professional investment firms and investment professionals who are employees of the company. They are bound by investment mandates determined by the company’s management and are measured against specific benchmarks. Among these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and reliance on particular active and passive investment strategies. Derivatives are used as an effective means to achieve investment objectives and/or as a component of the plan’s risk management strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management and credit exposure, cash equitization and to manage currency and commodity strategies. Outside the U.S., the investment objectives are similar to those described above, subject to local regulations. The weighted-average target allocation for the non-U.S. plans is 25 percent equity securities, 60 percent fixed-income securities, 3 percent real estate and 12 percent other investments, which is consistent with the allocation decisions made by the company’s management. In some countries, a higher percentage allocation to fixed income is required to manage solvency and funding risks. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared with the strategies previously described. Generally, these non-U.S. plans do not invest in illiquid assets and their use of derivatives is consistent with the U.S. plan and mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies.

The company’s nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a nominal, highly liquid trust fund balance to ensure timely benefit payments. Valuation Techniques The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation techniques during 2016 and 2015. Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM common stock is valued at the closing price reported on the New York Stock Exchange. Mutual funds are typically valued based on quoted market prices. These assets are generally classified as Level 1. The fair value of fixed-income securities is typically estimated using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price reported on the major market on which the individual securities are traded. Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2. Real estate valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant market data, including appraisals, to determine if the carrying value of these assets should be adjusted. These assets are classified as Level 3. Exchange traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded, while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates. These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices. Certain investments are measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient. These investments, which include commingled funds, hedge funds, private equity and real estate partnerships, are typically valued using the net asset value (NAV) provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. In accordance with FASB guidance, these investments have not been classified in the fair value hierarchy. Refer to note B, “Accounting Changes.” Contributions Defined Benefit Pension Plans

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.

Stock-Based Compensation Stock-Based Compensation Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. The company grants its employees Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs) and Performance Share Units (PSUs) and periodically grants stock options. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year period. The fair value of the awards is determined and fixed on the grant date based on the company’s stock price, adjusted for the exclusion of dividend equivalents. The company estimates the fair value of stock options using a Black-Scholes valuation model. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the Consolidated Statement of Earnings based on the employees’ respective functions. The company records deferred tax assets for awards that result in deductions on the company’s income tax returns, based on the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the Consolidated Statement of Earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards). The fair value of such RSUs is determined and fixed on the grant date based on the company’s stock price adjusted for the exclusion of dividend equivalents. The fair value of each PSU is determined on the grant date, based on the company’s stock price, adjusted for the exclusion of dividend equivalents, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets. The company estimates the fair value of stock options at the date of grant using the Black- Scholes valuation model. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the company.

Income Taxes Income Taxes Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When the company changes its determination as to the amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such determination is made. The company recognizes tax liabilities when, despite the company’s belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in taxes and the noncurrent portion of tax liabilities is included in other liabilities in the Consolidated Statement of Financial Position. To the extent that new information becomes available which causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense.

Translation of Non-U.S. Translation of Non-U.S. Currency Amounts Currency Amounts Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to United States (U.S.) dollars at year-end exchange rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange prevailing during the year. Inventories, property, plant and equipment—net and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates with the transaction gain or loss recognized in other (income) and expense. Income and expense items are translated at the weighted-average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in which exchange rates change.

Derivative Financial Derivative Financial Instruments Instruments Derivatives are recognized in the Consolidated Statement of Financial Position at fair value and are reported in prepaid expenses and other current assets, investments and sundry assets, other accrued expenses and liabilities or other liabilities. Classification of each derivative as current or noncurrent is based upon whether the maturity of the instrument is less than or greater than 12 months. To qualify for hedge accounting, the company requires that the instruments be effective in reducing the risk exposure that they are designated to hedge. For instruments that hedge cash flows, hedge designation criteria also require that it be probable that the underlying transaction will occur. Instruments that meet established accounting criteria are formally designated as hedges. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value or cash flows of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception. The company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated hedge period. Where the company applies hedge accounting, the company designates each derivative as a hedge of: (1) the fair value of a recognized financial asset or liability, or of an unrecognized firm commitment (fair value hedge attributable to interest rate or foreign currency risk); (2) the variability of anticipated cash flows of a forecasted transaction, or the cash flows to be received or paid related to a recognized financial asset or liability (cash flow hedge attributable to interest rate or foreign currency risk); or (3) a hedge of a long-term investment (net investment hedge) in a foreign operation. In addition, the company may enter into derivative contracts that economically hedge certain of its risks, even though hedge accounting does not apply or the company elects not to apply hedge accounting. In these cases, there exists a natural hedging relationship in which changes in the fair value of the derivative, which are recognized currently in net income, act as an economic offset to changes in the fair value of the underlying hedged item(s). Changes in the fair value of a derivative that is designated as a fair value hedge, along with offsetting changes in the fair value of the underlying hedged exposure, are recorded in earnings each period. For hedges of interest rate risk, the fair value adjustments are recorded as adjustments to interest expense and cost of financing in the Consolidated Statement of Earnings. For hedges of currency risk associated with recorded financial assets or liabilities, derivative fair value adjustments are recognized in other (income) and expense in the Consolidated Statement of Earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded, net of applicable taxes, in OCI, in the Consolidated Statement of Comprehensive Income. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivative that is deferred in AOCI is released to net income and reported in interest expense, cost, SG&A expense or other (income) and expense in the Consolidated Statement of Earnings based on the nature of the underlying cash flow hedged. Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. The effective portion of changes in the fair value of net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded as foreign currency translation adjustments in AOCI. Changes in the fair value of the portion of a net investment hedging derivative excluded from the effectiveness assessment are recorded in interest expense. If the underlying hedged item in a fair value hedge ceases to exist, all changes in the fair value of the derivative are included in net income each period until the instrument

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document matures. When the derivative transaction ceases to exist, a hedged asset or liability is no longer adjusted for changes in its fair value except as required under other relevant accounting standards. Derivatives that are not designated as hedges, as well as changes in the fair value of derivatives that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (collectively, “ineffectiveness”), are recorded in earnings for each period and are primarily reported in other (income) and expense. When a cash flow hedging relationship is discontinued, the net gain or loss in AOCI must generally remain in AOCI until the item that was hedged affects earnings. However, when it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two- month period thereafter, the net gain or loss in AOCI must be reclassified into earnings immediately. The company reports cash flows arising from derivative financial instruments designated as fair value or cash flow hedges consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as fair value or cash flow hedges are classified in cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and derivatives that do not qualify as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows. For currency swaps designated as hedges of foreign currency denominated debt (included in the company’s debt risk management program as addressed in note D, “Financial Instruments,” on pages 110 through 114), cash flows directly associated with the settlement of the principal element of these swaps are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement of Cash Flows. The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations. As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default. The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. The company may employ derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges,

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis, and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity. In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency swaps and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments. The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward-starting interest rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges.

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately nine years. The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings.

Financial Instruments and Fair Financial Instruments Value Measurement In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. See note D, “Financial Instruments,” on pages 109 to 110 for further information. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. Short-Term Receivables and Payables Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Loans and Long-Term Receivables Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Long-Term Debt Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy. Fair Value Measurement Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

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

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

· Level 3—Unobservable inputs for the asset or liability. The guidance requires the use of observable market data if such data is available without undue cost and effort. When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

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

·Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market. As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial instrument, fair value is measured using a model described above. Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

Cash Equivalents Cash Equivalents All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.

Marketable Securities Marketable Securities Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance sheet date. Long-term debt securities that are not expected to be realized in cash within one year and alliance equity securities are included in investments and sundry assets. Debt and marketable equity securities are considered available for sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in OCI. The realized gains and losses for available-for-sale securities are included in other (income) and expense in the Consolidated Statement of Earnings. Realized gains and losses are calculated based on the specific identification method. In determining whether an other-than-temporary decline in market value has occurred, the company considers the duration that, and extent to which, the fair value of the investment is below its cost, the financial condition and near-term prospects of the issuer or underlying collateral of a security; and the company’s intent and ability to retain the security in order to allow for an anticipated recovery in fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity and debt securities that the company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to other (income) and expense in the period in which the loss occurs. For debt securities that the company has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in other (income) and expense, while the remaining loss is recognized in OCI. The credit loss component recognized in other (income) and expense is identified as the amount of the principal cash flows not expected to be received over the remaining term of the debt security as projected using the company’s cash flow projections. The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Inventories Inventories Raw materials, work in process and finished goods are stated at the lower of average cost or market. Cash flows related to the sale of inventories are reflected in net cash provided by operating activities in the Consolidated Statement of Cash Flows.

Allowance for Credit Losses Allowance for Credit Losses and Notes and Accounts Receivable - Trade Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. A reasonable estimate of probable net losses on the value of customer receivables is recognized by establishing an allowance for credit losses. Notes and Accounts Receivable—Trade An allowance for uncollectible trade receivables is estimated based on a combination of write-off history, aging analysis and any specific, known troubled accounts.

Financing Receivables Financing Receivables

Financing receivables include sales-type leases, direct financing leases and loans. Leases are accounted for in accordance with lease accounting standards. Loan receivables are financial assets recorded at amortized cost which approximates fair value. The company determines its allowances for credit losses on financing receivables based on two portfolio segments: lease receivables and loan receivables. The company further segments the portfolio into two classes: major markets and growth markets. When calculating the allowances, the company considers its ability to mitigate a potential loss by repossessing leased equipment and by considering the current fair market value of any other collateral. The value of the equipment is the net realizable value. The allowance for credit losses for capital leases, installment sales and customer loans includes an assessment of the entire balance of the capital lease or loan, including amounts not yet due. The methodologies that the company uses to calculate its receivables reserves, which are applied consistently to its different portfolios, are as follows: Individually Evaluated—The company reviews all financing receivables considered at risk on a quarterly basis. The review primarily consists of an analysis based upon current information available about the client, such as financial statements, news reports, published credit ratings, current market-implied credit analysis, as well as the current economic environment, collateral net of repossession cost and prior collection history. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when foreclosure is probable. Using this information, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. Collectively Evaluated—The company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Factors that could result in actual receivable losses that are materially different from the estimated reserve include sharp changes in the economy, or a significant change in the economic health of a particular client that represents a concentration in the company’s receivables portfolio. Other Credit-Related Policies Past Due—The company views receivables as past due when payment has not been received after 90 days, measured from the original billing date. Non-Accrual—Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables (impaired loans or nonperforming leases) with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables may be removed from non-accrual status, if appropriate, based upon changes in client circumstances.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Impaired Loans—As stated above, the company evaluates all financing receivables considered at-risk, including loans, for impairment on a quarterly basis. The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status as appropriate. Client loans are primarily for software and services and are unsecured. These loans are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation. Write Off—Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible. Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that the customer is no longer in operation and/or, there is no reasonable expectation of additional collections or repossession. The company’s assessments factor in the history of collections and write-offs in specific countries and across the portfolio. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on a non-accrual status. The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit rating. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

Estimated Residual Values of Estimated Residual Values of Lease Assets Lease Assets The recorded residual values of lease assets are estimated at the inception of the lease to be the expected fair value of the assets at the end of the lease term. The company periodically reassesses the realizable value of its lease residual values. Any anticipated increases in specific future residual values are not recognized before realization through remarketing efforts. Anticipated decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct-financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to financing income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing income.

Common Stock Common Stock Common stock refers to the $.20 par value per share capital stock as designated in the company’s Certificate of Incorporation. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis.

Earnings Per Share of Earnings Per Share of Common Stock Common Stock Earnings per share (EPS) is computed using the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings. Basic EPS of common stock is computed by dividing net income by the weighted- average number of common shares outstanding for the period. Diluted EPS of common stock is

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock awards, convertible notes and stock options.

Accounting Changes New Standards to be Implemented In January 2017, the Financial Accounting Standards Board (FASB) issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance is effective January 1, 2018 and early adoption is permitted. The guidance will be applied prospectively to any transactions occurring within the period of adoption. The company adopted the guidance effective January 1, 2017 and does not expect a material impact in the consolidated financial statements. In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments in sundry assets and prepaid and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $102 million. In January 2017, the company had a transaction generating approximately $400 million to $500 million benefit to income tax expense, income from continuing operations and net income for the three months ended March 31, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope. In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance. In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective January 1, 2017 and upon transition did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share- based awards compared to grant date, however these impacts are not expected to be material. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. Prior to adoption, the company reported this activity as an operating cash outflow. For the years ended December 31, 2016 and 2015, respectively, the amounts for this activity that were recorded as operating cash outflows were $126 million and $248 million. This provision of the guidance requires retrospective application upon adoption on January 1, 2017. In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company will adopt the guidance as of the effective date of January 1, 2019. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The company’s operating lease commitments were $6.9 billion at December 31, 2016. In 2016, the use of third-party residual value guarantee insurance resulted in the company recognizing $220 million of sales-type lease revenue that would otherwise have been recognized over the lease period as operating lease revenue. In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document provisions. The guidance is not expected to have a material impact in the consolidated financial results. The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has since made significant progress, including identification of changes to policy, processes, systems and controls. The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements. Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements in the year of adoption. There will be no impact to cash flows. The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change. Standards Implemented In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The guidance was a change in financial presentation only. In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. The guidance did not have a material impact in the consolidated financial results. In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance was effective January 1, 2016. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results. In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted it on a prospective basis. The guidance did not have a material impact in the consolidated financial results. In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company had debt issuance costs of $82 million and $74 million at December 31, 2016 and 2015, respectively. Debt issuance costs were previously included in investments and sundry assets in the Consolidated Statement of Financial Position.

Commitments and The company records a provision with respect to a claim, suit, investigation or proceeding when Contingencies it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the years ended December 31, 2016, 2015 and 2014 were not material to the Consolidated Financial Statements. In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

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

Segments In January 2016, the company made a number of changes to its organizational structure and management system consistent with its ongoing transformation to a cognitive solutions and cloud platform business. With these changes, the company updated its reportable segments. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes. The company’s five reportable segments are as follows: The Cognitive Solutions segment includes solutions units that address many of the company’s strategic areas, including analytics, commerce and security, several of the new initiatives around Watson Platform, Watson Health, Watson Internet of Things and Transaction Processing Software. The Technology Services & Cloud Platforms segment includes the company’s cloud infrastructure and platform capabilities, the previously reported Global Technology Services business and Integration Software. Operating Systems Software has been aligned with the underlying hardware platforms in the Systems segment. The Global Business Services and Global Financing segments remain unchanged. The company also realigned a portion of its software support revenue, which was previously managed and reported in Integrated Technology Services within Global Technology Services, to the underlying software product areas.

The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document executive officer) in determining how to allocate resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics. Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arm’s-length, market-based transfer price. Systems that are used by Technology Services & Cloud Platforms in outsourcing engagements are primarily sourced internally from the Systems segment and software is sourced from various segments. Software used by Technology Services & Cloud Platforms on external engagements is sourced internally through Cognitive Solutions and the Systems segments. For providing IT services that are used internally, Technology Services & Cloud Platforms and Global Business Services recover cost, as well as a reasonable fee, that is intended to reflect the arm’s-length value of providing the services. They enter into arm’s-length loans at prices equivalent to market rates with Global Financing to facilitate the acquisition of equipment and software used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate. The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result, a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, certain marketing functions and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management system, e.g., advertising expense is allocated based on the gross profits of the segments. A portion of the shared expenses, which are recorded in net income, are not allocated to the segments. These expenses are associated with the elimination of internal transactions and other miscellaneous items. To ensure the efficient use of the company’s space and equipment, several segments may share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each user segment. This is consistent with the company’s management system and is reflected accordingly in the table on page 153. In those cases, there will not be a precise correlation between segment pre-tax income and segment assets. Similarly, the depreciation amounts reported by each segment are based on the assigned landlord ownership and may not be consistent with the amounts that are included in the segments’ pre-tax income. The amounts that are included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures that are reported by each segment also are consistent with the landlord ownership basis of asset assignment. Global Financing amounts for interest income and interest expense reflect the interest income and interest expense associated with the Global Financing business, including the intercompany financing activities discussed on page 34, as well as the income from investment in cash and marketable securities. The explanation of the difference between cost of financing and interest expense for segment presentation versus presentation in the Consolidated Statement of Earnings is included on page 80 of the Management Discussion. Client solutions often include IBM software and systems and other suppliers’ products if the client solution requires it. For each of the segments that include services; Software-as-a-Service, consulting, education, training and other product-related services are included as services. For each of these segments, software includes product license charges and ongoing subscriptions.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES Dec. 31, 2016 (Tables) SIGNIFICANT ACCOUNTING POLICIES

Changes in warranty liabilities Standard Warranty Liability ($ in millions)

2016 2015 Balance at January 1 $ 181 $ 197 Current period accruals 145 173 Accrual adjustments to reflect experience (6) 7 Charges incurred (164) (196) Balance at December 31 $ 156 $ 181

Extended Warranty Liability (Deferred Income) ($ in millions)

2016 2015 Balance at January 1 $ 538 $ 536 Revenue deferred for new extended warranty contracts 263 286 Amortization of deferred revenue (267) (253) Other* (4) (31) Balance at December 31 $ 531 $ 538 Current portion $ 264 $ 238 Noncurrent portion $ 267 $ 300

* Other consists primarily of foreign currency translation adjustments.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months Ended DIVESTITURES (Tables) Dec. 31, 2016 ACQUISITIONS/ DIVESTITURES Discontinued operation, ($ in millions) summarized financial information For the year ended December 31: 2016 2015 2014 Total revenue $ 0 $ 720 $ 1,335 Loss from discontinued operations, before tax (11) (175) (619) Loss on disposal, before tax 0 (116) (4,726) Total loss from discontinued operations, before income taxes (11) (291) (5,346) Provision/(benefit) for income taxes (2) (117) (1,617) Loss from discontinued operations, net of tax $ (9) $ (174) $ (3,729)

2016 Acquisitions ACQUISITIONS/ DIVESTITURES Business acquisitions, 2016 Acquisitions purchase price allocations ($ in millions)

Amortization The Truven Life Weather Health Other (in Years) Company Analytics Acquisitions Current assets $ 76 $ 171 $ 153 Fixed assets/noncurrent assets 123 127 110 Intangible assets Goodwill N/A 1,717 1,933 593 Completed technology 1–7 160 338 96 Client relationships 3–7 313 516 226 Patents/trademarks 1–7 349 54 42 Total assets acquired 2,738 3,141 1,220 Current liabilities (88) (148) (96) Noncurrent liabilities (372) (381) (76) Total liabilities assumed (460) (529) (171) Bargain purchase gain — — (40)* Total purchase price $ 2,278 $ 2,612 $ 1,009

N/A—Not applicable. * Bargain purchase gain relating to AT&T’s application and hosting services business was recognized in selling, general and administrative expense in the Consolidated Statement of Earnings in the three months ended March 31, 2016.

2015 Acquisitions ACQUISITIONS/ DIVESTITURES Business acquisitions, 2015 Acquisitions purchase price allocations ($ in millions)

Amortization

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Life (in Other Years) Merge Cleversafe Acquisitions Current assets $ 94 $ 23 $ 60 Fixed assets/noncurrent assets 128 63 82 Intangible assets Goodwill N/A 695 1,000 895 Completed technology 5–7 133 364 163 Client relationships 5–7 145 23 95 Patents/trademarks 2–7 54 11 23 Total assets acquired 1,248 1,484 1,318 Current liabilities (73) (15) (34) Noncurrent liabilities (139) (160) (73) Total liabilities assumed (212) (175) (107) Total purchase price $ 1,036 $ 1,309 $ 1,210

N/A—Not applicable

2014 Acquisitions ACQUISITIONS/ DIVESTITURES Business acquisitions, 2014 Acquisitions purchase price allocations ($ in millions)

Amortization Total Life (in Years) Acquisitions Current assets $ 56 Fixed assets/noncurrent assets 39 Intangible assets Goodwill N/A 442 Completed technology 5–7 68 Client relationships 7 77 Patents/trademarks 1–7 18 Total assets acquired 701 Current liabilities (26) Noncurrent liabilities (67) Total liabilities assumed (93) Total purchase price $ 608

N/A—Not applicable

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 12 Months Ended INSTRUMENTS (Tables) Dec. 31, 2016 FINANCIAL INSTRUMENTS Financial assets and financial ($ in millions) liabilities measured at fair value on a recurring basis At December 31, 2016: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit $ — $ 3,629 $ — $ 3,629 Money market funds 1,204 — — 1,204 Total 1,204 3,629 — 4,832 (6) Debt securities—current (2) — 699 — 699 (6) Debt securities—noncurrent (3) 1 6 — 8 Available-for-sale equity investments (3) 7 — — 7 Derivative assets (4) Interest rate contracts — 555 — 555 Foreign exchange contracts — 560 — 560 Equity contracts — 11 — 11 Total — 1,126 — 1,126 (7) Total assets $ 1,212 $ 5,460 $ — $ 6,672 (7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 188 $ — $ 188 Equity contracts — 10 — 10 Interest rate contracts — 8 — 8 Total liabilities $ — $ 206 $ — $ 206 (7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2)U.S. government securities reported as marketable securities in the Consolidated Statement of Financial Position (3)Included within investments and sundry assets in the Consolidated Statement of Financial Position (4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2016 were $532 million and $594 million, respectively (5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2016 were $145 million and $61 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $116 million. ($ in millions)

At December 31, 2015: Level 1 Level 2 Level 3 Total Assets Cash equivalents (1) Time deposits and certificates of deposit $ — $ 2,856 $ — $ 2,856 Money market funds 2,069 — — 2,069 Other securities — 18 — 18 Total 2,069 2,874 — 4,943 (6) Debt securities—current (2) — 506 — 506 (6) Debt securities—noncurrent (3) 1 6 — 8 Trading security investments (3) 28 — — 28

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Available-for-sale equity investments (3) 192 — — 192 Derivative assets (4) Interest rate contracts — 656 — 656 Foreign exchange contracts — 332 — 332 Equity contracts — 6 — 6 Total — 994 — 994 (7) Total assets $ 2,290 $ 4,381 $ — $ 6,671 (7) Liabilities Derivative liabilities (5) Foreign exchange contracts $ — $ 164 $ — $ 164 Equity contracts — 19 — 19 Interest rate contracts — 3 — 3 Total liabilities $ — $ 186 $ — $ 186 (7)

(1)Included within cash and cash equivalents in the Consolidated Statement of Financial Position (2)Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position (3)Included within investments and sundry assets in the Consolidated Statement of Financial Position (4)The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2015 were $292 million and $702 million, respectively (5)The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2015 were $164 million and $22 million, respectively (6) Available-for-sale securities with carrying values that approximate fair value (7)If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $139 million each.

Noncurrent debt and marketable ($ in millions) equity securities available-for- sale and recorded at fair value Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2016: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 3 $ 5 $ 0 $ 7

(1)Included within investments and sundry assets in the Consolidated Statement of Financial Position ($ in millions)

Gross Gross Adjusted Unrealized Unrealized Fair At December 31, 2015: Cost Gains Losses Value Debt securities—noncurrent (1) $ 5 $ 3 $ — $ 8 Available-for-sale equity investments (1) $ 186 $ 6 $ 0 $ 192

(1)Included within investments and sundry assets in the Consolidated Statement of Financial Position Sales of debt and available-for- ($ in millions) sale equity investments For the year ended December 31: 2016 2015 2014 Proceeds $ 151 $ 8 $ 21 Gross realized gains (before taxes) 3 1 0 Gross realized losses (before taxes) 37 1 5

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Unrealized gains/(losses) on ($ in millions) available-for-sale debt and equity securities For the year ended December 31: 2016 2015 Net unrealized gains/(losses) arising during the period $ (23) $ (33) Net unrealized (gains)/losses reclassified to net income* 21 53

*Includes pre-tax writedowns of $86 million in 2015. There were no writedowns in 2016. Fair Values of Derivative Fair Values of Derivative Instruments in the Consolidated Statement of Financial Instruments in the Consolidated Position Statement of Financial Position ($ in millions)

Fair Value of Derivative Assets Fair Value of Derivative Liabilities Balance Sheet Balance Sheet At December 31: Classification 2016 2015 Classification 2016 2015 Designated as hedging instruments Prepaid expenses and Other accrued Interest rate other current expenses and contracts assets $ — $ — liabilities $ — $ — Investments and sundry assets 555 656 Other liabilities 8 3 Prepaid Foreign expenses and Other accrued exchange other current expenses and contracts assets 421 197 liabilities 46 70 Investments and sundry assets 17 5 Other liabilities 35 19 Fair value of Fair value of derivative derivative assets $ 993 $858 liabilities $ 89 $ 92 Not designated as hedging instruments Prepaid Foreign expenses and Other accrued exchange other current expenses and contracts assets $ 100 $ 90 liabilities $ 89 $ 75 Investments and sundry assets 22 40 Other liabilities 18 — Prepaid expenses and Other accrued other current expenses and Equity contracts assets 11 6 liabilities 10 19 Investments and sundry assets — — Other liabilities — — Fair value of Fair value of derivative derivative assets $ 133 $136 liabilities $ 117 $ 94 Total debt designated as hedging instruments Short-term debt N/A N/A $1,125 $ — Long-term debt N/A N/A $7,844 $7,945 Total $1,126 $994 $9,175 $8,131

N/A—Not applicable

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Effect of Derivative Instruments The Effect of Derivative Instruments in the Consolidated Statement of Earnings in the Consolidated Statement of Earnings ($ in millions)

Gain/(Loss) Recognized in Earnings Consolidated Statement of Attributable to Risk Earnings Line Recognized on Derivatives Being Hedged (2) For the year ended December 31: Item 2016 2015 2014 2016 2015 2014 Derivative instruments in fair value hedges (1) (5) Interest rate contracts Cost of financing $ 28 $ 108 $ 231 $ 58 $ (1) $(127) Interest expense 31 94 206 63 (1) (114) Derivative instruments not designated as hedging instruments Foreign exchange contracts Other (income) and expense (189) 127 (776) N/A N/A N/A Interest rate contracts Other (income) and expense 0 (1) 34 N/A N/A N/A Equity contracts SG&A expense 112 (27) 51 N/A N/A N/A Other (income) and expense (1) (9) (9) N/A N/A N/A Total $ (18) $ 291 $ (263) $121 $ (1) $(241)

($ in millions)

Gain/(Loss) Recognized in Earnings and Other Comprehensive Income Consolidated Ineffectiveness and Effective Portion Statement of Effective Portion Amounts Excluded from For the year ended Recognized in OCI Earnings Line Reclassified from AOCI Effectiveness Testing (3) December 31: 2016 2015 2014 Item 2016 2015 2014 2016 2015 2014 Derivative instruments in cash flow hedges Interest rate Interest contracts $ — $ — $ — expense $ (24) $ 0 $ (1) $ — $ — $ — Foreign Other exchange (income) and contracts 243 618 958 expense (68) 731 98 (3) 5 (1) Cost (13) 192 (15) — — — SG&A expense 4 149 15 — — — Instruments in net investment hedges (4) Foreign exchange Interest contracts 311 889 1,136 expense — — — 77 13 0 Total $ 555 $ 1,507 $ 2,095 $ (102) $ 1,072 $ 97 $ 74 $ 18 $ (1)

(1)The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. (2)The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. (3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships. (4) Instruments in net investment hedges include derivative and non-derivative instruments. (5)For the years ended December 31, 2016, 2015 and 2014, fair value hedges resulted in a loss of $4 million, a loss of $2 million and a gain of $4 million in ineffectiveness, respectively.

N/A—Not applicable

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended INVENTORIES (Tables) Dec. 31, 2016 INVENTORIES Inventories ($ in millions)

At December 31: 2016 2015 Finished goods $ 358 $ 352 Work in process and raw materials 1,195 1,199 Total $ 1,553 $ 1,551

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING 12 Months Ended RECEIVABLES (Tables) Dec. 31, 2016 FINANCING RECEIVABLES Financing receivables, net of allowances for ($ in millions) credit losses, including residual values At December 31: 2016 2015 Current Net investment in sales-type and direct financing leases $ 2,909 $ 3,057 Commercial financing receivables 9,706 8,948 Client loan and installment payment receivables (loans) 6,390 7,015 Total $ 19,006 $ 19,020 Noncurrent Net investment in sales-type and direct financing leases $ 3,950 $ 4,501 Client loan and installment payment receivables (loans) 5,071 5,512 Total $ 9,021 $ 10,013

Schedule of financing receivables and allowance ($ in millions) for credit losses by portfolio segment Major Growth At December 31, 2016: Markets Markets Total Financing receivables Lease receivables $ 5,013 $ 1,323 $ 6,336 Loan receivables 9,148 2,589 11,737 Ending balance $ 14,161 $ 3,912 $ 18,073 Collectively evaluated for impairment $ 14,119 $ 3,646 $ 17,765 Individually evaluated for impairment $ 43 $ 266 $ 309 Allowance for credit losses Beginning balance at January 1, 2016 Lease receivables $ 25 $ 188 $ 213 Loan receivables 83 293 377 Total $ 109 $ 481 $ 590 Write-offs (59) (176) (235) Provision 7 51 58 Other 0 (3) (3) Ending balance at December 31, 2016 $ 57 $ 353 $ 410 Lease receivables $ 6 $ 127 $ 133 Loan receivables $ 51 $ 225 $ 276 Collectively evaluated for impairment $ 30 $ 98 $ 128 Individually evaluated for impairment $ 27 $ 255 $ 281

($ in millions)

Major Growth At December 31, 2015: Markets Markets Total Financing receivables Lease receivables $ 5,517 $ 1,524 $ 7,041 Loan receivables 9,739 3,165 12,904 Ending balance $ 15,256 $ 4,689 $ 19,945 Collectively evaluated for impairment $ 15,180 $ 4,227 $ 19,406 Individually evaluated for impairment $ 76 $ 462 $ 539 Allowance for credit losses Beginning balance at January 1, 2015 Lease receivables $ 32 $ 133 $ 165

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Loan receivables 79 317 396 Total $ 111 $ 450 $ 561 Write-offs (14) (48) (62) Provision 20 122 141 Other (8) (43) (51) Ending balance at December 31, 2015 $ 109 $ 481 $ 590 Lease receivables $ 25 $ 188 $ 213 Loan receivables $ 83 $ 293 $ 377 Collectively evaluated for impairment $ 43 $ 36 $ 79 Individually evaluated for impairment $ 65 $ 445 $ 511

Schedule of recorded investment in financing ($ in millions) receivables which are on non-accrual status At December 31: 2016 2015 Major markets $ 2 $ 2 Growth markets 38 63 Total lease receivables $ 40 $ 65 Major markets $ 19 $ 13 Growth markets 127 91 Total loan receivables $ 145 $ 104 Total receivables $ 185 $ 168

Schedule of impaired client loan receivables ($ in millions)

Recorded Related At December 31, 2016: Investment Allowance Major markets $ 31 $ 28 Growth markets 191 185 Total $ 223 $ 213

($ in millions)

Recorded Related At December 31, 2015: Investment Allowance Major markets $ 50 $ 47 Growth markets 297 284 Total $ 347 $ 331

($ in millions)

Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2016: Investment Recognized Basis Major markets $ 55 $ 0 $ — Growth markets 284 0 — Total $ 339 $ 0 $ —

($ in millions)

Interest Income Average Interest Recognized For the year ended Recorded Income on Cash December 31, 2015: Investment Recognized Basis Major markets $ 51 $ 0 $ — Growth markets 315 0 —

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total $ 367 $ 0 $ —

Schedule of net recorded investment by credit Lease Receivables quality indicator ($ in millions)

Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 496 $ 44 A1 – A3 1,162 181 Baa1 – Baa3 1,381 140 Ba1 – Ba2 1,144 246 Ba3 – B1 566 313 B2 – B3 271 163 Caa – D 26 69 Total $ 5,047 $ 1,156

Loan Receivables

($ in millions)

Major Growth At December 31, 2016: Markets Markets Credit rating Aaa – Aa3 $ 904 $ 87 A1 – A3 2,117 355 Baa1 – Baa3 2,515 274 Ba1 – Ba2 2,084 483 Ba3 – B1 1,031 613 B2 – B3 494 320 Caa – D 48 135 Total $ 9,193 $ 2,268

Lease Receivables ($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 535 $ 34 A1 – A3 1,318 142 Baa1 – Baa3 1,486 343 Ba1 – Ba2 1,208 309 Ba3 – B1 510 243 B2 – B3 401 189 Caa – D 33 76 Total $ 5,492 $ 1,336

* Reclassified to conform to 2016 presentation Loan Receivables ($ in millions)

Major Growth At December 31, 2015:* Markets Markets Credit rating Aaa – Aa3 $ 941 $ 73 A1 – A3 2,318 305

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Baa1 – Baa3 2,613 738 Ba1 – Ba2 2,125 664 Ba3 – B1 897 522 B2 – B3 705 406 Caa – D 58 164 Total $ 9,656 $ 2,872

* Reclassified to conform to 2016 presentation

Schedule of past due financing receivables ($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and At December 31, 2016: > 90 Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 8 $ 11 $ 4,994 $ 5,013 $ 34 Growth markets 23 78 1,222 1,323 77 Total lease receivables $ 31 $ 89 $ 6,216 $ 6,336 $ 111 Major markets $ 15 $ 5 $ 9,129 $ 9,148 $ 62 Growth markets 16 177 2,396 2,589 80 Total loan receivables $ 31 $ 182 $ 11,524 $ 11,737 $ 141 Total $ 62 $ 271 $ 17,740 $ 18,073 $ 253

(1)Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved. (2)At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days ($ in millions)

Fully <90 Days Recorded Total Reserved or Unbilled Total Investment Past Due Financing Financing Financing >90 Days and > 90 At December 31, 2015:* Days(1) Receivables Receivables Receivables Accruing(2) Major markets $ 5 $ 33 $ 5,479 $ 5,517 $ 108 Growth markets 30 140 1,355 1,524 60 Total lease receivables $ 35 $ 173 $ 6,834 $ 7,041 $ 168 Major markets $ 7 $ 35 $ 9,696 $ 9,739 $ 134 Growth markets 31 309 2,825 3,165 86 Total loan receivables $ 38 $ 344 $ 12,521 $ 12,904 $ 220 Total $ 73 $ 517 $ 19,355 $ 19,945 $ 388

(1)Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved. (2)At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days * Reclassified to conform to 2016 presentation

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PROPERTY, PLANT AND 12 Months Ended EQUIPMENT (Tables) Dec. 31, 2016 PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment ($ in millions)

At December 31: 2016 2015 Land and land improvements $ 506 $ 558 Buildings and building improvements 6,326 6,552 Plant, laboratory and office equipment 22,318 21,116 Plant and other property—gross 29,150 28,226 Less: Accumulated depreciation 18,842 18,051 Plant and other property—net 10,308 10,176 Rental machines 984 1,115 Less: Accumulated depreciation 461 565 Rental machines—net 523 551 Total—net $ 10,830 $ 10,727

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INVESTMENTS AND 12 Months Ended SUNDRY ASSETS (Tables) Dec. 31, 2016 INVESTMENTS AND SUNDRY ASSETS Investments and Sundry ($ in millions) Assets At December 31: 2016 2015 Deferred transition and setup costs and other deferred arrangements* $ 1,497 $ 1,624 Derivatives—noncurrent 594 702 Alliance investments Equity method 85 82 Non-equity method 19 393 Prepaid software 230 273 Long-term deposits 267 256 Other receivables 416 516 Employee benefit-related 272 273 Prepaid income taxes 477 496 Other assets 729 571 Total $ 4,585 $ 5,187

*Deferred transition and setup costs and other deferred arrangements are related to services client arrangements. Refer to note A, “Significant Accounting Policies,” on page 93 for additional information.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS 12 Months Ended INCLUDING GOODWILL Dec. 31, 2016 (Tables) INTANGIBLE ASSETS INCLUDING GOODWILL Intangible asset balances by major asset ($ in millions) class Gross Net Carrying Accumulated Carrying At December 31, 2016: Amount Amortization Amount Intangible asset class Capitalized software $ 1,537 $ (661) $ 876 Client relationships 2,831 (1,228) 1,602 Completed technology 3,322 (1,668) 1,654 Patents/trademarks 730 (205) 525 Other* 46 (15) 31 Total $ 8,466 $ (3,778) $ 4,688

*Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems. ($ in millions)

Gross Net Carrying Accumulated Carrying At December 31, 2015: Amount Amortization Amount Intangible asset class Capitalized software $ 1,348 $ (581) $ 767 Client relationships 1,856 (927) 929 Completed technology 2,960 (1,397) 1,563 Patents/trademarks 335 (142) 193 Other* 44 (10) 35 Total $ 6,543 $ (3,057) $ 3,487

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

Intangible assets, future amortization ($ in millions) expense Capitalized Acquired Software Intangibles Total 2017 $ 494 $ 957 $ 1,450 2018 300 809 1,109 2019 83 646 729 2020 — 547 547 2021 — 435 435

Changes in goodwill balances by ($ in millions) reportable segment Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2016 Additions Adjustments Divestitures Adjustments* 31, 2016 Cognitive Solutions $ 15,621 $ 3,821 $ 5 $ (12) $ 48 $ 19,484

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Global Business Services 4,396 303 4 (1) (95) 4,607 Technology Services & Cloud Platforms 10,156 119 (12) (5) (1) 10,258 Systems 1,848 — (4) — 5 1,850 Total $ 32,021 $ 4,244 $ (7) $ (18) $ (42) $ 36,199

* Primarily driven by foreign currency translation ($ in millions)

Foreign Currency Balance Purchase Translation Balance January 1, Goodwill Price and Other December Segment 2015 Additions Adjustments Divestitures Adjustments* 31, 2015 Cognitive Solutions $ 15,156 $ 1,020 $ (2) $ (18) $ (535) $ 15,621 Global Business Services 4,555 74 0 (1) (232) 4,396 Technology Services & Cloud Platforms 9,373 1,087 (1) (7) (296) 10,156 Systems 1,472 410 0 — (33) 1,848 Total $ 30,556 $ 2,590 $ (3) $ (26) $ (1,096) $ 32,021

* Primarily driven by foreign currency translation

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended BORROWINGS (Tables) Dec. 31, 2016 BORROWINGS Short-Term Debt Short-Term Debt ($ in millions)

At December 31: 2016 2015 Commercial paper $ 899 $ 600 Short-term loans 375 590 Long-term debt—current maturities 6,239 5,271 Total $ 7,513 $ 6,461

Long-Term Debt Long-Term Debt Pre-Swap Borrowing

($ in millions)

At December 31: Maturities 2016 2015 U.S. dollar notes and debentures (average interest rate at December 31, 2016): 3.98% 2017 $ 5,104 $ 9,351 3.21% 2018–2019 8,856 7,591 1.84% 2020–2021 4,941 3,717 2.35% 2022 1,901 1,900 3.38% 2023 1,500 1,500 3.63% 2024 2,000 2,000 7.00% 2025 600 600 3.45% 2026 1,350 — 6.22% 2027 469 469 6.50% 2028 313 313 5.88% 2032 600 600 8.00% 2038 83 83 5.60% 2039 745 745 4.00% 2042 1,107 1,107 7.00% 2045 27 27 4.70% 2046 650 — 7.13% 2096 316 316 30,563 30,319 Other currencies (average interest rate at December 31, 2016, in parentheses): Euros (1.6%) 2019–2028 7,122 4,892 Pound sterling (2.7%) 2020–2022 1,296 1,555 Japanese yen (0.9%) 2017–2026 1,576 1,180 Swiss francs (6.3%) 2020 7 9 Canadian (2.2%) 2017 373 360 Other (11.0%) 2017–2020 208 506 41,145 38,820 Less: net unamortized discount 839 838 Less: net unamortized debt issuance costs 82 74 Add: fair value adjustment* 669 790 40,893 38,699 Less: current maturities 6,239 5,271 Total $ 34,655 $ 33,428

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document *The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value plus a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

Post-Swap Borrowing (Long- ($ in millions) Term Debt, Including Current Portion) 2016 2015 For the year ended December 31: Amount Average Rate Amount Average Rate Fixed-rate debt $ 27,414 3.18 % $ 25,499 3.41 % Floating-rate debt* 13,480 1.59 % 13,199 0.96 % Total $ 40,893 $ 38,699

*Includes $7,338 million in 2016 and 2015 of notional interest rate swaps that effectively convert fixed-rate long-term debt into floating-rate debt (See note D, “Financial Instruments,” on pages 110 through 114.)

Pre-swap annual contractual ($ in millions) maturities of long-term debt outstanding Total 2017 $ 6,239 2018 4,918 2019 5,196 2020 4,593 2021 3,914 2022 and beyond 16,284 Total $ 41,145

Interest on Debt ($ in millions)

For the year ended December 31: 2016 2015 2014 Cost of financing $ 576 $ 540 $ 542 Interest expense 706 481 484 Net investment derivative activity (77) (13) 0 Interest capitalized 2 0 4 Total interest paid and accrued $ 1,208 $ 1,008 $ 1,030

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document OTHER LIABILITIES 12 Months Ended (Tables) Dec. 31, 2016 OTHER LIABILITIES Other Liabilities ($ in millions)

At December 31: 2016 2015 Income tax reserves $ 2,621 $ 3,150 Excess 401(k) Plus Plan 1,494 1,445 Disability benefits 538 590 Derivative liabilities 61 22 Special restructuring actions 358 362 Workforce reductions 424 407 Deferred taxes 424 253 Other taxes payable 90 89 Environmental accruals 262 270 Warranty accruals 68 83 Asset retirement obligations 142 134 Acquisition related 111 200 Divestiture related* 270 575 Other 613 519 Total $ 7,477 $ 8,099

* Primarily related to the divestiture of the Microelectronics business

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EQUITY ACTIVITY 12 Months Ended (Tables) Dec. 31, 2016 EQUITY ACTIVITY Reclassifications and Taxes Related to Reclassifications and Taxes Related to Items of Other Comprehensive Income Items of Other Comprehensive Income ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2016: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (20) $ (120) $ (140) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (38) $ 14 $ (23) Reclassification of (gains)/losses to other (income) and expense 34 (13) 21 Total net changes related to available- for-sale securities $ (3) $ 1 $ (2) Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 243 $ (80) $ 163 Reclassification of (gains)/losses to: Cost of sales 13 (8) 6 SG&A expense (4) (2) (7) Other (income) and expense 68 (26) 42 Interest expense 24 (9) 15 Total unrealized gains/(losses) on cash flow hedges $ 345 $ (126) $ 219 Retirement-related benefit plans (1) Net (losses)/gains arising during the period $ (2,490) $ 924 $ (1,566) Curtailments and settlements (16) 1 (15) Amortization of prior service (credits)/ costs (107) 34 (74) Amortization of net (gains)/losses 2,764 (976) 1,788 Total retirement-related benefit plans $ 150 $ (19) $ 132 Other comprehensive income/(loss) $ 472 $ (263) $ 209

(1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2015: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,379) $ (342) $ (1,721) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (54) $ 21 $ (33) Reclassification of (gains)/losses to other (income) and expense 86 (33) 53 Total net changes related to available- for-sale securities $ 32 $ (12) $ 20

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 618 $ (218) $ 399 Reclassification of (gains)/losses to: Cost of sales (192) 57 (135) SG&A expense (149) 43 (105) Other (income) and expense (731) 281 (451) Interest expense 0 0 0 Total unrealized gains/(losses) on cash flow hedges $ (454) $ 162 $ (292) Retirement-related benefit plans (1) Prior service costs/(credits) $ 6 $ (2) $ 4 Net (losses)/gains arising during the (1,925 period (2,963) 1,039 ) Curtailments and settlements 33 (9) 24 Amortization of prior service (credits)/ costs (100) 36 (65) Amortization of net (gains)/losses 3,304 (1,080) 2,223 Total retirement-related benefit plans $ 279 $ (17) $ 262 Other comprehensive income/(loss) $ (1,523) $ (208) $ (1,731)

(1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) ($ in millions)

Before Tax Tax (Expense)/ Net of Tax For the year ended December 31, 2014: Amount Benefit Amount Other comprehensive income/(loss) Foreign currency translation adjustments $ (1,636) $ (438) $ (2,074) Net changes related to available-for-sale securities Unrealized gains/(losses) arising during the period $ (29) $ 11 $ (18) Reclassification of (gains)/losses to other (income) and expense 5 (2) 3 Total net changes related to available- for-sale securities $ (24) $ 9 $ (15) Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) arising during the period $ 958 $ (341) $ 618 Reclassification of (gains)/losses to: Cost of sales 15 (7) 9 SG&A expense (15) 6 (9) Other (income) and expense (98) 38 (60) Interest expense 1 0 0 Total unrealized gains/(losses) on cash flow hedges $ 861 $ (304) $ 557 Retirement-related benefit plans (1) Prior service costs/(credits) $ 1 $ 0 $ 1 Net (losses)/gains arising during the period (9,799) 3,433 (6,366) Curtailments and settlements 24 (7) 17 Amortization of prior service (credits)/ costs (114) 41 (73) Amortization of net (gains)/losses 2,531 (852) 1,678 Total retirement-related benefit plans $ (7,357) $ 2,615 $ (4,742) Other comprehensive income/(loss) $ (8,156) $ 1,883 $ (6,274)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (1)These AOCI components are included in the computation of net periodic pension cost. (See note S, “Retirement-Related Benefits,” for additional information.) Accumulated Other Comprehensive Accumulated Other Comprehensive Income/(Loss) (net of tax) Income/(Loss) (net of tax) ($ in millions)

Net Change Net Unrealized Net Unrealized Foreign Retirement- Gains/(Losses) Accumulated Gains/(Losses) Currency Related on Available- Other on CashFlow Translation Benefit For-Sale Comprehensive Hedges Adjustments* Plans Securities Income/(Loss) December 31, 2013 $ (165)$ 332 $ (21,767)$ (1)$ (21,602) Other comprehensive income before reclassifications 618 (2,074) (6,348) (18) (7,822) Amount reclassified from accumulated other comprehensive income (60) 0 1,605 3 1,548 Total change for the period 557 (2,074) (4,742) (15) (6,274) December 31, 2014 392 (1,742) (26,509) (15) (27,875) Other comprehensive income before reclassifications 399 (1,721) (1,897) (33) (3,252) Amount reclassified from accumulated other comprehensive income (691) 0 2,158 53 1,520 Total change for the period (292) (1,721) 262 20 (1,731) December 31, 2015 100 (3,463) (26,248) 5 (29,607) Other comprehensive income before reclassifications 163 (140) (1,581) (23) (1,581) Amount reclassified from accumulated other comprehensive income 56 0 1,714 21 1,791 Total change for the period 219 (140) 132 (2) 209 December 31, 2016 $ 319 $ (3,603)$ (26,116)$ 2 $ (29,398)

*Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended TAXES (Tables) Dec. 31, 2016 TAXES Income before income taxes ($ in millions)

For the year ended December 31: 2016 2015 2014 Income from continuing operations before income taxes U.S. operations $ 3,650 $ 5,915 $ 7,509 Non-U.S. operations 8,680 10,030 12,477 Total income from continuing operations before income taxes $12,330 $15,945 $19,986

Components of the provision for income taxes by ($ in millions) geographic operations and taxing jurisdiction For the year ended December 31: 2016 2015 2014 U.S. operations $ 38 $ 849 $ 2,093 Non-U.S. operations 411 1,732 2,141 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234

($ in millions)

For the year ended December 31: 2016 2015 2014 U.S. federal Current $ 186 $ (321) $ 1,134 Deferred (746) 553 105 $ (560) $ 232 $ 1,239 U.S. state and local Current $ 244 $ 128 $ 541 Deferred (44) 116 (105) $ 200 $ 244 $ 436 Non-U.S. Current $ 988 $ 2,101 $ 2,825 Deferred (179) 4 (266) $ 809 $ 2,105 $ 2,559 Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234 Discontinued operations provision for income taxes (2) (117) (1,617) Provision for social security, real estate, personal property and other taxes 3,417 3,497 4,068 Total taxes included in net income $ 3,864 $ 5,961 $ 6,685

Effective income tax rate reconciliation For the year ended December 31: 2016 2015 2014 Statutory rate 35% 35% 35% Foreign tax differential (21) (17) (14) Japan resolution (10) 0 0 State and local 1 1 1

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Domestic incentives (1) (2) (2) Other 0 (1) 1 Effective rate 4% 16% 21%

Percentages rounded for disclosure purposes.

Components of deferred tax assets and liabilities Deferred Tax Assets ($ in millions)

At December 31: 2016 2015* Retirement benefits $ 4,671 $ 4,621 Share-based and other compensation 1,132 963 Domestic tax loss/credit carryforwards 1,676 1,055 Deferred income 741 762 Foreign tax loss/credit carryforwards 816 767 Bad debt, inventory and warranty reserves 473 528 Depreciation 270 329 Accruals 624 904 Other 1,503 1,000 Gross deferred tax assets 11,906 10,929 Less: valuation allowance 916 740 Net deferred tax assets $10,990 $10,189

* Reclassified to conform to 2016 presentation Deferred Tax Liabilities ($ in millions)

At December 31: 2016 2015 Depreciation $ 856 $ 919 Retirement benefits 406 252 Goodwill and intangible assets 1,800 1,407 Leases 651 916 Software development costs 672 554 Deferred transition costs 351 395 Other 1,455 1,177 Gross deferred tax liabilities $ 6,191 $ 5,620

Reconciliation of the beginning and ending amount of ($ in millions) unrecognized tax benefits 2016 2015 2014 Balance at January 1 $ 4,574 $ 5,104 $ 4,458 Additions based on tax positions related to the current year 560 464 697 Additions for tax positions of prior years 334 569 586 Reductions for tax positions of prior years (including impacts due to a lapse in statute) (1,443) (1,348) (579) Settlements (285) (215) (58) Balance at December 31 $ 3,740 $ 4,574 $ 5,104

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EARNINGS PER SHARE 12 Months Ended OF COMMON STOCK Dec. 31, 2016 (Tables) EARNINGS PER SHARE OF COMMON STOCK Computation of basic and diluted ($ in millions except per share amounts) earnings per share For the year ended December 31: 2016 2015 2014 Weighted-average number of shares on which earnings per share calculations are based Basic 955,422,530 978,744,523 1,004,272,584 Add—incremental shares under stock-based compensation plans 2,416,940 3,037,001 4,332,155 Add—incremental shares associated with contingently issuable shares 874,626 918,744 1,395,741 Assuming dilution 958,714,097 982,700,267 1,010,000,480 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Loss from discontinued operations, net of tax (9) (174) (3,729) Net income on which basic earnings per share is calculated $ 11,872 $ 13,190 $ 12,022 Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Net income applicable to contingently issuable shares 0 (1) (3) Income from continuing operations on which diluted earnings per share is calculated $ 11,881 $ 13,363 $ 15,749 Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (9) (174) (3,729) Net income on which diluted earnings per share is calculated $ 11,872 $ 13,189 $ 12,020 Earnings/(loss) per share of common stock Assuming dilution Continuing operations $ 12.39 $ 13.60 $ 15.59 Discontinued operations (0.01) (0.18) (3.69) Total $ 12.38 $ 13.42 $ 11.90 Basic Continuing operations $ 12.44 $ 13.66 $ 15.68 Discontinued operations (0.01) (0.18) (3.71) Total $ 12.43 $ 13.48 $ 11.97

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RENTAL EXPENSE AND 12 Months Ended LEASE COMMITMENTS Dec. 31, 2016 (Tables) RENTAL EXPENSE AND LEASE COMMITMENTS

Operating lease commitments ($ in millions)

2017 2018 2019 2020 2021 Beyond 2021 Operating lease commitments Gross minimum rental commitments (including vacant space below) $1,414 $1,328 $1,218 $1,016 $796 $ 1,111 Vacant space $ 42 $ 29 $ 20 $ 15 $ 11 $ 9 Sublease income commitments $ 12 $ 8 $ 6 $ 3 $ — $ — Capital lease commitments $ 1 $ 2 $ 2 $ 2 $ — $ —

Capital lease commitments ($ in millions)

2017 2018 2019 2020 2021 Beyond 2021 Operating lease commitments Gross minimum rental commitments (including vacant space below) $1,414 $1,328 $1,218 $1,016 $796 $ 1,111 Vacant space $ 42 $ 29 $ 20 $ 15 $ 11 $ 9 Sublease income commitments $ 12 $ 8 $ 6 $ 3 $ — $ — Capital lease commitments $ 1 $ 2 $ 2 $ 2 $ — $ —

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION (Tables) Dec. 31, 2016 STOCK-BASED COMPENSATION

Stock-based compensation cost ($ in millions) included in income from continuing operations For the year ended December 31: 2016 2015 2014 Cost $ 88 $ 100 $ 121 Selling, general and administrative 401 322 350 Research, development and engineering 55 51 54 Other (income) and expense* — (6) (13) Pre-tax stock-based compensation cost 544 468 512 Income tax benefits (179) (156) (174) Net stock-based compensation cost $ 364 $ 312 $ 338

* Reflects the one-time effects related to divestitures Summary of Restricted Stock 2016 2015 2014 Units activity Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units Balance at January 1 $ 159 7,527,341 $ 171 7,734,277 $ 166 8,635,317 RSUs granted 140 3,985,870 143 4,230,186 172 2,525,947 RSUs released 174 (1,860,660) 164 (3,567,495) 157 (2,401,761) RSUs canceled/ forfeited 158 (753,459) 167 (869,627) 167 (1,025,226) Balance at December 31 $ 147 8,899,092 $ 159 7,527,341 $ 171 7,734,277

Summary of Performance Share 2016 2015 2014 Units activity Weighted- Weighted- Weighted- Average Number Average Number Average Number Grant Price of Units Grant Price of Units Grant Price of Units Balance at January 1 $ 173 2,928,932 $ 185 3,140,707 $ 178 2,824,294 PSUs granted at target 140 990,336 153 1,137,242 180 1,430,098 Performance adjustments* 194 (387,457) 185 (168,055) 157 29,960 PSUs released 194 (419,759) 185 (840,552) 157 (1,027,181) PSUs canceled/ forfeited 174 (237,294) 184 (340,410) 187 (116,464) Balance at December 31** $ 155 2,874,758 $ 173 2,928,932 $ 185 3,140,707

* Represents the change in shares issued to employees after vesting of PSUs because final performance metrics were above or below specified targets ** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued will depend on final performance against specified targets over the vesting period.

Summary of option activity 2016 2015 2014 Weighted- Weighted- Weighted- Average Number of Average Number of Average Number of Exercise Shares Exercise Shares Exercise Shares Price Under Option Price Under Option Price Under Option Balance at January 1 $ 94 479,774 $ 97 1,750,949 $ 97 5,622,951

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Options granted 140 1,500,000 — — — — Options exercised 91 (361,088) 98 (1,214,109) 97 (3,740,252) Options canceled/ expired 86 (4,763) 100 (57,066) 95 (131,750) Balance at December 31 $ 137 1,613,923 $ 94 479,774 $ 97 1,750,949 Exercisable at December 31 $ 103 113,923 $ 94 479,774 $ 97 1,750,949

Options outstanding and Options Outstanding exercisable by exercise price Weighted- ranges Weighted- Average Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $ 7,198,794 0.3 $129 – $154 140 1,500,000 39,236,250 9.1 $ 137 1,613,923 $46,435,044 8.5

Options Exercisable Weighted- Weighted- Average Average Number of Aggregate Remaining Exercise Shares Intrinsic Contractual Life Exercise Price Range Price Under Option Value (in Years) $128 and under $ 103 113,923 $7,198,794 0.3

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS (Tables) Dec. 31, 2016 RETIREMENT-RELATED BENEFITS Summary of total retirement- ($ in millions) related benefits net periodic (income)/cost in the Consolidated U.S. Plans Non-U.S. Plans Total Statement of Earnings For the year ended December 31: 2016 2015 2014 2016 2015 2014 2016 2015 2014 Defined benefit pension plans $(334)$(284)$(833)$1,039 $1,421 $1,267 $ 705 $1,137 $ 434 Retention Plan 17 23 15 — — — 17 23 15 Total defined benefit pension plans (income)/ cost $(317)$(261)$(818)$1,039 $1,421 $1,267 $ 722 $1,160 $ 449 IBM 401(k) Plus Plan and non-U.S. plans $ 626 $ 676 $ 713 $ 420 $ 442 $ 526 $1,046 $1,117 $1,239 Excess 401(k) 24 21 14 — — — 24 21 14 Total defined contribution plans cost $ 650 $ 697 $ 727 $ 420 $ 442 $ 526 $1,070 $1,138 $1,253 Nonpension postretirement benefit plans cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66 $ 211 $ 273 $ 272 Total retirement-related benefits net periodic cost $ 527 $ 654 $ 115 $1,475 $1,918 $1,859 $2,003 $2,572 $1,974

Summary of the total PBO for ($ in millions) defined benefit plans, APBO for nonpension postretirement benefit Benefit Obligations Fair Value of Plan Assets Funded Status* plans, fair value of plan assets and At December 31: 2016 2015 2016 2015 2016 2015 U.S. Plans associated funded status Overfunded plans Qualified PPP $ 50,403 $ 51,287 $ 51,405 $ 51,716 $ 1,002 $ 429 Underfunded plans Excess PPP $ 1,509 $ 1,522 $ — $ — $ (1,509) $ (1,522) Retention Plan 307 312 — — (307) (312) Nonpension postretirement benefit plan 4,470 4,652 26 71 (4,444) (4,582) Total underfunded U.S. plans $ 6,286 $ 6,486 $ 26 $ 71 $ (6,260) $ (6,415) Non-U.S. Plans Overfunded plans Qualified defined benefit pension plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Nonpension postretirement benefit plans 0 0 0 0 0 0 Total overfunded non- U.S. plans $ 17,614 $ 16,766 $ 19,647 $ 18,070 $ 2,032 $ 1,304 Underfunded plans Qualified defined benefit pension plans $ 21,447 $ 22,039 $ 16,374 $ 17,677 $ (5,074) $ (4,362) Nonqualified defined benefit pension plans 5,919 5,911 — — (5,919) (5,911)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Nonpension postretirement benefit plans 692 618 71 59 (622) (558) Total underfunded non- U.S. plans $ 28,059 $ 28,568 $ 16,445 $ 17,737 $(11,614) $(10,832) Total overfunded plans $ 68,017 $ 68,053 $ 71,051 $ 69,786 $ 3,034 $ 1,734 Total underfunded plans $ 34,344 $ 35,054 $ 16,470 $ 17,807 $(17,874) $(17,247)

*Funded status is recognized in the Consolidated Statement of Financial Position as follows: Asset amounts as prepaid pension assets; (Liability) amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).

Changes in benefit obligations ($ in millions) and plan assets Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 Change in benefit obligation Benefit obligation at January 1 $53,120 $56,643 $44,717 $49,834 $ 4,652 $ 5,053 $ 618 $ 817 Service cost — — 420 454 17 24 5 7 Interest cost 2,048 2,028 1,035 1,075 165 163 51 50 Plan participants’ contributions — — 30 34 50 52 — — Acquisitions/ divestitures, net — — (63) 39 0 (8) 0 0 Actuarial losses/ (gains) 602 (1,920) 3,217 (861) 16 (204) 16 (52) Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Direct benefit payments (123) (117) (381) (402) (30) (23) (27) (26) Foreign exchange impact — — (2,222) (3,907) — — 35 (174) Medicare/ Government subsidies — — — — — 1 — — Amendments/ curtailments/ settlements/ other — — 20 235 — 0 0 0 Benefit obligation at December 31 $52,218 $53,120 $44,981 $44,717 $ 4,470 $ 4,652 $ 692 $ 618 Change in plan assets Fair value of plan assets at January 1 $51,716 $55,772 $35,748 $39,543 $ 71 $ 16 $ 59 $ 84 Actual return on plan assets 3,118 (542) 3,828 417 0 0 8 7 Employer contributions — — 464 474 305 409 0 0 Acquisitions/ divestitures, net — — (73) 53 0 0 0 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Plan participants’ contributions — — 30 34 50 52 — — Benefits paid from trust (3,430) (3,514) (1,792) (1,784) (400) (406) (5) (5) Foreign exchange impact — — (2,175) (3,004) — — 9 (26) Amendments/ curtailments/ settlements/ other — — (10)* 14* — — 0 (1) Fair value of plan assets at December 31 $51,405 $51,716 $36,020 $35,748 $ 26 $ 71 $ 71 $ 59 Funded status at December 31 $ (814) $ (1,405) $ (8,960) $ (8,969) $ (4,444) $(4,582) $ (622) $ (558) Accumulated benefit obligation** $52,218 $53,120 $44,514 $44,071 N/A N/A N/A N/A

* Includes the reinstatement of certain plan assets in Brazil due to government rulings in 2011 and 2013 allowing certain previously restricted plan assets to be returned to IBM. Return of assets to IBM over a three-year period began June 2011 and September 2013 respectively, with approximately $23 million returned in 2016 and $33 million returned during 2015. The remaining surplus in Brazil at December 31, 2016 is excluded from total plan assets due to continued restrictions imposed by the government on the use of those plan assets. ** Represents the benefit obligation assuming no future participant compensation increases N/A—Not applicable

Net funded status ($ in millions)

Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans At December 31: 2016 2015 2016 2015 2016 2015 2016 2015 Prepaid pension assets $ 1,002 $ 429 $ 2,032 $ 1,304 $ 0 $ 0 $ 0 $ 0 Current liabilities— compensation and benefits (118) (116) (303) (297) (368) (320) (15) (11) Noncurrent liabilities— retirement and nonpension postretirement benefit obligations (1,698) (1,718) (10,689) (9,976) (4,076) (4,262) (607) (547) Funded status—net $ (814) $(1,405) $(8,960) $(8,969) $(4,444) $(4,582) $ (622) $ (558)

Pre-tax net loss and prior service ($ in millions) costs/(credits) and transition (assets)/liabilities recognized in Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans OCI and changes in pre-tax net U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans 2016 2015 2016 2015 2016 2015 2016 2015 loss, prior service costs/(credits) Net loss at and transition (assets)/liabilities January 1 $19,363 $18,442 $20,724 $21,676 $ 609 $ 852 $ 128 $ 189 recognized in AOCI Current period loss/(gain) 1,173 2,576 1,251 661 16 (204) 14 (51)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Curtailments and settlements — — (22) (33) — — 20 0 Amortization of net loss included in net periodic (income)/cost (1,314) (1,654) (1,408) (1,581) (20) (39) (9) (10) Net loss at December 31 $19,222 $19,363 $20,544 $20,724 $ 605 $ 609 $ 154 $ 128 Prior service costs/(credits) at January 1 $ 101 $ 110 $ (294) $ (386) $ 30 $ 23 $ (21) $ (26) Current period prior service costs/(credits) — — — (6) — — — 0 Curtailments and Settlements — — 0 — — — 18 — Amortization of prior service (costs)/credits included in net periodic (income)/cost (10) (10) 106 98 7 7 5 5 Prior service costs/(credits) at December 31 $ 90 $ 101 $ (188) $ (294) $ 37 $ 30 $ 1 $ (21) Transition (assets)/ liabilities at January 1 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Amortization of transition assets/ (liabilities) included in net periodic (income)/cost — — 0 0 — — 0 0 Transition (assets)/ liabilities at December 31 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0 Total loss recognized in accumulated other comprehensive income/ (loss)* $19,313 $19,464 $20,356 $20,429 $ 642 $ 639 $ 154 $ 106

*See note L, “Equity Activity,” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.

Pre-tax estimated net loss, ($ in millions) estimated prior service costs/ (credits) and estimated transition Defined Benefit Nonpension Postretirement Pension Plans Benefit Plans (assets)/liabilities that will be Non- Non- amortized from AOCI into net U.S. Plans U.S. Plans U.S. Plan U.S. Plans periodic (income)/cost in the next Net loss $ 1,348 $ 1,434 $ 21 $ 6 Prior service costs/(credits) fiscal year 16 (93) (7) 0 Transition (assets)/liabilities — 0 — 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Defined benefit pension plans ($ in millions) with accumulated benefit obligations (ABO) in excess of 2016 2015 plan assets Benefit Plan Benefit Plan At December 31: Obligation Assets Obligation Assets Plans with PBO in excess of plan assets $ 29,182 $ 16,374 $ 29,784 $ 17,677 Plans with ABO in excess of plan assets 28,770 16,272 29,135 17,492 Plans with assets in excess of PBO 68,017 71,051 68,053 69,786

Pension Plans RETIREMENT-RELATED BENEFITS Components of net periodic ($ in millions) (income)/cost of the company's retirement-related benefit plans Defined Benefit Pension Plans U.S. Plans Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ — $ — $ — $ 420 $ 454 $ 449 Interest cost 2,048 2,028 2,211 1,035 1,075 1,533 Expected return on plan assets (3,689) (3,953) (4,096) (1,867) (1,919) (2,247) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) 10 10 10 (106) (98) (111) Recognized actuarial losses 1,314 1,654 1,056 1,408 1,581 1,400 Curtailments and settlements — — — 22 35 26 Multi-employer plans/other costs* — — — 126 293 217 Total net periodic (income)/cost $ (317) $ (261) $ (818) $ 1,039 $ 1,421 $ 1,267

*The non-U.S. plans amount includes $56 million, $233 million and $148 million related to the IBM Spain pension litigation for 2016, 2015 and 2014, respectively. See page 142 for additional information.

Assumptions used to measure the Defined Benefit Pension Plans net periodic (income)/cost and U.S. Plans Non-U.S. Plans year-end benefit obligations 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic (income)/cost for the year ended December 31 Discount rate 4.00 % 3.70 % 4.50 % 2.40 % 2.34 % 3.32 % Expected long-term returns on plan assets 7.00 % 7.50 % 8.00 % 5.53 % 5.67 % 6.08 % Rate of compensation increase N/A N/A N/A 2.40 % 2.49 % 2.52 % Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.80 % 4.00 % 3.70 % 1.80 % 2.40 % 2.34 % Rate of compensation increase N/A N/A N/A 2.45 % 2.40 % 2.49 %

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document N/A—Not applicable

Defined benefit pension plans' The following table presents the company’s defined benefit pension plans’ asset classes and asset classes and their associated their associated fair value at December 31, 2016. The U.S. Plan consists of the Qualified PPP fair value and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries. ($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $5,778 $ 1 $ — $ 5,779 $4,080 $ 0 $ — $ 4,080 Equity mutual funds (2) 93 — — 93 35 — — 35 Fixed income Government and related (3) — 14,897 — 14,897 — 7,577 16 7,593 Corporate bonds (4) — 18,063 101 18,164 — 2,045 1 2,045 Mortgage and asset- backed securities — 652 5 656 — 4 — 4 Fixed income mutual funds (5) 359 — — 359 22 — — 22 Insurance contracts — — — — — 1,137 — 1,137 Cash and short-term investments (6) 55 1,927 — 1,982 294 707 — 1,001 Real estate — — — — — — 294 294 Derivatives (7) 18 20 — 38 43 752 — 796 Other mutual funds (8) — — — — 114 — — 114 Subtotal 6,303 35,560 106 41,969 4,589 12,223 310 17,122 Investments measured at net asset value using the NAV practical expedient (9) — — — 9,641 — — — 18,946 Other (10) — — — (205) — — — (48) Fair value of plan assets $6,303 $35,560 $ 106 $51,405 $4,589 $12,223 $ 310 $36,020

(1)Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $28 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $15 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4)The U.S. Plan includes IBM corporate bonds of $4 million, representing 0.01 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.003 percent of the non-U.S. Plan assets. (5) Invests predominantly in fixed income securities (6) Includes cash, cash equivalents and short-term marketable securities (7)Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives (8) Invests in both equity and fixed-income securities (9)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31, 2015. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries.

($ in millions)

U.S. Plan Non-U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity Equity securities (1) $11,210 $ 1 $ — $11,211 $4,631 $ 0 $ — $ 4,631 Equity mutual funds (2) 99 — — 99 90 — — 90 Fixed income Government and related (3) — 9,854 — 9,854 — 7,482 16 7,499 Corporate bonds (4) — 17,088 2 17,090 — 1,896 4 1,899 Mortgage and asset-backed securities — 633 10 643 — 6 — 6 Fixed income mutual funds (5) 313 — — 313 38 — — 38 Insurance contracts — — — — — 1,079 — 1,079 Cash and short-term investments (6) 244 2,305 — 2,549 142 422 — 564 Real estate — — — — — — 411 411 Derivatives (7) (82) 2 — (80) (1) 481 — 480 Other mutual funds (8) — — — — 115 — — 115 Subtotal 11,784 29,884 12 41,680 5,016 11,366 431 16,812 Investments measured at net asset value using the NAV practical expedient (9) — — — 10,179 — — — 18,986 Other (10) — — — (143) — — — (50) Fair value of plan assets $11,784 $29,884 $ 12 $51,716 $5,016 $11,366 $ 431 $35,748

(1)Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $34 million, representing 0.1 percent of the U.S. Plan assets. Non-U.S. Plans include IBM common stock of $14 million, representing 0.04 percent of the non-U.S. Plans assets. (2) Invests in predominantly equity securities (3) Includes debt issued by national, state and local governments and agencies (4)The U.S. Plan includes IBM corporate bonds of $23 million, representing 0.04 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate bonds of $1 million representing 0.004 percent of the non-U.S. Plan assets. (5) Invests in predominantly fixed-income securities (6) Includes cash and cash equivalents and short-term marketable securities (7)Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives (8) Invests in both equity and fixed-income securities (9)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds, hedge funds, private equity and real estate partnerships (10)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets

Total expected benefit payments ($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total Qualified Nonqualified Qualified Nonqualified Expected Non- Non- U.S. Plan U.S. Plans U.S. Plans U.S. Plans Benefit Payments Payments Payments Payments Payments 2017 $ 3,519 $ 120 $ 1,689 $ 306 $ 5,634 2018 3,519 121 1,705 301 5,646 2019 3,504 121 1,730 312 5,668 2020 3,589 122 1,741 358 5,809 2021 3,525 123 1,783 376 5,806 2022—2026 16,970 594 9,077 2,121 28,762

U.S. Pension Plans RETIREMENT-RELATED BENEFITS Reconciliation of the beginning ($ in millions) and ending balances of Level 3 assets Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2016 $ 2 $ 10 $ 12 Return on assets held at end of year (3) 0 (2) Return on assets sold during the year 0 1 1 Purchases, sales and settlements, net 103 (5) 99 Transfers, net (2) (2) (3) Balance at December 31, 2016 $ 101 $ 5 $ 106

($ in millions)

Mortgage and Asset- Corporate Backed Bonds Securities Total Balance at January 1, 2015 $ 4 $ 20 $ 24 Return on assets held at end of year 0 0 0 Return on assets sold during the year 1 0 1 Purchases, sales and settlements, net (5) (2) (7) Transfers, net 2 (8) (6) Balance at December 31, 2015 $ 2 $ 10 $ 12

Non-US Pension Plans RETIREMENT-RELATED BENEFITS Reconciliation of the beginning ($ in millions) and ending balances of Level 3 assets Government Corporate Real and Related Bonds Estate Total Balance at January 1, 2016 $ 16 $ 4 $ 411 $ 431 Return on assets held at end of year 1 0 (22) (21) Return on assets sold during the year 0 0 35 35 Purchases, sales and settlements, net 0 (3) (68) (72) Transfers, net 0 — — 0 Foreign exchange impact 0 0 (62) (63) Balance at December 31, 2016 $ 16 $ 1 $ 294 $ 310

($ in millions)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Government Corporate and Related Bonds Real Estate Total Balance at January 1, 2015 $ 32 $ 1 $ 411 $ 444 Return on assets held at end of year (2) 0 28 26 Return on assets sold during the year 0 0 42 42 Purchases, sales and settlements, net (10) 3 (51) (58) Transfers, net — — — — Foreign exchange impact (3) 0 (20) (23) Balance at December 31, 2015 $ 16 $ 4 $ 411 $ 431

Nonpension Postretirement Plans RETIREMENT-RELATED BENEFITS Components of net periodic ($ in millions) (income)/cost of the company's retirement-related benefit plans Nonpension Postretirement Benefit Plans U.S. Plan Non-U.S. Plans For the year ended December 31: 2016 2015 2014 2016 2015 2014 Service cost $ 17 $ 24 $ 26 $ 5 $ 7 $ 7 Interest cost 165 163 187 51 50 63 Expected return on plan assets 0 0 0 (6) (7) (9) Amortization of transition assets — — — 0 0 0 Amortization of prior service costs/ (credits) (7) (7) (7) (5) (5) (5) Recognized actuarial losses 20 39 0 9 10 11 Curtailments and settlements — — — (38) 0 0 Total net periodic cost $ 195 $ 218 $ 206 $ 16 $ 55 $ 66

Assumptions used to measure the Nonpension Postretirement Benefit Plans net periodic (income)/cost and U.S. Plan Non-U.S. Plans year-end benefit obligations 2016 2015 2014 2016 2015 2014 Weighted-average assumptions used to measure net periodic cost for the year ended December 31 Discount rate 3.70 % 3.40 % 4.10 % 7.06 % 7.51 % 7.78 % Expected long-term returns on plan assets N/A N/A N/A 9.95 % 10.17 % 10.22 % Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.60 % 3.70 % 3.40 % 8.26 % 7.06 % 7.51 %

N/A—Not applicable

Total expected benefit payments ($ in millions)

Total Qualified Nonqualified Expected Non- Non- U.S. Plan U.S. Plans U.S. Plans Benefit Payments Payments Payments Payments 2017 $ 396 $ 6 $ 30 $ 432

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2018 397 6 32 435 2019 403 6 34 443 2020 405 6 37 448 2021 395 7 39 441 2022—2026 1,743 36 219 1,998

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION (Tables) Dec. 31, 2016 SEGMENT INFORMATION Revenue and Pre-tax Income Management System Segment View by Segment ($ in millions)

Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 External revenue $18,187 $16,700 $ 35,337 $ 7,714 $ 1,692 $79,630 Internal revenue 2,630 409 715 750 1,802 6,307 Total revenue $20,817 $17,109 $ 36,052 $ 8,464 $ 3,494 $85,936 Pre-tax income from continuing operations $ 6,352 $ 1,732 $ 4,707 $ 933 $ 1,656 $15,380 Revenue year-to-year change 3.8 % (3.1 )% 0.6 % (18.0 )% (22.0 )% (2.7 )% Pre-tax income year-to-year change (12.3 )% (33.4 )% (17.0 )% (45.8 )% (29.9 )% (21.5 )% Pre-tax income margin 30.5 % 10.1 % 13.1 % 11.0 % 47.4 % 17.9 %

2015 External revenue $17,841 $17,166 $ 35,142 $ 9,547 $ 1,840 $81,535 Internal revenue 2,215 499 698 778 2,637 6,826 Total revenue $20,055 $17,664 $ 35,840 $10,325 $ 4,477 $88,361 Pre-tax income from continuing operations $ 7,245 $ 2,602 $ 5,669 $ 1,722 $ 2,364 $19,602 Revenue year-to-year change (8.4 )% (11.9 )% (9.8 )% (22.4 )% (1.0 )% (11.2 )% Pre-tax income year-to-year change (11.8 )% (22.3 )% (20.0 )% 24.4 % 8.0 % (11.8 )% Pre-tax income margin 36.1 % 14.7 % 15.8 % 16.7 % 52.8 % 22.2 %

2014 External revenue $19,689 $19,512 $ 38,889 $12,294 $ 2,034 $92,418 Internal revenue 2,216 543 840 1,006 2,488 7,093 Total revenue $21,906 $20,055 $ 39,729 $13,300 $ 4,522 $99,512 Pre-tax income from continuing operations $ 8,215 $ 3,347 $ 7,084 $ 1,384 $ 2,189 $22,219 Revenue year-to-year change (0.1 )% (8.5 )% (0.9 )% (19.8 )% 5.1 % (5.1 )% Pre-tax income year-to-year change (5.2 )% (2.9 )% (7.3 )% (21.5 )% 0.8 % (6.2 )% Pre-tax income margin 37.5 % 16.7 % 17.8 % 10.4 % 48.4 % 22.3 %

Reconciliation of segment ($ in millions) revenue to IBM as reported For the year ended December 31: 2016 2015 2014 Revenue Total reportable segments $ 85,936 $ 88,361 $ 99,512 Other revenue 289 206 374 Elimination of internal transactions (6,307) (6,826) (7,093) Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reconciliation of segment pre- ($ in millions) tax income to IBM as reported For the year ended December 31: 2016 2015** 2014** Pre-tax income from continuing operations: Total reportable segments $ 15,380 $ 19,602 $ 22,219 Amortization of acquired intangible assets (998) (677) (791) Acquisition-related charges (5) (26) (12) Non-operating retirement- related (costs)/income (598) (1,050) (353) Elimination of internal transactions (1,160) (1,675) (1,746) Unallocated corporate amounts* (290) (230) 688 Total pre-tax income from continuing operations $ 12,330 $ 15,945 $ 19,986

* The 2014 amount includes the gain related to the Retail Store Solutions divestiture and the net gain related to the System x business divestiture. ** Reclassified to conform to 2016 presentation.

Assets and Other Items by Management System Segment View segment ($ in millions)

Cognitive Solutions & Industry Services Technology Global Services & Cognitive Business Cloud Global Total For the year ended December 31: Solutions Services Platforms Systems Financing Segments 2016 Assets $ 25,517 $ 8,628 $ 24,085 $ 3,812 $ 36,492 $ 98,534 Depreciation/amortization of intangibles* 1,228 104 2,224 375 317 4,248 Capital expenditures/ investments in intangibles 495 55 2,382 453 380 3,764 Interest income — — — — 1,547 1,547 Interest expense — — — — 371 371

2015 Assets $ 20,017 $ 8,327 $ 23,530 $ 3,967 $ 36,157 $ 91,999 Depreciation/amortization of intangibles* 921 81 1,944 321 343 3,610 Capital expenditures/ investments in intangibles 448 86 2,619 321 356 3,830 Interest income — — — — 1,720 1,720 Interest expense — — — — 469 469

2014 Assets $ 19,525 $ 8,831 $ 22,512 $ 4,219 $ 38,845 $ 93,933 Depreciation/amortization of intangibles* 1,040 98 1,982 734 455 4,308 Capital expenditures/ investments in intangibles 413 79 2,321 627 482 3,921 Interest income — — — — 1,951 1,951 Interest expense — — — — 518 518

*Segment pre-tax income from continuing operations does not include the amortization of intangible assets.

Reconciliation of assets to ($ in millions) IBM as reported At December 31: 2016 2015 2014 Assets Total reportable segments $ 98,534 $ 91,999 $ 93,933 Elimination of internal transactions (5,670) (4,709) (5,193)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Unallocated amounts Cash and marketable securities 6,752 6,634 7,182 Notes and accounts receivable 2,660 2,333 4,253 Deferred tax assets 5,078 4,693 6,465 Plant, other property and equipment 2,656 2,650 2,169 Pension assets 3,034 1,734 2,160 Other 4,425 5,161 6,303 Total IBM consolidated assets $ 117,470 $ 110,495 $ 117,271

Geographic Information Revenue* ($ in millions)

For the year ended December 31: 2016 2015 2014 United States $ 30,194 $ 30,514 $ 32,021 Japan 8,339 7,544 8,382 Other countries 41,386 43,683 52,390 Total IBM consolidated revenue $ 79,919 $ 81,741 $ 92,793

* Revenues are attributed to countries based on the location of the client. Plant and Other Property—Net

($ in millions)

At December 31: 2016 2015 2014 United States $ 4,701 $ 4,644 $ 4,388 Other countries 5,607 5,532 5,690 Total $ 10,308 $ 10,176 $ 10,078

Revenue by Classes of Similar ($ in millions) Products or Services For the year ended December 31: 2016 2015 2014 Cognitive Solutions Software $ 13,969 $ 14,557 $ 16,502 Services 4,111 3,175 3,143 Systems 107 108 44 Global Business Services Services $ 16,399 $ 16,851 $ 19,202 Software 179 164 186 Systems 121 151 124 Technology Services & Cloud Platforms Services $ 24,311 $ 23,947 $ 26,462 Maintenance 5,862 6,085 6,790 Software 3,818 3,907 4,332 Systems 1,346 1,203 1,304 Systems Servers $ 3,567 $ 5,032 $ 7,177 Storage 2,083 2,325 2,641 Software 1,586 1,749 2,053 Services 478 442 423 Global Financing Financing $ 1,231 $ 1,386 $ 1,543 Used equipment sales 461 454 491

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Basis of Presentation Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions Other (income) and expense Noncontrolling interest amounts, net of tax $ 16 $ 8 $ 6

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months ACCOUNTING POLICIES Ended - Services Revenue (Details) - Dec. 31, Services - USD ($) Dec. 31, 2016 2015 $ in Millions Services Deferred income $ 5,873 $ 6,039 Unbilled services accounts receivable included in notes and accounts receivable - $ 1,611 $ 1,630 trade Unbilled services accounts receivable, expected period of billing 4 months Minimum Services Services contract terms 1 year Maximum Services Services contract terms 10 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT ACCOUNTING POLICIES Dec. 31, Dec. 31, - Services Costs (Details) - 2016 2015 USD ($) $ in Millions SIGNIFICANT ACCOUNTING POLICIES Deferred services transition and setup costs $ 2,072 $ 2,144 Estimated amortization of deferred services transition and setup costs for 2017 590 Estimated amortization of deferred services transition and setup costs for 2018 515 Estimated amortization of deferred services transition and setup costs for 2019 374 Estimated amortization of deferred services transition and setup costs for 2020 248 Estimated amortization of deferred services transition and setup costs thereafter 344 Deferred amounts paid to clients in excess of the fair value of acquired assets used in 160 $ 184 outsourcing arrangements Estimated amortization of deferred amounts paid to clients in excess of the fair value of 53 acquired assets for 2017 Estimated amortization of deferred amounts paid to clients in excess of the fair value of 46 acquired assets for 2018 Estimated amortization of deferred amounts paid to clients in excess of the fair value of 28 acquired assets for 2019 Estimated amortization of deferred amounts paid to clients in excess of the fair value of 20 acquired assets for 2020 Estimated amortization of deferred amounts paid to clients in excess of the fair value of $ 13 acquired assets thereafter

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Software Costs (Details) - Dec. 31, 2016 Capitalized software - Maximum Cost of sales Intangible assets Amortization period 3 years SG&A expense Intangible assets Amortization period 3 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Standard Warranty Dec. 31, 2016Dec. 31, 2015 Liability (Details) - USD ($) $ in Millions Movement in standard warranty liability Beginning Balance $ 181 $ 197 Current period accruals 145 173 Accrual adjustments to reflect actual experience (6) 7 Charges incurred (164) (196) Ending Balance $ 156 $ 181 Minimum Product Warranties Product warranty term 1 year Maximum Product Warranties Product warranty term 3 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Extended Warranty Dec. 31, 2016Dec. 31, 2015 Liability (Details) - USD ($) $ in Millions Movement in extended warranty liability Current portion $ 11,035 $ 11,021 Noncurrent portion 3,600 3,771 Extended Warranty Liability (Deferred Income) Movement in extended warranty liability Beginning Balance 538 536 Revenue deferred for new extended warranty contracts 263 286 Amortization of deferred revenue (267) (253) Other (4) (31) Ending Balance 531 538 Current portion 264 238 Noncurrent portion $ 267 $ 300

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Advertising and Promotional Expense Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions SIGNIFICANT ACCOUNTING POLICIES Advertising and promotional expense $ 1,327 $ 1,290 $ 1,307

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES Dec. 31, 2016 - Depreciation (Details) Buildings | Minimum Depreciation and amortization Estimated useful lives of certain depreciable assets 30 years Buildings | Maximum Depreciation and amortization Estimated useful lives of certain depreciable assets 50 years Building equipment | Minimum Depreciation and amortization Estimated useful lives of certain depreciable assets 10 years Building equipment | Maximum Depreciation and amortization Estimated useful lives of certain depreciable assets 20 years Land improvements Depreciation and amortization Estimated useful lives of certain depreciable assets 20 years Plant, laboratory and office equipment | Minimum Depreciation and amortization Estimated useful lives of certain depreciable assets 2 years Plant, laboratory and office equipment | Maximum Depreciation and amortization Estimated useful lives of certain depreciable assets 20 years Computer equipment | Minimum Depreciation and amortization Estimated useful lives of certain depreciable assets 1 year 6 months Computer equipment | Maximum Depreciation and amortization Estimated useful lives of certain depreciable assets 5 years Leasehold improvements | Maximum Depreciation and amortization Estimated useful lives of certain depreciable assets 25 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES Dec. 31, 2016 - Amortization (Details) Capitalized software | Cost of sales | Maximum Intangible assets Amortization period 3 years Capitalized software | SG&A expense | Maximum Intangible assets Amortization period 3 years Other intangible assets | Minimum Intangible assets Amortization period 1 year Other intangible assets | Maximum Intangible assets Amortization period 7 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Stock-Based Compensation Dec. 31, 2016 (Details) - Restricted Stock Units Minimum Stock-Based Compensation Vesting period 1 year Maximum Stock-Based Compensation Vesting period 5 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT 12 Months Ended ACCOUNTING POLICIES - Financing Receivables (Details) - Total Lease Dec. 31, 2016 Receivable and Loan item Receivable Portfolio Segments Financing receivables Number of portfolio segments 2 Number of classes of financing receivable 2 Period after which financing receivables become past due 90 days

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SIGNIFICANT ACCOUNTING POLICIES Dec. 31, 2016Dec. 31, 2015 - Common Stock (Details) - $ / shares SIGNIFICANT ACCOUNTING POLICIES Common stock, par value (in dollars per share) $ 0.20 $ 0.20

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 3 Months 12 Months Ended ACCOUNTING CHANGES Ended (Details) - USD ($) Mar. Dec. Dec. Dec. Dec. Jan. $ in Millions 31, 31, 31, 31, 31, 01, 2017 2018 2016 2015 2014 2017 ACCOUNTING CHANGES Investments and sundry assets $ 4,585 $ 5,187 Prepaid expenses and other current assets 4,564 4,205 Deferred tax assets 5,224 4,822 Retained earnings 152,759146,124 Provision for income taxes (Note N) $ 449 2,581 4,234 Pre-tax income from continuing operations 12,330 15,945 19,986 Net income 11,872 13,190 12,022 Cash payments on behalf of employees for shares directly 126 248 withheld for taxes Operating lease commitments 6,900 Sales-type lease revenue recognized based on use of residual 220 value guarantee insurance Impact to cash flows $ 140 (790) (2,240) Debt issuance costs 82 74 Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory | Early adoption ACCOUNTING CHANGES Investments and sundry assets $ (95) Prepaid expenses and other current assets (47) Deferred tax assets 244 Retained earnings $ 102 Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory | Early adoption | Expected | Minimum ACCOUNTING CHANGES Provision for income taxes (Note N) $ (400) Pre-tax income from continuing operations 400 Net income 400 Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory | Early adoption | Expected | Maximum ACCOUNTING CHANGES Provision for income taxes (Note N) (500) Pre-tax income from continuing operations 500 Net income $ 500

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Accounting Standards Update 2014-09, Revenue from Contracts with Customers | Expected ACCOUNTING CHANGES Impact to cash flows $ 0 Accounting Standards Update 2015-03, Interest-Imputation of Interest ACCOUNTING CHANGES Debt issuance costs $ 82 $ 74

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 1 Months 12 Months ACQUISITIONS/ Ended Ended DIVESTITURES - Dec. Dec. Businesses Acquired, 2016 Jul. 31, Dec. 31, 2016 31, 31, Apr. 08, 2016 Jan. 29, 2016 (Details) 2017 USD ($) 2015 2014 USD ($) USD ($) $ in Millions USD ($) item USD USD ($) ($) ACQUISITIONS Goodwill $ $ $ 36,199 32,021 30,556 Technology Services & Cloud Platforms ACQUISITIONS Goodwill 10,258 10,156 9,373 Global Business Services ACQUISITIONS Goodwill 4,607 4,396 4,555 Cognitive Solutions ACQUISITIONS Goodwill $ $ $ 19,484 15,621 15,156 2016 Acquisitions ACQUISITIONS Businesses acquired, number (in 15 entities) | item Businesses acquired, aggregate cost $ 5,899 The Weather Company ACQUISITIONS Businesses acquired, cash $ 2,278 consideration Goodwill $ 1,717 Expected percent of goodwill 0.00% deductible for tax purposes Acquired intangible asset, weighted 6 years 10 average useful life months 24 days The Weather Company | Cognitive Solutions ACQUISITIONS Goodwill $ 1,717 Truven Health Analytics ACQUISITIONS Businesses acquired, aggregate cost $ 2,612 Goodwill $ 1,933

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Expected percent of goodwill 15.00% deductible for tax purposes Acquired intangible asset, weighted 6 years 10 average useful life months 24 days Percentage of business acquired (as a 100.00% percent) Truven Health Analytics | Expected ACQUISITIONS Businesses acquired, cash $ 200 consideration Truven Health Analytics | Cognitive Solutions ACQUISITIONS Goodwill $ 1,933 Other 2016 Acquisitions ACQUISITIONS Goodwill $ 593 Expected percent of goodwill 55.00% deductible for tax purposes Acquired intangible asset, weighted 6 years 3 average useful life months 18 days Percentage of business acquired (as a 100.00% percent) Other 2016 Acquisitions | Technology Services & Cloud Platforms ACQUISITIONS Businesses acquired, number (in 4 entities) | item Goodwill $ 119 Other 2016 Acquisitions | Global Business Services ACQUISITIONS Businesses acquired, number (in 6 entities) | item Goodwill $ 303 Other 2016 Acquisitions | Cognitive Solutions ACQUISITIONS Businesses acquired, number (in 3 entities) | item Goodwill $ 171

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months DIVESTITURES - 2016 Ended Purchase Price Allocation Dec. 31, Dec. 31, (Details) - USD ($) Apr. 08, 2016 Jan. 29, 2016 Dec. 31, 2016 2015 2014 $ in Millions ACQUISITIONS Goodwill $ 36,199 $ 32,021 $ 30,556 2016 Acquisitions | Completed technology | Minimum ACQUISITIONS Acquired intangible asset, weighted 1 year average useful life 2016 Acquisitions | Completed technology | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life 2016 Acquisitions | Client relationships | Minimum ACQUISITIONS Acquired intangible asset, weighted 3 years average useful life 2016 Acquisitions | Client relationships | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life 2016 Acquisitions | Patents/ trademarks | Minimum ACQUISITIONS Acquired intangible asset, weighted 1 year average useful life 2016 Acquisitions | Patents/ trademarks | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life The Weather Company ACQUISITIONS Current assets $ 76 Fixed assets/noncurrent assets 123 Goodwill 1,717 Total assets acquired 2,738 Current liabilities (88) Noncurrent liabilities (372)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total liabilities assumed (460) Total purchase price $ 2,278 Acquired intangible asset, weighted 6 years 10 months average useful life 24 days The Weather Company | Completed technology ACQUISITIONS Intangible assets $ 160 The Weather Company | Client relationships ACQUISITIONS Intangible assets 313 The Weather Company | Patents/ trademarks ACQUISITIONS Intangible assets $ 349 Truven Health Analytics ACQUISITIONS Current assets $ 171 Fixed assets/noncurrent assets 127 Goodwill 1,933 Total assets acquired 3,141 Current liabilities (148) Noncurrent liabilities (381) Total liabilities assumed (529) Total purchase price $ 2,612 Acquired intangible asset, weighted 6 years 10 months average useful life 24 days Truven Health Analytics | Completed technology ACQUISITIONS Intangible assets $ 338 Truven Health Analytics | Client relationships ACQUISITIONS Intangible assets 516 Truven Health Analytics | Patents/ trademarks ACQUISITIONS Intangible assets $ 54 Other 2016 Acquisitions ACQUISITIONS Current assets $ 153 Fixed assets/noncurrent assets 110 Goodwill 593

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total assets acquired 1,220 Current liabilities (96) Noncurrent liabilities (76) Total liabilities assumed (171) Bargain purchase gain (40) Total purchase price $ 1,009 Acquired intangible asset, weighted 6 years 3 months average useful life 18 days Other 2016 Acquisitions | Completed technology ACQUISITIONS Intangible assets $ 96 Other 2016 Acquisitions | Client relationships ACQUISITIONS Intangible assets 226 Other 2016 Acquisitions | Patents/ trademarks ACQUISITIONS Intangible assets $ 42

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 3 Months 12 Months ACQUISITIONS/ Ended Ended DIVESTITURES - Dec. 31, Businesses Acquired, 2015 Oct. 13, Dec. 31, 2015 Dec. 31, Dec. 31, Nov. 06, 2015 2015 (Details) 2015 USD ($) 2016 2014 USD ($) USD ($) $ in Millions USD ($) item USD ($) USD ($) item ACQUISITIONS Goodwill $ $ $ 32,021 $ 32,021 36,199 30,556 Cognitive Solutions ACQUISITIONS Goodwill 15,621 15,621 19,484 15,156 Technology Services & Cloud Platforms ACQUISITIONS Goodwill 10,156 10,156 10,258 9,373 Global Business Services ACQUISITIONS Goodwill 4,396 4,396 4,607 4,555 Systems ACQUISITIONS Goodwill 1,848 $ 1,848 $ 1,850 $ 1,472 2015 Acquisitions ACQUISITIONS Businesses acquired, number (in entities) 14 | item Businesses acquired, aggregate cost $ 3,555 Merge ACQUISITIONS Percentage of business acquired (as a 100.00% percent) Businesses acquired, cash consideration $ 1,036 Goodwill $ 695 Expected percent of goodwill deductible 0.00% for tax purposes Acquired intangible asset, weighted 7 years average useful life Merge | Cognitive Solutions ACQUISITIONS Goodwill $ 502 Merge | Technology Services & Cloud Platforms ACQUISITIONS Goodwill $ 193 Cleversafe

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS Percentage of business acquired (as a 100.00% percent) Businesses acquired, cash consideration $ 1,309 Goodwill $ 1,000 Expected percent of goodwill deductible 0.00% for tax purposes Acquired intangible asset, weighted 6 years 10 average useful life months 24 days Cleversafe | Technology Services & Cloud Platforms ACQUISITIONS Goodwill $ 590 Cleversafe | Systems ACQUISITIONS Goodwill $ 410 Other 2015 Acquisitions ACQUISITIONS Goodwill 895 $ 895 Expected percent of goodwill deductible 7.00% for tax purposes Acquired intangible asset, weighted 6 years 4 average useful life months 24 days Other 2015 Acquisitions | Cognitive Solutions ACQUISITIONS Businesses acquired, number (in entities) 6 | item Goodwill 518 $ 518 Other 2015 Acquisitions | Technology Services & Cloud Platforms ACQUISITIONS Businesses acquired, number (in entities) 4 | item Goodwill $ 303 $ 303 Other 2015 Acquisitions | Global Business Services ACQUISITIONS Businesses acquired, number (in entities) 2 | item Goodwill $ 74 $ 74 AlchemyAPI ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Blekko ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Explorys ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Phytel ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Compose ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) IRIS Analytics ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Blue Box ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) StrongLoop ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Gravitant ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Clearleap ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent) Meteorix ACQUISITIONS Percentage of business acquired (as a 100.00% 100.00% percent)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months Ended DIVESTITURES - 2015 Purchase Price Allocation Oct. 13, Dec. 31, Dec. 31, Nov. 06, 2015 Dec. 31, 2015 (Details) - USD ($) 2015 2016 2014 $ in Millions ACQUISITIONS Goodwill $ 32,021 $ 36,199 $ 30,556 2015 Acquisitions | Completed technology | Minimum ACQUISITIONS Acquired intangible asset, weighted 5 years average useful life 2015 Acquisitions | Completed technology | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life 2015 Acquisitions | Client relationships | Minimum ACQUISITIONS Acquired intangible asset, weighted 5 years average useful life 2015 Acquisitions | Client relationships | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life 2015 Acquisitions | Patents/trademarks | Minimum ACQUISITIONS Acquired intangible asset, weighted 2 years average useful life 2015 Acquisitions | Patents/trademarks | Maximum ACQUISITIONS Acquired intangible asset, weighted 7 years average useful life Merge ACQUISITIONS Current assets $ 94 Fixed assets/noncurrent assets 128 Goodwill 695 Total assets acquired 1,248 Current liabilities (73) Noncurrent liabilities (139)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Total liabilities assumed (212) Total purchase price $ 1,036 Acquired intangible asset, weighted 7 years average useful life Merge | Completed technology ACQUISITIONS Intangible assets $ 133 Merge | Client relationships ACQUISITIONS Intangible assets 145 Merge | Patents/trademarks ACQUISITIONS Intangible assets $ 54 Cleversafe ACQUISITIONS Current assets $ 23 Fixed assets/noncurrent assets 63 Goodwill 1,000 Total assets acquired 1,484 Current liabilities (15) Noncurrent liabilities (160) Total liabilities assumed (175) Total purchase price $ 1,309 Acquired intangible asset, weighted 6 years 10 months average useful life 24 days Cleversafe | Completed technology ACQUISITIONS Intangible assets $ 364 Cleversafe | Client relationships ACQUISITIONS Intangible assets 23 Cleversafe | Patents/trademarks ACQUISITIONS Intangible assets $ 11 Other 2015 Acquisitions ACQUISITIONS Current assets $ 60 Fixed assets/noncurrent assets 82 Goodwill 895 Total assets acquired 1,318 Current liabilities (34) Noncurrent liabilities (73) Total liabilities assumed (107) Total purchase price $ 1,210

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Acquired intangible asset, weighted 6 years 4 months average useful life 24 days Other 2015 Acquisitions | Completed technology ACQUISITIONS Intangible assets $ 163 Other 2015 Acquisitions | Client relationships ACQUISITIONS Intangible assets 95 Other 2015 Acquisitions | Patents/ trademarks ACQUISITIONS Intangible assets $ 23

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months Ended DIVESTITURES - Dec. 31, 2014 Dec. 31, Dec. 31, Businesses Acquired, 2014 USD ($) 2016 2015 (Details) item USD ($) USD ($) $ in Millions ACQUISITIONS Goodwill $ 30,556 $ 36,199 $ 32,021 Cognitive Solutions ACQUISITIONS Goodwill 15,156 19,484 15,621 Technology Services & Cloud Platforms ACQUISITIONS Goodwill $ 9,373 $ 10,258 $ 10,156 2014 Acquisitions ACQUISITIONS Businesses acquired, number (in entities) | item 6 Businesses acquired, aggregate cost $ 608 Acquired intangible asset, weighted average useful life 6 years 9 months 18 days Goodwill $ 442 Expected percent of goodwill deductible for tax purposes 1.00% Percentage of business acquired (as a percent) 100.00% 2014 Acquisitions | Cognitive Solutions ACQUISITIONS Businesses acquired, number (in entities) | item 4 Goodwill $ 311 2014 Acquisitions | Technology Services & Cloud Platforms ACQUISITIONS Businesses acquired, number (in entities) | item 2 Goodwill $ 131

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 12 Months Ended DIVESTITURES - 2014 Purchase Price Allocation Dec. 31, 2014 Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions ACQUISITIONS Goodwill $ 30,556 $ 36,199 $ 32,021 2014 Acquisitions ACQUISITIONS Current assets 56 Fixed assets/noncurrent assets 39 Goodwill 442 Total assets acquired 701 Current liabilities (26) Noncurrent liabilities (67) Total liabilities assumed (93) Total purchase price $ 608 Acquired intangible asset, weighted average useful life 6 years 9 months 18 days 2014 Acquisitions | Completed technology ACQUISITIONS Intangible assets $ 68 2014 Acquisitions | Completed technology | Minimum ACQUISITIONS Acquired intangible asset, weighted average useful life 5 years 2014 Acquisitions | Completed technology | Maximum ACQUISITIONS Acquired intangible asset, weighted average useful life 7 years 2014 Acquisitions | Client relationships ACQUISITIONS Intangible assets $ 77 Acquired intangible asset, weighted average useful life 7 years 2014 Acquisitions | Patents/trademarks ACQUISITIONS Intangible assets $ 18 2014 Acquisitions | Patents/trademarks | Minimum ACQUISITIONS Acquired intangible asset, weighted average useful life 1 year 2014 Acquisitions | Patents/trademarks | Maximum ACQUISITIONS Acquired intangible asset, weighted average useful life 7 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 1 Months 3 Months 12 Months Ended DIVESTITURES - Ended Ended Microelectronics Disposal Group (Details) - Jul. Dec. Dec. Sep. Sep. Dec. Dec. Dec. Microelectronics business - 01, 31, 31, 30, 30, 31, 31, 31, USD ($) 2015 2017 2016 2015 2014 2016 2015 2014 $ in Millions Discontinued Operations, Disposed of by Means Other than Sale Discontinued Operations Discontinued operation, period of exclusive 10 manufacturing agreement after disposal years Pre-tax (charge) credit related to sale $ $ $ (116) (4,700) (4,726) Impairment of long-lived assets to be disposed 2,400 of Total cash consideration expected to be 1,500 transferred to acquiring company Other related costs $ 800 Cumulative pre-tax charge $ 4,800 Net cash transferred $ 500 $ 515 Cash consideration transferred, before $ 750 adjustments Minimum | Discontinued Operations, Disposed of by Means Other than Sale Discontinued Operations Transition service agreement duration 1 year Maximum | Discontinued Operations, Disposed of by Means Other than Sale Discontinued Operations Transition service agreement duration 3 years Pre-tax (charge) credit related to sale $ (1) Expected Discontinued Operations Net cash transferred $ 250

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ACQUISITIONS/ 3 Months 12 Months Ended DIVESTITURES - Ended Discontinued Operations Financial Information Sep. 30, Dec. 31, Dec. 31, Dec. 31, (Details) - USD ($) 2014 2016 2015 2014 $ in Millions Income Statement Disclosures Provision/(benefit) for income taxes $ (2) $ (117) $ (1,617) Loss from discontinued operations, net of tax (9) (174) (3,729) Microelectronics business | Discontinued Operations, Disposed of by Means Other than Sale Income Statement Disclosures Total revenue 0 720 1,335 Loss from discontinued operations, before tax (11) (175) (619) Loss on disposal, before tax $ (4,700) (116) (4,726) Total loss from discontinued operations, before income taxes (11) (291) (5,346) Provision/(benefit) for income taxes (2) (117) (1,617) Loss from discontinued operations, net of tax $ (9) $ (174) $ (3,729)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months 3 Months Ended Ended ACQUISITIONS/ Dec. Jan. Sep. Dec. Dec. Dec. DIVESTITURES - Other 31, Mar. Dec. Jun. Mar. Dec. Sep. Jun. Oct. 23, 10, 31, 31, 31, Disposal Groups (Details) 2016 31, 31, 30, 31, 31, 30, 30, 01, 2014 2013 2016 20152014 $ in Millions USD 2016 20152015 2015 201420142014 2014 USD USD USD USDUSD ($) item item item item item item item ($) ($) ($) ($) ($) item Industry Standard x86 Server Portfolio | Disposal group disposed of by sale, not discontinued operations Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Transaction price for sale of $ business 2,100 Approximate amount of $ transaction price received in cash 1,800 Pre-tax gain/(loss) on sale of $ 57 $ 63 business Expected pre-tax gain (loss) on $ 1,600 sale of business 1,600 Disposal group expected total gain (loss) on sale, net of 1,300 1,300 associated costs Cumulative gain on sale of business, net of transition and 1,200 1,200 performance-based costs Industry Standard x86 Server Portfolio | Minimum | Disposal group disposed of by sale, not discontinued operations Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Transition service agreement 1 duration year Industry Standard x86 Server Portfolio | Maximum | Disposal group disposed of by sale, not discontinued operations

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Disposal group equity consideration ownership (as a 5.00% percent) Transition service agreement 3 duration years Customer Care Business Process Outsourcing Services | Disposal group disposed of by sale, not discontinued operations Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Transaction price for sale of $ 501 business Approximate amount of 430 transaction price received in cash Amount of transaction price $ 71 received in stock Pre-tax gain/(loss) on sale of $ 7 business 202 Cumulative pre-tax gain/(loss) on $ 213 213 sale of business Customer Care Business Process Outsourcing Services | Maximum | Disposal group disposed of by sale, not discontinued operations Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Disposal group equity consideration ownership (as a 5.00% percent) Others Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Pre-tax gain/(loss) on sale of $ $ 42 $ 81 business 132 Software Product-Related Divestitures Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Number of divestitures | item 4 3 1 2 2 4 1 Service-Related Offerings Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Number of divestitures | item 1 Global Business Services Offerings Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] Number of divestitures | item 1 1

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL INSTRUMENTS - Fair Dec. 31, Dec. 31, Value Measurements 2016 2015 (Details) - USD ($) $ in Millions Financial assets and financial liabilities measured at fair value on a recurring basis: Debt securities - noncurrent $ 8 $ 8 Available-for-sale equity investments 7 192 Derivative assets 1,126 994 Potential reduction in net position of total derivative assets 116 139 Fair value assets, Level 2 to Level 1 transfer 0 0 Fair value assets, Level 1 to Level 2 transfer 0 0 Fair value liabilities, Level 2 to Level 1 transfer 0 0 Fair value liabilities, Level 1 to Level 2 transfer 0 0 Recurring Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 4,832 4,943 Debt securities - current 699 506 Debt securities - noncurrent 8 8 Trading security investments 28 Available-for-sale equity investments 7 192 Derivative assets 1,126 994 Total Assets 6,672 6,671 Total Liabilities 206 186 Potential reduction in net position of total derivative assets 116 139 Potential reduction in net position of total derivative liabilities 116 139 Recurring | Prepaid expenses and other current assets Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 532 292 Recurring | Investments and sundry assets Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 594 702 Recurring | Other accrued expenses and liabilities Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative liabilities 145 164 Recurring | Other liabilities Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative liabilities 61 22

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Recurring | Interest rate contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 555 656 Derivative liabilities 8 3 Recurring | Foreign exchange contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 560 332 Derivative liabilities 188 164 Recurring | Equity contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 11 6 Derivative liabilities 10 19 Recurring | Time deposits and certificates of deposit Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 3,629 2,856 Recurring | Money market funds Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 1,204 2,069 Recurring | Other securities Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 18 Recurring | Level 1 Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 1,204 2,069 Debt securities - noncurrent 1 1 Trading security investments 28 Available-for-sale equity investments 7 192 Total Assets 1,212 2,290 Recurring | Level 1 | Money market funds Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 1,204 2,069 Recurring | Level 2 Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents 3,629 2,874 Debt securities - current 699 506 Debt securities - noncurrent 6 6

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Derivative assets 1,126 994 Total Assets 5,460 4,381 Total Liabilities 206 186 Recurring | Level 2 | Interest rate contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 555 656 Derivative liabilities 8 3 Recurring | Level 2 | Foreign exchange contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 560 332 Derivative liabilities 188 164 Recurring | Level 2 | Equity contracts Financial assets and financial liabilities measured at fair value on a recurring basis: Derivative assets 11 6 Derivative liabilities 10 19 Recurring | Level 2 | Time deposits and certificates of deposit Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents $ 3,629 2,856 Recurring | Level 2 | Other securities Financial assets and financial liabilities measured at fair value on a recurring basis: Cash equivalents $ 18

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL INSTRUMENTS - Not Measured at Fair Value Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions Long-Term Debt Carrying amount of long-term debt $ 34,655 $ 33,428 Fair value of long-term debt $ 36,838 $ 35,220

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 3 Months 12 Months Ended INSTRUMENTS - Debt and Ended Equity Securities (Details) - Mar. 31, Dec. 31, Dec. 31, Dec. 31, USD ($) 2016 2016 2015 2014 $ in Millions Debt and Marketable Equity Securities Debt securities - noncurrent, Adjusted Cost $ 5 $ 5 Debt securities - noncurrent, Gross Unrealized Gains 3 3 Debt securities - noncurrent, Fair Value 8 8 Available-for-sale equity investments, Adjusted Cost 3 186 Available-for-sale equity investments, Gross Unrealized Gains 5 6 Available-for-sale equity investments, Gross Unrealized Losses 0 0 Available-for-sale equity investments, Fair Value 7 192 Sales of debt and available-for-sale equity investments Proceeds 151 8 $ 21 Gross realized gains (before taxes) 3 1 0 Gross realized losses (before taxes) 37 1 $ 5 Unrealized holding gains/(losses) on available-for-sale debt and equity securities Net unrealized gains/(losses) arising during the period (23) (33) Net unrealized (gains)/losses reclassified to net income 21 53 Writedowns included in net income for the period $ 0 86 Maximum contractual maturities of substantially all available- 1 year for-sale debt securities Lenovo's common stock Debt and Marketable Equity Securities Available-for-sale equity investments, Adjusted Cost 185 Other-than-temporary impairment loss $ 86 Sales of debt and available-for-sale equity investments Gross realized losses (before taxes) $ 37

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 12 Months INSTRUMENTS - Ended Derivatives, Offsetting Dec. 31, (Details) - USD ($) Dec. 31, 2016 2015 $ in Millions Derivative Financial Instruments Fair value of derivative instruments under collateralized arrangements in a liability $ 11 $ 28 position Collateral posted on derivative instruments $ 0 0 Maximum spread on credit default swap agreements before full collateralization is 2.50% required Fair value of total derivative instruments, Assets $ 1,126 994 Liabilities included in master netting arrangements 116 139 Obligation to return cash collateral 141 90 Non-cash collateral received 35 40 Net exposure related to derivative assets recorded in the Statement of Financial 834 726 Position Net exposure related to derivative liabilities recorded in the Statement of Financial 90 47 Position Cash collateral rehypothecated 0 0 Other receivables Derivative Financial Instruments Right to reclaim cash collateral 0 0 Accounts payable Derivative Financial Instruments Obligation to return cash collateral $ 141 $ 90

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 12 Months Ended INSTRUMENTS - Dec. 31, 2016 Dec. 31, 2015 Derivatives, Other USD ($) USD ($) Information (Details) instrument instrument $ in Millions Derivative instruments in cash flow hedging relationships | Forward-starting interest rate swaps Derivative [Line Items] Number of derivative instruments outstanding | instrument 0 0 Derivative instruments in cash flow hedging relationships | Forward-starting interest rate swaps | Maximum Derivative [Line Items] Net gains (losses) before taxes in other comprehensive income/(loss), cash $ 1 $ 1 flow hedges Gains (losses) expected to be reclassified to net income within the next 12 $ 1 1 months Derivative instruments in cash flow hedging relationships | Foreign exchange forward contracts Derivative [Line Items] Maximum length of time hedged 4 years Notional amount $ 8,300 $ 8,200 Average remaining maturity 8 months 12 8 months 12 days days Net gains (losses) before taxes in other comprehensive income/(loss), cash $ 462 $ 147 flow hedges Gains (losses) expected to be reclassified to net income within the next 12 $ 397 121 months Derivative instruments in cash flow hedging relationships | Cross-currency swaps Derivative [Line Items] Maximum length of time hedged 9 years Notional amount $ 1,400 0 Net gains (losses) before taxes in other comprehensive income/(loss), cash 29 (2) flow hedges Gains (losses) expected to be reclassified to net income within the next 12 27 months Derivative instruments in cash flow hedging relationships | Cross-currency swaps | Maximum Derivative [Line Items] Gains (losses) expected to be reclassified to net income within the next 12 (1) months Net investment hedge Derivative [Line Items] Notional amount $ 6,700 $ 5,500

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Average remaining maturity 2 months 12 2 months 12 days days Designated as hedging instruments | Interest rate swaps Derivative [Line Items] Notional amount $ 7,338 $ 7,338 Average remaining maturity 6 years 2 months 7 years 2 months 12 days 12 days Derivative instruments not designated as hedging instruments | Foreign exchange contracts Derivative [Line Items] Notional amount $ 12,700 $ 11,700 Derivative instruments not designated as hedging instruments | Foreign exchange contracts | Maximum Derivative [Line Items] Term of contract 1 year Derivative instruments not designated as hedging instruments | Economic hedge of compensation obligations Derivative [Line Items] Notional amount $ 1,200 $ 1,200 Derivative instruments not designated as hedging instruments | Warrants qualifying as derivatives Derivative [Line Items] Number of derivative instruments outstanding | instrument 0 0 Derivative instruments not designated as hedging instruments | Credit default swaps Derivative [Line Items] Number of derivative instruments outstanding | instrument 0 0 Derivative instruments not designated as hedging instruments | Economic hedge of investment securities Derivative [Line Items] Number of derivative instruments outstanding | instrument 0 Derivative instruments not designated as hedging instruments | Economic hedge of investment securities | Maximum Derivative [Line Items] Notional amount $ 100

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL INSTRUMENTS - Dec. 31, Dec. 31, Derivatives, Fair Value 2016 2015 (Details) - USD ($) $ in Millions Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets $ 1,126 $ 994 Short-term debt 7,513 6,461 Total long-term debt (excluding current portion) 34,655 33,428 Fair value of total derivative liabilities and debt 9,175 8,131 Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 993 858 Fair value of total derivative instruments, Liabilities 89 92 Designated as hedging instruments | Net investment hedge Fair Values of Derivative Instruments Short-term debt 1,125 Total long-term debt (excluding current portion) 7,844 7,945 Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 133 136 Fair value of total derivative instruments, Liabilities 117 94 Prepaid expenses and other current assets | Foreign exchange contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 421 197 Prepaid expenses and other current assets | Foreign exchange contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 100 90 Prepaid expenses and other current assets | Equity contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 11 6 Investments and sundry assets | Interest rate contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 555 656 Investments and sundry assets | Foreign exchange contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Assets 17 5 Investments and sundry assets | Foreign exchange contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Fair value of total derivative instruments, Assets 22 40 Other accrued expenses and liabilities | Foreign exchange contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities 46 70 Other accrued expenses and liabilities | Foreign exchange contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities 89 75 Other accrued expenses and liabilities | Equity contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities 10 19 Other liabilities | Interest rate contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities 8 3 Other liabilities | Foreign exchange contracts | Designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities 35 $ 19 Other liabilities | Foreign exchange contracts | Derivative instruments not designated as hedging instruments Fair Values of Derivative Instruments Fair value of total derivative instruments, Liabilities $ 18

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCIAL 12 Months Ended INSTRUMENTS - Derivatives, Gains and Dec. 31, Dec. 31, Dec. 31, Losses (Details) - USD ($) 2016 2015 2014 $ in Millions Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives $ (18) $ 291 $ (263) Gain (loss) recognized in earnings attributable to risk being hedged 121 (1) (241) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective 555 1,507 2,095 Portion Recognized in OCI Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective (102) 1,072 97 Portion Reclassified from AOCI to Earnings Gain (Loss) Recognized in Earnings and Other Comprehensive Income, 74 18 (1) (Ineffectiveness) and Amounts Excluded from Effectiveness Testing Gain (loss) on fair value hedges ineffectiveness (4) (2) 4 Gains and (Losses) excluded from the assessment of hedge effectiveness for fair value 0 0 0 hedges Gains and (Losses) associated with underlying exposure that did not occur or was not 0 0 0 expected to occur for cash flow hedges Foreign exchange contracts | Derivative instruments in cash flow hedging relationships Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective 243 618 958 Portion Recognized in OCI Foreign exchange contracts | Net investment hedge Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective 311 889 1,136 Portion Recognized in OCI Cost of financing | Interest rate contracts | Derivative instruments in fair value hedging relationships Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives 28 108 231 Gain (loss) recognized in earnings attributable to risk being hedged 58 (1) (127) Interest expense | Interest rate contracts | Derivative instruments in fair value hedging relationships Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives 31 94 206 Gain (loss) recognized in earnings attributable to risk being hedged 63 (1) (114) Interest expense | Interest rate contracts | Derivative instruments in cash flow hedging relationships Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective (24) 0 (1) Portion Reclassified from AOCI to Earnings Interest expense | Foreign exchange contracts | Net investment hedge Derivative Instruments, Gain (Loss)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gain (Loss) Recognized in Earnings and Other Comprehensive Income, 77 13 0 (Ineffectiveness) and Amounts Excluded from Effectiveness Testing SG&A expense | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective 4 149 15 Portion Reclassified from AOCI to Earnings SG&A expense | Equity contracts | Derivative instruments not designated as hedging instruments Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives 112 (27) 51 Other (income) and expense | Interest rate contracts | Derivative instruments not designated as hedging instruments Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives 0 (1) 34 Other (income) and expense | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective (68) 731 98 Portion Reclassified from AOCI to Earnings Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (3) 5 (1) (Ineffectiveness) and Amounts Excluded from Effectiveness Testing Other (income) and expense | Foreign exchange contracts | Derivative instruments not designated as hedging instruments Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives (189) 127 (776) Other (income) and expense | Equity contracts | Derivative instruments not designated as hedging instruments Derivative Instruments, Gain (Loss) Gain (loss) recognized in earnings on derivatives (1) (9) (9) Cost of sales | Foreign exchange contracts | Derivative instruments in cash flow hedging relationships Derivative Instruments, Gain (Loss) Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective $ (13) $ 192 $ (15) Portion Reclassified from AOCI to Earnings

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INVENTORIES (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015 $ in Millions INVENTORIES Finished goods $ 358 $ 352 Work in process and raw materials 1,195 1,199 Total $ 1,553 $ 1,551

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING 12 Months RECEIVABLES - Net of Ended Allowances (Details) - USD Dec. 31, Dec. 31, Dec. 31, ($) 2016 2015 2014 $ in Millions Financing receivables Financing receivables, net, current $ 19,006 $ 19,020 Financing receivables, net, noncurrent 9,021 10,013 Lease receivables Financing receivables Financing receivables, net, current 2,909 3,057 Financing receivables, net, noncurrent 3,950 4,501 Sales-type and direct financing leases, unguaranteed residual value 585 645 Sales-type and direct financing leases, unearned income 513 536 Allowance for credit losses $ 133 213 $ 165 Scheduled maturities of minimum lease payments outstanding as a percentage 46.00% of the total, 2017 Scheduled maturities of minimum lease payments outstanding as a percentage 29.00% of the total, 2018 Scheduled maturities of minimum lease payments outstanding as a percentage 16.00% of the total, 2019 Scheduled maturities of minimum lease payments outstanding as a percentage 6.00% of the total, 2020 Scheduled maturities of minimum lease payments outstanding as a percentage 2.00% of the total, 2021 and beyond Lease receivables | Minimum Financing receivables Financing receivable, payment terms 2 years Lease receivables | Maximum Financing receivables Financing receivable, payment terms 6 years Commercial financing receivables Financing receivables Financing receivables, net, current $ 9,706 8,948 Allowance for credit losses $ 28 19 Commercial financing receivables | Minimum Financing receivables Financing receivable, payment terms 30 days Commercial financing receivables | Maximum Financing receivables Financing receivable, payment terms 90 days Loan receivables Financing receivables Financing receivables, net, current $ 6,390 7,015

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Financing receivables, net, noncurrent 5,071 5,512 Allowance for credit losses $ 276 $ 377 $ 396 Loan receivables | Maximum Financing receivables Financing receivable, payment terms 7 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 3 Months 12 Months Ended FINANCING Ended RECEIVABLES - By Dec. 31, Dec. 31, Portfolio Segment (Details) Dec. 31, 2016 2016 2015 $ in Millions USD ($) USD ($) USD ($) item Financing receivables Financing receivables pledged as collateral for borrowings $ 689 $ 689 $ 545 Financing receivables held for sale 0 $ 0 0 Total Lease Receivable and Loan Receivable Portfolio Segments Financing receivables Number of portfolio segments | item 2 Number of classes of financing receivable | item 2 Financing receivables on a gross basis 18,073 $ 18,073 19,945 Collectively evaluated for impairment 17,765 17,765 19,406 Individually evaluated for impairment 309 309 539 Allowance for credit losses: Allowance for credit losses, beginning balance 590 561 Write-offs (188) (235) (62) Provision 58 141 Other (3) (51) Allowance for credit losses, ending balance 410 410 590 Collectively evaluated for impairment 128 128 79 Individually evaluated for impairment 281 281 511 Total Lease Receivable and Loan Receivable Portfolio Segments | Major Markets Financing receivables Financing receivables on a gross basis 14,161 14,161 15,256 Collectively evaluated for impairment 14,119 14,119 15,180 Individually evaluated for impairment 43 43 76 Allowance for credit losses: Allowance for credit losses, beginning balance 109 111 Write-offs (41) (59) (14) Provision 7 20 Other 0 (8) Allowance for credit losses, ending balance 57 57 109 Collectively evaluated for impairment 30 30 43 Individually evaluated for impairment 27 27 65 Total Lease Receivable and Loan Receivable Portfolio Segments | Growth Markets Financing receivables Financing receivables on a gross basis 3,912 3,912 4,689 Collectively evaluated for impairment 3,646 3,646 4,227 Individually evaluated for impairment 266 266 462

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Allowance for credit losses: Allowance for credit losses, beginning balance 481 450 Write-offs (147) (176) (48) Provision 51 122 Other (3) (43) Allowance for credit losses, ending balance 353 353 481 Collectively evaluated for impairment 98 98 36 Individually evaluated for impairment 255 255 445 Lease receivables Financing receivables Financing receivables on a gross basis 6,336 6,336 7,041 Allowance for credit losses: Allowance for credit losses, beginning balance 213 165 Write-offs (73) Allowance for credit losses, ending balance 133 133 213 Lease receivables | Major Markets Financing receivables Financing receivables on a gross basis 5,013 5,013 5,517 Allowance for credit losses: Allowance for credit losses, beginning balance 25 32 Allowance for credit losses, ending balance 6 6 25 Lease receivables | Growth Markets Financing receivables Financing receivables on a gross basis 1,323 1,323 1,524 Allowance for credit losses: Allowance for credit losses, beginning balance 188 133 Allowance for credit losses, ending balance 127 127 188 Loan receivables Financing receivables Financing receivables on a gross basis 11,737 11,737 12,904 Allowance for credit losses: Allowance for credit losses, beginning balance 377 396 Write-offs (115) Allowance for credit losses, ending balance 276 276 377 Loan receivables | Major Markets Financing receivables Financing receivables on a gross basis 9,148 9,148 9,739 Allowance for credit losses: Allowance for credit losses, beginning balance 83 79 Allowance for credit losses, ending balance 51 51 83 Loan receivables | Growth Markets Financing receivables Financing receivables on a gross basis 2,589 2,589 3,165 Allowance for credit losses:

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Allowance for credit losses, beginning balance 293 317 Allowance for credit losses, ending balance $ 225 $ 225 $ 293

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING RECEIVABLES - Non- Accrual Status (Details) - Dec. 31, 2016Dec. 31, 2015 USD ($) $ in Millions Total Lease Receivable and Loan Receivable Portfolio Segments Financing Receivables on Non-accrual Status Total Receivables $ 185 $ 168 Lease receivables Financing Receivables on Non-accrual Status Total Receivables 40 65 Loan receivables Financing Receivables on Non-accrual Status Total Receivables 145 104 Major Markets | Lease receivables Financing Receivables on Non-accrual Status Total Receivables 2 2 Major Markets | Loan receivables Financing Receivables on Non-accrual Status Total Receivables 19 13 Growth Markets | Lease receivables Financing Receivables on Non-accrual Status Total Receivables 38 63 Growth Markets | Loan receivables Financing Receivables on Non-accrual Status Total Receivables $ 127 $ 91

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING 12 Months Ended RECEIVABLES - Impaired Loans (Details) - Loan Dec. 31, 2016Dec. 31, 2015 receivables - USD ($) $ in Millions Impaired client loan receivables Recorded Investment $ 223 $ 347 Related Allowance 213 331 Average Recorded Investment 339 367 Interest Income Recognized 0 0 Major Markets Impaired client loan receivables Recorded Investment 31 50 Related Allowance 28 47 Average Recorded Investment 55 51 Interest Income Recognized 0 0 Growth Markets Impaired client loan receivables Recorded Investment 191 297 Related Allowance 185 284 Average Recorded Investment 284 315 Interest Income Recognized $ 0 $ 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING RECEIVABLES - Credit Dec. 31, Dec. 31, Quality Indicators (Details) - 2016 2015 USD ($) $ in Millions Major Markets | Lease receivables Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment $ 5,047 $ 5,492 Major Markets | Lease receivables | Aaa - Aa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 496 535 Major Markets | Lease receivables | A1 - A3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 1,162 1,318 Major Markets | Lease receivables | Baa1 - Baa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 1,381 1,486 Major Markets | Lease receivables | Ba1 - Ba2 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 1,144 1,208 Major Markets | Lease receivables | Ba3 - B1 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 566 510 Major Markets | Lease receivables | B2 - B3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 271 401 Major Markets | Lease receivables | Caa - D Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 26 33 Major Markets | Loan receivables Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 9,193 9,656 Major Markets | Loan receivables | Aaa - Aa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 904 941

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Major Markets | Loan receivables | A1 - A3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 2,117 2,318 Major Markets | Loan receivables | Baa1 - Baa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 2,515 2,613 Major Markets | Loan receivables | Ba1 - Ba2 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 2,084 2,125 Major Markets | Loan receivables | Ba3 - B1 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 1,031 897 Major Markets | Loan receivables | B2 - B3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 494 705 Major Markets | Loan receivables | Caa - D Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 48 58 Growth Markets | Lease receivables Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 1,156 1,336 Growth Markets | Lease receivables | Aaa - Aa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 44 34 Growth Markets | Lease receivables | A1 - A3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 181 142 Growth Markets | Lease receivables | Baa1 - Baa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 140 343 Growth Markets | Lease receivables | Ba1 - Ba2 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 246 309 Growth Markets | Lease receivables | Ba3 - B1

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 313 243 Growth Markets | Lease receivables | B2 - B3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 163 189 Growth Markets | Lease receivables | Caa - D Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 69 76 Growth Markets | Loan receivables Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 2,268 2,872 Growth Markets | Loan receivables | Aaa - Aa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 87 73 Growth Markets | Loan receivables | A1 - A3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 355 305 Growth Markets | Loan receivables | Baa1 - Baa3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 274 738 Growth Markets | Loan receivables | Ba1 - Ba2 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 483 664 Growth Markets | Loan receivables | Ba3 - B1 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 613 522 Growth Markets | Loan receivables | B2 - B3 Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment 320 406 Growth Markets | Loan receivables | Caa - D Net recorded investment for each class of receivables, by credit quality indicator Financing receivables, net recorded investment $ 135 $ 164

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING 12 Months Ended RECEIVABLES - Industries (Details) - Global Financing - Dec. 31, 2016Dec. 31, 2015 Financing Receivable Portfolio Financial Industry Financing receivables Financing receivables (as a percent) 34.00% 36.00% Government Industry Financing receivables Financing receivables (as a percent) 14.00% 11.00% Manufacturing Industry Financing receivables Financing receivables (as a percent) 13.00% 14.00% Services Industry Financing receivables Financing receivables (as a percent) 12.00% 11.00% Retail Industry Financing receivables Financing receivables (as a percent) 8.00% 9.00% Communications Industry Financing receivables Financing receivables (as a percent) 7.00% 7.00% Healthcare Industry Financing receivables Financing receivables (as a percent) 6.00% 6.00% Other industries Financing receivables Financing receivables (as a percent) 6.00% 6.00%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document FINANCING RECEIVABLES - Past Due Dec. 31, Dec. 31, (Details) - USD ($) 2016 2015 $ in Millions Past Due Financing Receivable Troubled debt restructurings of financing receivables $ 0 $ 0 Total Lease Receivable and Loan Receivable Portfolio Segments Past Due Financing Receivable Fully Reserved Financing Receivable 271 517 Less than 90 Days or Unbilled Financing Receivables 17,740 19,355 Total Financing Receivables 18,073 19,945 Recorded Investment > 90 Days and Accruing 253 388 Total Lease Receivable and Loan Receivable Portfolio Segments | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days 62 73 Lease receivables Past Due Financing Receivable Fully Reserved Financing Receivable 89 173 Less than 90 Days or Unbilled Financing Receivables 6,216 6,834 Total Financing Receivables 6,336 7,041 Recorded Investment > 90 Days and Accruing 111 168 Lease receivables | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days 31 35 Loan receivables Past Due Financing Receivable Fully Reserved Financing Receivable 182 344 Less than 90 Days or Unbilled Financing Receivables 11,524 12,521 Total Financing Receivables 11,737 12,904 Recorded Investment > 90 Days and Accruing 141 220 Loan receivables | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days 31 38 Major Markets | Total Lease Receivable and Loan Receivable Portfolio Segments Past Due Financing Receivable Total Financing Receivables 14,161 15,256 Major Markets | Lease receivables Past Due Financing Receivable Fully Reserved Financing Receivable 11 33 Less than 90 Days or Unbilled Financing Receivables 4,994 5,479 Total Financing Receivables 5,013 5,517 Recorded Investment > 90 Days and Accruing 34 108 Major Markets | Lease receivables | Total Past Due > 90 days

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Past Due Financing Receivable Total Past Due > 90 days 8 5 Major Markets | Loan receivables Past Due Financing Receivable Fully Reserved Financing Receivable 5 35 Less than 90 Days or Unbilled Financing Receivables 9,129 9,696 Total Financing Receivables 9,148 9,739 Recorded Investment > 90 Days and Accruing 62 134 Major Markets | Loan receivables | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days 15 7 Growth Markets | Total Lease Receivable and Loan Receivable Portfolio Segments Past Due Financing Receivable Total Financing Receivables 3,912 4,689 Growth Markets | Lease receivables Past Due Financing Receivable Fully Reserved Financing Receivable 78 140 Less than 90 Days or Unbilled Financing Receivables 1,222 1,355 Total Financing Receivables 1,323 1,524 Recorded Investment > 90 Days and Accruing 77 60 Growth Markets | Lease receivables | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days 23 30 Growth Markets | Loan receivables Past Due Financing Receivable Fully Reserved Financing Receivable 177 309 Less than 90 Days or Unbilled Financing Receivables 2,396 2,825 Total Financing Receivables 2,589 3,165 Recorded Investment > 90 Days and Accruing 80 86 Growth Markets | Loan receivables | Total Past Due > 90 days Past Due Financing Receivable Total Past Due > 90 days $ 16 $ 31

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document PROPERTY, PLANT AND 12 Months Ended EQUIPMENT (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment $ 30,133 $ 29,342 Less: Accumulated depreciation 19,303 18,615 Net property, plant and equipment 10,830 10,727 Pre-tax impairment charge 215 Plant and other property PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 29,150 28,226 Less: Accumulated depreciation 18,842 18,051 Net property, plant and equipment 10,308 10,176 $ 10,078 Land and land improvements PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 506 558 Building and building improvements PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 6,326 6,552 Plant, laboratory and office equipment PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 22,318 21,116 Rental machines PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 984 1,115 Less: Accumulated depreciation 461 565 Net property, plant and equipment $ 523 $ 551

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INVESTMENTS AND SUNDRY ASSETS (Details) Dec. 31, 2016Dec. 31, 2015 - USD ($) $ in Millions INVESTMENTS AND SUNDRY ASSETS Deferred transition and setup costs and other deferred arrangements $ 1,497 $ 1,624 Derivatives - noncurrent 594 702 Alliance investments - equity method 85 82 Alliance investments - non-equity method 19 393 Prepaid software 230 273 Long-term deposits 267 256 Other receivables 416 516 Employee benefit-related 272 273 Prepaid income taxes 477 496 Other assets 729 571 Total $ 4,585 $ 5,187

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS INCLUDING GOODWILL - Intangible Assets by Class Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions Intangible asset balances by major asset class: Gross Carrying Amount $ 8,466 $ 6,543 Accumulated Amortization (3,778) (3,057) Net Carrying Amount 4,688 3,487 Capitalized software Intangible asset balances by major asset class: Gross Carrying Amount 1,537 1,348 Accumulated Amortization (661) (581) Net Carrying Amount 876 767 Client relationships Intangible asset balances by major asset class: Gross Carrying Amount 2,831 1,856 Accumulated Amortization (1,228) (927) Net Carrying Amount 1,602 929 Completed technology Intangible asset balances by major asset class: Gross Carrying Amount 3,322 2,960 Accumulated Amortization (1,668) (1,397) Net Carrying Amount 1,654 1,563 Patents/trademarks Intangible asset balances by major asset class: Gross Carrying Amount 730 335 Accumulated Amortization (205) (142) Net Carrying Amount 525 193 Other intangible assets Intangible asset balances by major asset class: Gross Carrying Amount 46 44 Accumulated Amortization (15) (10) Net Carrying Amount $ 31 $ 35

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS 12 Months Ended INCLUDING GOODWILL - Intangible Assets Activity Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions INTANGIBLE ASSETS INCLUDING GOODWILL Net carrying amount increase $ 1,201 Impairment of intangible assets 0 $ 0 Intangible asset amortization expense 1,544 1,193 $ 1,347 Retirement of fully amortized intangible assets $ 817 $ 1,809

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS INCLUDING GOODWILL - Dec. 31, 2016 Future Amortization USD ($) (Details) $ in Millions Future amortization expense, by year 2017 $ 1,450 2018 1,109 2019 729 2020 547 2021 435 Capitalized software Future amortization expense, by year 2017 494 2018 300 2019 83 Acquired intangibles Future amortization expense, by year 2017 957 2018 809 2019 646 2020 547 2021 $ 435

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document INTANGIBLE ASSETS 12 Months Ended INCLUDING GOODWILL - Goodwill by Segment Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions Changes in Goodwill Balances Beginning Balance $ 32,021 $ 30,556 Goodwill Additions 4,244 2,590 Purchase Price Adjustments (7) (3) Divestitures (18) (26) Foreign Currency Translation and Other Adjustments (42) (1,096) Ending Balance 36,199 32,021 Goodwill impairment losses 0 0 Goodwill accumulated impairment losses 0 0 Cognitive Solutions Changes in Goodwill Balances Beginning Balance 15,621 15,156 Goodwill Additions 3,821 1,020 Purchase Price Adjustments 5 (2) Divestitures (12) (18) Foreign Currency Translation and Other Adjustments 48 (535) Ending Balance 19,484 15,621 Global Business Services Changes in Goodwill Balances Beginning Balance 4,396 4,555 Goodwill Additions 303 74 Purchase Price Adjustments 4 0 Divestitures (1) (1) Foreign Currency Translation and Other Adjustments (95) (232) Ending Balance 4,607 4,396 Technology Services & Cloud Platforms Changes in Goodwill Balances Beginning Balance 10,156 9,373 Goodwill Additions 119 1,087 Purchase Price Adjustments (12) (1) Divestitures (5) (7) Foreign Currency Translation and Other Adjustments (1) (296) Ending Balance 10,258 10,156 Systems Changes in Goodwill Balances Beginning Balance 1,848 1,472 Goodwill Additions 410 Purchase Price Adjustments (4) 0 Foreign Currency Translation and Other Adjustments 5 (33)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Ending Balance $ 1,850 $ 1,848

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Short- Term Debt (Details) - USD Dec. 31, 2016Dec. 31, 2015 ($) $ in Millions Short-term debt disclosures Long-term debt - current maturities $ 6,239 $ 5,271 Total short-term debt 7,513 6,461 Commercial paper Short-term debt disclosures Short-term debt $ 899 $ 600 Weighted-average interest rates for short-term loans (as a percent) 0.70% 0.40% Short-term loans Short-term debt disclosures Short-term debt $ 375 $ 590 Weighted-average interest rates for short-term loans (as a percent) 9.50% 5.20%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Long- Term Debt, Components Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions Borrowings Long-term debt, gross $ 41,145 $ 38,820 Less: net unamortized discount 839 838 Less: unamortized debt issuance costs 82 74 Add: fair value adjustment 669 790 Long-term debt (including current maturities) 40,893 38,699 Less: current maturities 6,239 5,271 Total long-term debt (excluding current portion) 34,655 33,428 IBM International Group Capital, LLC Borrowings Long-term debt, gross $ 0 Ownership interest in subsidiary (as a percent) 100.00% U.S. dollars Borrowings Long-term debt, gross $ 30,563 30,319 Euros Borrowings Long-term debt, gross $ 7,122 4,892 Debt instrument, average interest rate percentage (as a percent) 1.60% Pound sterling Borrowings Long-term debt, gross $ 1,296 1,555 Debt instrument, average interest rate percentage (as a percent) 2.70% Japanese yen Borrowings Long-term debt, gross $ 1,576 1,180 Debt instrument, average interest rate percentage (as a percent) 0.90% Swiss francs Borrowings Long-term debt, gross $ 7 9 Debt instrument, average interest rate percentage (as a percent) 6.30% Canadian Borrowings Long-term debt, gross $ 373 360 Debt instrument, average interest rate percentage (as a percent) 2.20% Other Borrowings Long-term debt, gross $ 208 506 Debt instrument, average interest rate percentage (as a percent) 11.00% Maturing 2017 | U.S. dollars

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Borrowings Long-term debt, gross $ 5,104 9,351 Debt instrument, average interest rate percentage (as a percent) 3.98% Maturing 2018 Through 2019 | U.S. dollars Borrowings Long-term debt, gross $ 8,856 7,591 Debt instrument, average interest rate percentage (as a percent) 3.21% Maturing 2020 Through 2021 | U.S. dollars Borrowings Long-term debt, gross $ 4,941 3,717 Debt instrument, average interest rate percentage (as a percent) 1.84% Maturing 2022 | U.S. dollars Borrowings Long-term debt, gross $ 1,901 1,900 Debt instrument, average interest rate percentage (as a percent) 2.35% Maturing 2023 | U.S. dollars Borrowings Long-term debt, gross $ 1,500 1,500 Debt instrument, average interest rate percentage (as a percent) 3.38% Maturing 2024 | U.S. dollars Borrowings Long-term debt, gross $ 2,000 2,000 Debt instrument, average interest rate percentage (as a percent) 3.63% Maturing 2025 | U.S. dollars Borrowings Long-term debt, gross $ 600 600 Debt instrument, average interest rate percentage (as a percent) 7.00% Maturing 2026 | U.S. dollars Borrowings Long-term debt, gross $ 1,350 Debt instrument, average interest rate percentage (as a percent) 3.45% Maturing 2027 | U.S. dollars Borrowings Long-term debt, gross $ 469 469 Debt instrument, average interest rate percentage (as a percent) 6.22% Maturing 2028 | U.S. dollars Borrowings Long-term debt, gross $ 313 313 Debt instrument, average interest rate percentage (as a percent) 6.50% Maturing 2032 | U.S. dollars Borrowings Long-term debt, gross $ 600 600 Debt instrument, average interest rate percentage (as a percent) 5.88% Maturing 2038 | U.S. dollars

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Borrowings Long-term debt, gross $ 83 83 Debt instrument, average interest rate percentage (as a percent) 8.00% Maturing 2039 | U.S. dollars Borrowings Long-term debt, gross $ 745 745 Debt instrument, average interest rate percentage (as a percent) 5.60% Maturing 2042 | U.S. dollars Borrowings Long-term debt, gross $ 1,107 1,107 Debt instrument, average interest rate percentage (as a percent) 4.00% Maturing 2045 | U.S. dollars Borrowings Long-term debt, gross $ 27 27 Debt instrument, average interest rate percentage (as a percent) 7.00% Maturing 2046 | U.S. dollars Borrowings Long-term debt, gross $ 650 Debt instrument, average interest rate percentage (as a percent) 4.70% Maturing 2096 | U.S. dollars Borrowings Long-term debt, gross $ 316 $ 316 Debt instrument, average interest rate percentage (as a percent) 7.13%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Long- 12 Months Ended Term Debt, Covenants Dec. 31, 2016 (Details) USD ($) $ in Millions BORROWINGS Limit based on net tangible assets 10.00% Minimum net interest expense ratio 2.20 Default provision on credit facility $ 500

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Post-Swap Borrowing (Details) - USD Dec. 31, 2016Dec. 31, 2015 ($) $ in Millions Borrowings Fixed-rate debt $ 27,414 $ 25,499 Floating-rate debt 13,480 13,199 Long-term debt (including current maturities) $ 40,893 $ 38,699 Fixed-rate debt, Average Rate (as a percent) 3.18% 3.41% Floating-rate debt, Average Rate (as a percent) 1.59% 0.96% Designated as hedging instruments | Interest rate swaps Borrowings Notional amount $ 7,338 $ 7,338

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Pre-Swap Maturities (Details) - USD Dec. 31, 2016Dec. 31, 2015 ($) $ in Millions Pre-swap annual contractual maturities of long-term debt outstanding 2017 $ 6,239 2018 4,918 2019 5,196 2020 4,593 2021 3,914 2022 and beyond 16,284 Total $ 41,145 $ 38,820

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Interest 12 Months Ended on Debt (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Interest on Debt Cost of financing $ 576 $ 540 $ 542 Interest expense 706 481 484 Net investment derivative activity (77) (13) 0 Interest capitalized 2 0 4 Total interest paid and accrued $ 1,208 $ 1,008 $ 1,030

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document BORROWINGS - Lines of 12 Months Ended Credit (Details) - Credit Agreement - USD ($) Dec. 31, 2016 Dec. 31, 2015Dec. 31, 2014 $ in Millions Lines of Credit Revolving line of credit, term 5 years Revolving line of credit, amount $ 10,250.0 Revolving line of credit, term extension 1 year Revolving line of credit, expiration date Nov. 10, 2021 Revolving line of credit, expenses $ 5.5 $ 5.3 $ 5.4 Revolving line of credit, additional amount 1,750.0 Revolving line of credit, borrowings outstanding $ 0.0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document OTHER LIABILITIES - Components (Details) - USD Dec. 31, 2016Dec. 31, 2015 ($) $ in Millions Noncurrent liabilities Income tax reserves $ 2,621 $ 3,150 Excess 401(k) Plus Plan 1,494 1,445 Disability benefits 538 590 Derivative liabilities 61 22 Special restructuring actions 358 362 Workforce reductions 424 407 Deferred taxes 424 253 Other taxes payable 90 89 Environmental accruals 262 270 Warranty accruals 68 83 Asset retirement obligations 142 134 Acquisition-related 111 200 Divestiture-related 270 575 Other 613 519 Total $ 7,477 $ 8,099

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document OTHER LIABILITIES - Environmental Liabilities Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions OTHER LIABILITIES Total amounts accrued for non-ARO environmental liabilities $ 272 $ 283 Total amounts accrued for ARO liabilities $ 173 $ 166

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EQUITY ACTIVITY - Stock 12 Months Ended Repurchases and Other Transactions (Details) - USD Dec. 31, ($) Dec. 31, 2016 Dec. 31, 2015 2014 $ / shares in Units, $ in Millions EQUITY ACTIVITY Common stock, Shares authorized (in shares) 4,687,500,0004,687,500,000 Common stock, par value (in dollars per share) $ 0.20 $ 0.20 Common stock, outstanding (in shares) 945,867,403 Preferred stock, shares authorized (in shares) 150,000,000 Preferred stock, par value (in dollars per share) $ 0.01 Preferred stock, shares outstanding (in shares) 0 Common stock repurchased (in shares) 23,283,400 30,338,647 71,504,867 Common stock repurchased, value $ 3,455 $ 4,701 $ 13,395 Common stock repurchase authorization available, value $ 5,109 Common stock issued under employee plans (in shares) 3,893,366 6,013,875 7,687,026 Issue of treasury shares as a result of RSU releases and stock option 383,077 1,155,558 1,264,232 exercises (in shares) Common stock remitted by employees in order to satisfy tax 854,365 1,625,820 1,313,569 withholding requirements (in shares) Value of common shares remitted by employees in order to satisfy tax $ 126 $ 248 $ 236 withholding requirements

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EQUITY ACTIVITY - 12 Months Ended Reclassifications and Taxes Dec. 31, Dec. 31, Dec. 31, (Details) - USD ($) 2016 2015 2014 $ in Millions Reclassifications and Taxes Related to Items of Other Comprehensive Income Cost of sales $ 41,625 $ 41,057 $ 46,386 SG&A expense 21,069 20,430 23,180 Other (income) and expense 145 (724) (1,938) Interest expense 630 468 484 Provision for income taxes (Note N) 449 2,581 4,234 Net (income) loss (11,872) (13,190) (12,022) Other comprehensive income/(loss), Before Tax Amount 472 (1,523) (8,156) Other comprehensive income/(loss), Tax (Expense)/Benefit (263) (208) 1,883 Other comprehensive income/(loss) (Note L) 209 (1,731) (6,274) Accumulated Other Comprehensive Income/(Loss) Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Net of Tax Amount (1,581) (3,252) (7,822) Reclassification/amortization, Net of Tax Amount 1,791 1,520 1,548 Other comprehensive income/(loss), Before Tax Amount 472 (1,523) (8,156) Other comprehensive income/(loss), Tax (Expense)/Benefit (263) (208) 1,883 Other comprehensive income/(loss) (Note L) 209 (1,731) (6,274) Foreign Currency Translation Adjustments Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Net of Tax Amount (140) (1,721) (2,074) Reclassification/amortization, Net of Tax Amount 0 0 0 Other comprehensive income/(loss), Before Tax Amount (20) (1,379) (1,636) Other comprehensive income/(loss), Tax (Expense)/Benefit (120) (342) (438) Other comprehensive income/(loss) (Note L) (140) (1,721) (2,074) Net Unrealized Gains/(Losses) on Available-For-Sale Securities Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Before Tax Amount (38) (54) (29) Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit 14 21 11 Unrealized gains/(losses) arising during the period, Net of Tax Amount (23) (33) (18) Reclassification/amortization, Net of Tax Amount 21 53 3 Other comprehensive income/(loss), Before Tax Amount (3) 32 (24) Other comprehensive income/(loss), Tax (Expense)/Benefit 1 (12) 9 Other comprehensive income/(loss) (Note L) (2) 20 (15) Net Unrealized Gains/(Losses) on Available-For-Sale Securities | Reclassifications

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reclassifications and Taxes Related to Items of Other Comprehensive Income Other (income) and expense 34 86 5 Provision for income taxes (Note N) (13) (33) (2) Net (income) loss 21 53 3 Net Unrealized Gains/(Losses) on Cash Flow Hedges Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Before Tax Amount 243 618 958 Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit (80) (218) (341) Unrealized gains/(losses) arising during the period, Net of Tax Amount 163 399 618 Reclassification/amortization, Net of Tax Amount 56 (691) (60) Other comprehensive income/(loss), Before Tax Amount 345 (454) 861 Other comprehensive income/(loss), Tax (Expense)/Benefit (126) 162 (304) Other comprehensive income/(loss) (Note L) 219 (292) 557 Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications Reclassifications and Taxes Related to Items of Other Comprehensive Income Cost of sales 13 (192) 15 SG&A expense (4) (149) (15) Other (income) and expense 68 (731) (98) Interest expense 24 0 1 Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Cost of sales Reclassifications and Taxes Related to Items of Other Comprehensive Income Provision for income taxes (Note N) (8) 57 (7) Net (income) loss 6 (135) 9 Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | SG&A expense Reclassifications and Taxes Related to Items of Other Comprehensive Income Provision for income taxes (Note N) (2) 43 6 Net (income) loss (7) (105) (9) Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Other (income) and expense Reclassifications and Taxes Related to Items of Other Comprehensive Income Provision for income taxes (Note N) (26) 281 38 Net (income) loss 42 (451) (60) Net Unrealized Gains/(Losses) on Cash Flow Hedges | Reclassifications | Interest expense Reclassifications and Taxes Related to Items of Other Comprehensive Income Provision for income taxes (Note N) (9) 0 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Net (income) loss 15 0 0 Net Change Retirement-Related Benefit Plans Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Net of Tax Amount (1,581) (1,897) (6,348) Reclassification/amortization, Net of Tax Amount 1,714 2,158 1,605 Other comprehensive income/(loss), Before Tax Amount 150 279 (7,357) Other comprehensive income/(loss), Tax (Expense)/Benefit (19) (17) 2,615 Other comprehensive income/(loss) (Note L) 132 262 (4,742) Retirement-Related Benefit Plans, Prior Service Costs/(Credits) Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Before Tax Amount 6 1 Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit (2) 0 Unrealized gains/(losses) arising during the period, Net of Tax Amount 4 1 Reclassification/amortization, Before Tax Amount (107) (100) (114) Reclassification/amortization, Tax (Expense)/Benefit 34 36 41 Reclassification/amortization, Net of Tax Amount (74) (65) (73) Retirement-Related Benefit Plans, Net Gains/(Losses) Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Before Tax Amount (2,490) (2,963) (9,799) Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit 924 1,039 3,433 Unrealized gains/(losses) arising during the period, Net of Tax Amount (1,566) (1,925) (6,366) Reclassification/amortization, Before Tax Amount 2,764 3,304 2,531 Reclassification/amortization, Tax (Expense)/Benefit (976) (1,080) (852) Reclassification/amortization, Net of Tax Amount 1,788 2,223 1,678 Retirement-Related Benefit Plans, Curtailments and Settlements Reclassifications and Taxes Related to Items of Other Comprehensive Income Unrealized gains/(losses) arising during the period, Before Tax Amount (16) 33 24 Unrealized gains/(losses) arising during the period, Tax (Expense)/Benefit 1 (9) (7) Unrealized gains/(losses) arising during the period, Net of Tax Amount $ (15) $ 24 $ 17

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EQUITY ACTIVITY - 12 Months Ended AOCI Rollforward (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period $ 14,424 $ 12,014 $ 22,929 Other comprehensive income/(loss) (Note L) 209 (1,731) (6,274) Balance at the End of the Period 18,392 14,424 12,014 Accumulated Other Comprehensive Income/(Loss) Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period (29,607) (27,875) (21,602) Other comprehensive income before reclassifications (1,581) (3,252) (7,822) Amount reclassified from accumulated other comprehensive income 1,791 1,520 1,548 Other comprehensive income/(loss) (Note L) 209 (1,731) (6,274) Balance at the End of the Period (29,398) (29,607) (27,875) Net Unrealized Gains/(Losses) on Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period 100 392 (165) Other comprehensive income before reclassifications 163 399 618 Amount reclassified from accumulated other comprehensive income 56 (691) (60) Other comprehensive income/(loss) (Note L) 219 (292) 557 Balance at the End of the Period 319 100 392 Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period (3,463) (1,742) 332 Other comprehensive income before reclassifications (140) (1,721) (2,074) Amount reclassified from accumulated other comprehensive income 0 0 0 Other comprehensive income/(loss) (Note L) (140) (1,721) (2,074) Balance at the End of the Period (3,603) (3,463) (1,742) Net Change Retirement-Related Benefit Plans Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period (26,248) (26,509) (21,767) Other comprehensive income before reclassifications (1,581) (1,897) (6,348) Amount reclassified from accumulated other comprehensive income 1,714 2,158 1,605 Other comprehensive income/(loss) (Note L) 132 262 (4,742) Balance at the End of the Period (26,116) (26,248) (26,509) Net Unrealized Gains/(Losses) on Available-For-Sale Securities Accumulated Other Comprehensive Income (Loss) (net of tax) Balance at the Beginning of the Period 5 (15) (1) Other comprehensive income before reclassifications (23) (33) (18) Amount reclassified from accumulated other comprehensive income 21 53 3 Other comprehensive income/(loss) (Note L) (2) 20 (15) Balance at the End of the Period $ 2 $ 5 $ (15)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 1 Months Ended Months Ended CONTINGENCIES AND Dec. COMMITMENTS - Feb. Jul. 31, Contingencies (Details) 13, Jul. 18, May 31, Mar. 31, May 31, 2016 $ in Millions 2014 25, 2012 2015 2015 2010 USD USD 2013 USDdefendantdefendantdefendant ($) ($) ($) country claim IBM v. State Of Indiana Loss Contingencies Duration of trial 42 days Amount of settlement to be (paid)/received | $ $ 50 $ 52 IBM United Kingdom Limited vs. IBM UK Pension Trusts Loss Contingencies Number of representative beneficiaries of the UK Trust 2 membership | defendant Loss contingency, estimate of possible loss | $ $ 290 Individual Participants Of Defined Benefit Plans vs. IBM United Kingdom Loss Contingencies Claims pending | claim 290 Litigation Case In United States District Court regarding divesting Microelectronics business Loss Contingencies Number of officers or executives named as defendants 3 | defendant Litigation Case In United States District Court regarding divesting Microelectronics business, alleging violations of the Employee Retirement Income Security Act Loss Contingencies Number of officers or executives named as defendants 3 | defendant Civil enforcement action with the SEC Loss Contingencies Period for which reports are to be submitted to SEC 2 and court on certain matters, including those relating to years compliance with the FCPA Brazil Tax Matters Loss Contingencies Damages sought, value | $ $ 980

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Minimum Loss Contingencies Clients' presence in number of countries | country 175

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document CONTINGENCIES AND COMMITMENTS - Dec. 31, Dec. 31, Extensions of Credit 2016 2015 (Details) - USD ($) $ in Millions Extended lines of credit Commitments, guarantees: Unused amounts in lines of credit to third-party entities and commitments for future $ 6,542 $ 5,477 financing to clients Financing for client purchase agreements Commitments, guarantees: Unused amounts in lines of credit to third-party entities and commitments for future $ 2,463 $ 2,097 financing to clients

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document CONTINGENCIES AND COMMITMENTS - Financial Guarantees Dec. 31, 2016Dec. 31, 2015 (Details) - USD ($) $ in Millions Financial guarantees Guarantor obligations Guarantor obligations, maximum exposure $ 34 $ 34

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Income before 12 Months Ended Income Taxes (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Income from continuing operations before income taxes U.S. operations $ 3,650 $ 5,915 $ 7,509 Non-U.S. operations 8,680 10,030 12,477 Income from continuing operations before income taxes $ 12,330 $ 15,945 $ 19,986

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Provision by 12 Months Ended Geographic Operations (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Income tax provision by geographic operations Total continuing operations provision for income taxes $ 449 $ 2,581 $ 4,234 U.S. Income tax provision by geographic operations Total continuing operations provision for income taxes 38 849 2,093 Non-U.S. Income tax provision by geographic operations Total continuing operations provision for income taxes $ 411 $ 1,732 $ 2,141

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Provision by 12 Months Ended Taxing Jurisdiction (Details) Dec. 31, Dec. 31, Dec. 31, - USD ($) 2016 2015 2014 $ in Millions U.S. federal Current $ 186 $ (321) $ 1,134 Deferred (746) 553 105 Total (560) 232 1,239 U.S. state and local Current 244 128 541 Deferred (44) 116 (105) Total 200 244 436 Non-U.S. Current 988 2,101 2,825 Deferred (179) 4 (266) Total 809 2,105 2,559 Total continuing operations provision for income taxes 449 2,581 4,234 Discontinued operations provision for income taxes (2) (117) (1,617) Provision for social security, real estate, personal property and other 3,417 3,497 4,068 taxes Total taxes included in net income $ 3,864 $ 5,961 $ 6,685

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended TAXES - Tax Rate Dec. 31, Dec. 31, Dec. 31, Reconciliation (Details) 2016 2015 2014 Reconciliation of the statutory U.S. federal tax rate to the company's effective tax rate from continuing operations Statutory rate 35.00% 35.00% 35.00% Foreign tax differential (21.00%) (17.00%) (14.00%) Japan resolution (10.00%) 0.00% 0.00% State and local 1.00% 1.00% 1.00% Domestic incentives (1.00%) (2.00%) (2.00%) Other 0.00% (1.00%) 1.00% Effective rate 4.00% 16.00% 21.00%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 3 Months TAXES - Tax Rate Months Ended Reconciliation Narrative Ended (Details) - USD ($) Dec. Dec. Dec. Mar. 31, Dec. 31, $ in Millions 31, 31, 31, 2016 2016 2015 2014 2013 Effective income tax rate reconciliation, additional disclosures Unrecognized tax benefit (in dollars) $ 3,740 $ 4,574 $ 5,104 $ 4,458 Annual increase (decrease) in effective income tax rate (12.50%) Rate decrease from resolution of long-standing tax matter in 9.50% Japan Year-to-year decrease related to intercompany payments by 5.70% foreign subsidiaries and intercompany licensing of IP Reduced benefit year-to-year in relation to audit settlements 2.30% Decreased benefit year-to-year in utilization of foreign tax credits 0.60% Japan Tax Authorities Effective income tax rate reconciliation, additional disclosures Unrecognized tax benefit (in dollars) $ 1,000 Refund of taxes previously paid (in dollars) $ 1,000 Interest received with tax refund (in dollars) $ 200

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Deferred Taxes (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Deferred Tax Assets Retirement benefits $ 4,671 $ 4,621 Share-based and other compensation 1,132 963 Domestic tax loss/credit carryforwards 1,676 1,055 Deferred income 741 762 Foreign tax loss/credit carryforwards 816 767 Bad debt, inventory and warranty reserves 473 528 Depreciation 270 329 Accruals 624 904 Other 1,503 1,000 Gross deferred tax assets 11,906 10,929 Less: valuation allowance 916 740 $ 646 Net deferred tax assets 10,990 10,189 Deferred Tax Liabilities Depreciation 856 919 Retirement benefits 406 252 Goodwill and intangible assets 1,800 1,407 Leases 651 916 Software development costs 672 554 Deferred transition costs 351 395 Other 1,455 1,177 Gross deferred tax liabilities $ 6,191 $ 5,620

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Carryforwards 12 Months Ended (Details) Dec. 31, 2016 $ in Millions USD ($) Loss and tax credit carryforwards Tax effect of foreign and domestic loss carryforwards $ 855 Domestic and foreign tax credit carryforwards $ 1,982 Minimum Loss and tax credit carryforwards Period for which substantially all loss and tax credit carryforwards are available 2 years Period for which the majority of loss and tax credit carryforwards are available 10 years

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Unrecognized Tax 12 Months Ended Benefits Reconciliation Dec. 31, Dec. 31, Dec. 31, (Details) - USD ($) 2016 2015 2014 $ in Millions TAXES Increase (decrease) in amount of unrecognized tax benefits $ (834) Reconciliation of the beginning and ending amount of unrecognized tax benefits Balance at January 1 4,574 $ 5,104 $ 4,458 Additions based on tax positions related to the current year 560 464 697 Additions for tax positions of prior years 334 569 586 Reductions for tax positions of prior years (including impacts due to a (1,443) (1,348) (579) lapse in statute) Settlements (285) (215) (58) Balance at December 31 $ 3,740 $ 4,574 $ 5,104

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Unrecognized Tax 12 Months Ended Benefits Additional Dec. Dec. Dec. Dec. Disclosures (Details) - USD 31, 31, 31, 31, ($) 2016 2015 2014 2013 $ in Millions TAXES Unrecognized tax benefit (in dollars) $ 3,740 $ 4,574 $ 5,104 $ 4,458 Offsetting tax benefits associated with the correlative effects of potential transfer 775 pricing adjustments, state income taxes and timing adjustments benefit Net unrecognized tax benefit amount that, if recognized, would favorably affect 2,965 3,724 4,229 the company's effective tax rate Recognized interest expense and penalties 62 141 $ 216 Interest and penalties accrued 625 $ 613 Reasonably possible reduction in unrecognized tax benefits within the next 12 $ 966 months

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Income Tax 1 Months 3 Months 12 Months Ended Assessments (Details) - Ended Ended Indian Tax Authorities - Jul. 31, Dec. 31, USD ($) Dec. 31, 2016 2016 2013 $ in Millions Income tax examination Tax assessment notice amount $ 866 $ 789 Income Tax Examination, Year under 2009 Examination Income Tax Examination, Likelihood of The company believes it will prevail Unfavorable Settlement on these matters. New assessment period 18 months Prepaid taxes $ 568

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document TAXES - Undistributed Dec. 31, 2016 Foreign Earnings (Details) USD ($) $ in Billions TAXES Undistributed earnings of non-U.S. subsidiaries $ 71.4

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RESEARCH, 12 Months Ended DEVELOPMENT AND ENGINEERING (Details) - Dec. 31, Dec. 31, Dec. 31, USD ($) 2016 2015 2014 $ in Millions RESEARCH, DEVELOPMENT AND ENGINEERING RD&E expense $ 5,751 $ 5,247 $ 5,437 Scientific research, application of scientific advances, services and 5,421 5,178 5,595 application Software-related expenses 3,470 3,064 3,064 Product-related engineering expenses $ 332 $ 267 $ 211

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RESEARCH, 12 Months Ended DEVELOPMENT AND ENGINEERING - Discontinued Operations Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions Discontinued Operations, Disposed of by Means Other than Sale Discontinued Operations RD&E expense included in discontinued operations $ 1 $ 197 $ 368

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EARNINGS PER SHARE 12 Months Ended OF COMMON STOCK - Computation (Details) - USD Dec. 31, Dec. 31, ($) Dec. 31, 2014 2016 2015 $ / shares in Units, $ in Millions Weighted-average number of shares on which earnings per share calculations are based Basic (in shares) 955,422,530978,744,5231,004,272,584 Add - incremental shares under stock-based compensation plans (in 2,416,940 3,037,001 4,332,155 shares) Add - incremental shares associated with contingently issuable shares 874,626 918,744 1,395,741 (in shares) Assuming dilution (in shares) 958,714,097982,700,2671,010,000,480 Net income on which basic earnings per share calculations are based Income from continuing operations $ 11,881 $ 13,364 $ 15,751 Loss from discontinued operations, net of tax (9) (174) (3,729) Net income on which basic earnings per share is calculated 11,872 13,190 12,022 Net income on which diluted earnings per share calculations are based Income from continuing operations 11,881 13,364 15,751 Net income applicable to contingently issuable shares 0 (1) (3) Income from continuing operations on which diluted earnings per share 11,881 13,363 15,749 is calculated Loss from discontinued operations, net of tax, on which basic and (9) (174) (3,729) diluted earnings per share is calculated Net income on which diluted earnings per share is calculated $ 11,872 $ 13,189 $ 12,020 Assuming dilution Continuing operations (in dollars per share) $ 12.39 $ 13.60 $ 15.59 Discontinued operations (in dollars per share) (0.01) (0.18) (3.69) Total (in dollars per share) 12.38 13.42 11.90 Basic Continuing operations (in dollars per share) 12.44 13.66 15.68 Discontinued operations (in dollars per share) (0.01) (0.18) (3.71) Total (in dollars per share) $ 12.43 $ 13.48 $ 11.97

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document EARNINGS PER SHARE 12 Months Ended OF COMMON STOCK - Dec. 31, Dec. 31, Dec. 31, Antidilutive Stock Options 2016 2015 2014 (Details) - shares Stock Options Antidilutive stock options Outstanding stock options not included in the computation of diluted earnings 405,552 41,380 17,420 per share (in shares)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RENTAL EXPENSE AND 12 Months Ended LEASE COMMITMENTS - Expense (Details) - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ in Millions Income Statement Disclosures Rental expense $ 1,508 $ 1,474 $ 1,592 Discontinued Operations, Disposed of by Means Other than Sale Income Statement Disclosures Rental expense $ 29 $ 95

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RENTAL EXPENSE AND LEASE COMMITMENTS - Dec. 31, 2016 Commitments (Details) USD ($) $ in Millions Operating lease commitments Gross minimum rental commitments (including vacant space below) for 2017 $ 1,414 Gross minimum rental commitments (including vacant space below) for 2018 1,328 Gross minimum rental commitments (including vacant space below) for 2019 1,218 Gross minimum rental commitments (including vacant space below) for 2020 1,016 Gross minimum rental commitments (including vacant space below) for 2021 796 Gross minimum rental commitments (including vacant space below) beyond 2021 1,111 Vacant space for 2017 42 Vacant space for 2018 29 Vacant space for 2019 20 Vacant space for 2020 15 Vacant space for 2021 11 Vacant space beyond 2021 9 Sublease income commitments for 2017 12 Sublease income commitments for 2018 8 Sublease income commitments for 2019 6 Sublease income commitments for 2020 3 Capital lease commitments Capital lease commitments for 2017 1 Capital lease commitments for 2018 2 Capital lease commitments for 2019 2 Capital lease commitments for 2020 $ 2

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - Cost Dec. 31, Dec. 31, (Details) - USD ($) Dec. 31, 2016 2015 2014 $ in Millions Stock-based compensation cost, allocation of recognized costs Pre-tax stock-based compensation cost $ 544 $ 468 $ 512 Income tax benefits (179) (156) (174) Net stock-based compensation cost 364 312 338 Stock-based compensation cost, unrecognized, related to non-vested awards $ 934 871 Stock-based compensation cost, unrecognized, related to non-vested awards, 2 years 7 weighted average period of recognition months 6 days Cost of sales Stock-based compensation cost, allocation of recognized costs Pre-tax stock-based compensation cost $ 88 100 121 SG&A expense Stock-based compensation cost, allocation of recognized costs Pre-tax stock-based compensation cost 401 322 350 Research, development and engineering Stock-based compensation cost, allocation of recognized costs Pre-tax stock-based compensation cost $ 55 51 54 Other (income) and expense Stock-based compensation cost, allocation of recognized costs Pre-tax stock-based compensation cost $ (6) $ (13)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months COMPENSATION - Ended Incentive Awards (Details) - Long-term performance Dec. 31, 2016 plans shares shares in Millions Stock-Based Compensation Shares authorized under existing stock based compensation plans (in shares) 273.0 Additional shares considered authorized under previous stock based compensation plans (in 66.2 shares) Unused shares available to be granted (in shares) 106.7

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - RSU and PSU Activity (Details) - Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ / shares Restricted Stock Units Weighted Average Grant Price Beginning balance (in dollars per share) $ 159 $ 171 $ 166 Granted (in dollars per share) 140 143 172 Released (in dollars per share) 174 164 157 Canceled/forfeited (in dollars per share) 158 167 167 Ending balance (in dollars per share) $ 147 $ 159 $ 171 Number of Units Beginning balance (in shares) 7,527,341 7,734,277 8,635,317 Granted (in shares) 3,985,870 4,230,186 2,525,947 Released (in shares) (1,860,660) (3,567,495) (2,401,761) Canceled/forfeited (in shares) (753,459) (869,627) (1,025,226) Ending balance (in shares) 8,899,092 7,527,341 7,734,277 Performance Share Units Weighted Average Grant Price Beginning balance (in dollars per share) $ 173 $ 185 $ 178 Granted (in dollars per share) 140 153 180 Performance adjustments (in dollars per share) 194 185 157 Released (in dollars per share) 194 185 157 Canceled/forfeited (in dollars per share) 174 184 187 Ending balance (in dollars per share) $ 155 $ 173 $ 185 Number of Units Beginning balance (in shares) 2,928,932 3,140,707 2,824,294 Granted (in shares) 990,336 1,137,242 1,430,098 Performance adjustments (in shares) (387,457) (168,055) 29,960 Released (in shares) (419,759) (840,552) (1,027,181) Canceled/forfeited (in shares) (237,294) (340,410) (116,464) Ending balance (in shares) 2,874,758 2,928,932 3,140,707

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - RSUs and PSUs, Other Disclosures Dec. 31, Dec. 31, Dec. 31, (Details) - USD ($) 2016 2015 2014 $ in Millions Stock-Based Compensation Stock-based compensation cost, unrecognized, related to non-vested $ 934 $ 871 awards RSUs and PSUs Stock-Based Compensation Tax benefits realized in connection with vesting and release of awards $ 118 $ 228 $ 222 Restricted Stock Units Stock-Based Compensation Remaining weighted-average contractual term 3 years 3 years 3 years Fair value of stock units granted $ 557 $ 606 $ 434 Fair value of stock units vested and released 323 583 378 Stock-based compensation cost, unrecognized, related to non-vested 814 800 754 awards Cash received from employees as a result of vesting and release of $ 0 0 0 awards Restricted Stock Units | Minimum Stock-Based Compensation Vesting period 1 year Restricted Stock Units | Maximum Stock-Based Compensation Vesting period 5 years Performance Share Units Stock-Based Compensation Vesting period 3 years Fair value of stock units granted $ 138 174 257 Fair value of stock units vested and released $ 81 $ 156 $ 161

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - Stock Option Activity (Details) - Stock Options - USD ($) Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 $ / shares in Units, $ in Millions Weighted-Average Exercise Price Outstanding, beginning balance (in dollars per share) $ 94 $ 97 $ 97 Option granted (in dollars per share) 140 Options exercised (in dollars per share) 91 98 97 Options canceled/expired (in dollars per share) 86 100 95 Outstanding, ending balance (in dollars per share) 137 94 97 Exercisable at end of period (in dollars per share) $ 103 $ 94 $ 97 Number of Shares under Option Outstanding, beginning balance (in shares) 479,774 1,750,949 5,622,951 Options granted (in shares) 1,500,000 Options exercised (in shares) (361,088) (1,214,109) (3,740,252) Options canceled/expired (in shares) (4,763) (57,066) (131,750) Outstanding, ending balance (in shares) 1,613,923 479,774 1,750,949 Exercisable at end of period (in shares) 113,923 479,774 1,750,949 Granted in 2016 Stock options Vesting period 3 years Contractual term 10 years Total compensation cost to be recognized for stock options $ 12

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended STOCK-BASED Dec. 31, 2016 COMPENSATION - USD ($) Exercise Price Ranges $ / shares (Details) shares Stock option activity by exercise price ranges Options Outstanding, Weighted Average Exercise Price (in dollars per share) $ 137 Options Outstanding, Number of Shares Under Option (in shares) | shares 1,613,923 Options Outstanding, Aggregate Intrinsic Value | $ $ 46,435,044 Options Outstanding, Weighted Average Remaining Contractual Life 8 years 6 months Exercise Price Range $128 and under Stock option activity by exercise price ranges Exercise price, upper range limit (in dollars per share) $ 128 Options Outstanding, Weighted Average Exercise Price (in dollars per share) $ 103 Options Outstanding, Number of Shares Under Option (in shares) | shares 113,923 Options Outstanding, Aggregate Intrinsic Value | $ $ 7,198,794 Options Outstanding, Weighted Average Remaining Contractual Life 3 months 18 days Options Exercisable, Weighted Average Exercise Price (in dollars per share) $ 103 Options Exercisable, Number of Shares Under Option (in shares) | shares 113,923 Options Exercisable, Aggregate Intrinsic Value | $ $ 7,198,794 Options Exercisable, Weighted Average Remaining Contractual Life 3 months 18 days Exercise Price Range $129-$154 Stock option activity by exercise price ranges Exercise price, lower range limit (in dollars per share) $ 129 Exercise price, upper range limit (in dollars per share) 154 Options Outstanding, Weighted Average Exercise Price (in dollars per share) $ 140 Options Outstanding, Number of Shares Under Option (in shares) | shares 1,500,000 Options Outstanding, Aggregate Intrinsic Value | $ $ 39,236,250 Options Outstanding, Weighted Average Remaining Contractual Life 9 years 1 month 6 days

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - Stock Option Exercises, Acquisitions (Details) - USD Dec. 31, Dec. 31, 2016 Dec. 31, 2015 ($) 2014 $ / shares in Units, $ in Millions Share-based Compensation Arrangement by Share-based Payment Award Treasury stock, shares (in shares) 1,279,249,4121,255,494,724 Additional stock options and RSU outstanding in connection with 600,000 acquisitions (in shares) Additional options outstanding, weighted-average exercise price (in $ 33 dollars per share) Stock Options Share-based Compensation Arrangement by Share-based Payment Award Total intrinsic value of options exercised $ 20 $ 74 $ 323 Cash received from employees as a result of employee stock option 33 119 364 exercises Tax benefit from exercise of stock based awards $ 7 $ 26 $ 107

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document STOCK-BASED 12 Months Ended COMPENSATION - ESPP Dec. 31, Dec. 31, Dec. 31, Jul. 31, (Details) - Employee Stock 2016 2015 2014 2014 Purchase Plan - USD ($) Stock-Based Compensation Discount on purchase of common stock (as a percent) 5.00% Maximum percentage of payroll deductions on eligible 10.00% compensation Maximum stock purchases by employees, value $ 25,000 Maximum stock purchases by employees (in shares) 1,000 Shares purchased by employees under the ESPP (in shares) 1,200,000 1,300,000 1,300,000 Common stock reserved and approved for issuance under the 25,000,000 plan (in shares) Shares available for purchase (in shares) 21,800,000 23,100,000 24,400,000

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months RETIREMENT-RELATED Ended BENEFITS - Defined Benefit Jul. 01, Plans (Details) Dec. 31, 2016 1999 Personal Pension Plan (PPP) Defined Benefit Plans Number of years used in final pay formula that determines benefits 5 years U.S. Nonpension Postretirement Benefit Plans Defined Benefit Plans Minimum years of service remaining from retirement eligibility to participate in Future 5 years Health Account (FHA) benefits Service period for retirement within which employees are covered under the entity's 5 years prior health benefits arrangements

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months RETIREMENT-RELATED Ended BENEFITS - Defined Dec. 31, Contribution Plans (Details) 2016 $ in Millions USD ($) IBM 401(k) Plus Plan Defined Contribution Plans Maximum percentage, dollar-for-dollar match by entity to employee contribution of eligible 6.00% compensation for employees hired prior to January 1, 2005 Maximum percentage, dollar-for-dollar match by entity to employee contribution of eligible 5.00% compensation for employees hired after January 1, 2005 Employer's automatic contribution as a percentage of eligible compensation, lowest level defined 1.00% Employer's automatic contribution as a percentage of eligible compensation, second level defined 2.00% Employer's automatic contribution as a percentage of eligible compensation, highest level defined 4.00% Service period after which employees receive automatic and matching contributions 1 year Minimum amount that must be invested in company stock (in dollars) $ 0 IBM Excess 401(k) Plus Plan Defined Contribution Plans Service period after which employees receive automatic and matching contributions 1 year

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS - All Retirement Plans Cost (Details) - USD Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 ($) $ in Millions Retirement-Related Benefits Total retirement-related benefits net periodic cost $ 2,003 $ 2,572 $ 1,974 U.S. Retirement-Related Benefits Total retirement-related benefits net periodic cost 527 654 115 Non-U.S. Retirement-Related Benefits Total retirement-related benefits net periodic cost 1,475 1,918 1,859 IBM 401(k) Plus Plan Retirement-Related Benefits Total defined contribution plans cost 626 676 713 Non-US Pension Plans Retirement-Related Benefits Total defined contribution plans cost 420 442 526 IBM 401(k) Plus Plan and Non-U.S. Defined Contribution Plans Retirement-Related Benefits Total defined contribution plans cost 1,046 1,117 1,239 IBM Excess 401(k) Plus Plan Retirement-Related Benefits Total defined contribution plans cost 24 21 14 U.S. Pension Plans Retirement-Related Benefits Total defined contribution plans cost 650 697 727 Pension Plans Retirement-Related Benefits Total defined contribution plans cost 1,070 1,138 1,253 Personal Pension Plan (PPP) Retirement-Related Benefits Total defined benefit plans (income)/cost (334) (284) (833) Non-US Pension Plans Retirement-Related Benefits Total defined benefit plans (income)/cost 1,039 1,421 1,267 PPP and Non-U.S. Defined Benefit Pension Plans Retirement-Related Benefits Total defined benefit plans (income)/cost 705 1,137 434 Retention Plan Retirement-Related Benefits Total defined benefit plans (income)/cost 17 23 15 U.S. Pension Plans

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Retirement-Related Benefits Total defined benefit plans (income)/cost (317) (261) (818) Pension Plans Retirement-Related Benefits Total defined benefit plans (income)/cost 722 1,160 449 U.S. Nonpension Postretirement Benefit Plans Retirement-Related Benefits Total defined benefit plans (income)/cost 195 218 206 Non-U.S. Nonpension Postretirement Benefit Plans Retirement-Related Benefits Total defined benefit plans (income)/cost 16 55 66 Nonpension Postretirement Plans Retirement-Related Benefits Total defined benefit plans (income)/cost $ 211 $ 273 $ 272

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED BENEFITS - PBO, APBO, FV of Plan Assets, Funded Dec. 31, 2016Dec. 31, 2015 Status) (Details) - USD ($) $ in Millions Funded status of plan Overfunded plan benefit obligation $ 68,017 $ 68,053 Overfunded plan fair value of plan assets 71,051 69,786 Overfunded plan funded status 3,034 1,734 Underfunded plan benefit obligation 34,344 35,054 Underfunded plan fair value of plan assets 16,470 17,807 Underfunded plan funded status (17,874) (17,247) U.S. Defined Benefit Plans Funded status of plan Underfunded plan benefit obligation 6,286 6,486 Underfunded plan fair value of plan assets 26 71 Underfunded plan funded status (6,260) (6,415) Qualified PPP Funded status of plan Overfunded plan benefit obligation 50,403 51,287 Overfunded plan fair value of plan assets 51,405 51,716 Overfunded plan funded status $ 1,002 429 Percentage of plan funded 102.00% Excess PPP Funded status of plan Underfunded plan benefit obligation $ 1,509 1,522 Underfunded plan funded status (1,509) (1,522) Retention Plan Funded status of plan Underfunded plan benefit obligation 307 312 Underfunded plan funded status (307) (312) U.S. Nonpension Postretirement Benefit Plans Funded status of plan Underfunded plan benefit obligation 4,470 4,652 Underfunded plan fair value of plan assets 26 71 Underfunded plan funded status (4,444) (4,582) Non-U.S. Defined Benefit Plans Funded status of plan Overfunded plan benefit obligation 17,614 16,766 Overfunded plan fair value of plan assets 19,647 18,070 Overfunded plan funded status 2,032 1,304 Underfunded plan benefit obligation 28,059 28,568 Underfunded plan fair value of plan assets 16,445 17,737 Underfunded plan funded status (11,614) (10,832)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Qualified Non-U.S. Pension Plans Funded status of plan Overfunded plan benefit obligation 17,614 16,766 Overfunded plan fair value of plan assets 19,647 18,070 Overfunded plan funded status 2,032 1,304 Underfunded plan benefit obligation 21,447 22,039 Underfunded plan fair value of plan assets 16,374 17,677 Underfunded plan funded status (5,074) (4,362) Nonqualified Non-U.S. Pension Plans Funded status of plan Underfunded plan benefit obligation 5,919 5,911 Underfunded plan funded status (5,919) (5,911) Non-U.S. Nonpension Postretirement Benefit Plans Funded status of plan Overfunded plan benefit obligation 0 0 Overfunded plan fair value of plan assets 0 0 Overfunded plan funded status 0 0 Underfunded plan benefit obligation 692 618 Underfunded plan fair value of plan assets 71 59 Underfunded plan funded status (622) (558) Pension Plans Funded status of plan Overfunded plan benefit obligation 68,017 68,053 Overfunded plan fair value of plan assets 71,051 69,786 Underfunded plan benefit obligation 29,182 29,784 Underfunded plan fair value of plan assets $ 16,374 $ 17,677 Percentage of plan funded 90.00% Qualified Defined Benefit Pension Plans Funded status of plan Percentage of plan funded 98.00%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 3 Months 12 Months Ended BENEFITS - Net Periodic Ended Cost (Details) - USD ($) Dec. 31, Dec. 31, Dec. 31, Dec. 31, $ in Millions 2016 2016 2015 2014 U.S. Pension Plans Components of net periodic (income)/cost of the retirement-related benefit plans Interest cost $ 2,048 $ 2,028 $ 2,211 Expected return on plan assets (3,689) (3,953) (4,096) Amortization of prior service costs/(credits) 10 10 10 Recognized actuarial losses 1,314 1,654 1,056 Total net periodic (income)/cost of defined benefit plans (317) (261) (818) Non-US Pension Plans Components of net periodic (income)/cost of the retirement-related benefit plans Service cost 420 454 449 Interest cost 1,035 1,075 1,533 Expected return on plan assets (1,867) (1,919) (2,247) Amortization of transition assets 0 0 0 Amortization of prior service costs/(credits) (106) (98) (111) Recognized actuarial losses 1,408 1,581 1,400 Curtailments and settlements 22 35 26 Multi-employer plans/other costs 126 293 217 Total net periodic (income)/cost of defined benefit plans 1,039 1,421 1,267 Non-US Pension Plans | Litigation in Spain regarding defined benefit and defined contribution plans | SG&A expense Components of net periodic (income)/cost of the retirement-related benefit plans Multi-employer plans/other costs $ 56 56 233 148 U.S. Nonpension Postretirement Benefit Plans Components of net periodic (income)/cost of the retirement-related benefit plans Service cost 17 24 26 Interest cost 165 163 187 Expected return on plan assets 0 0 0 Amortization of prior service costs/(credits) (7) (7) (7) Recognized actuarial losses 20 39 0 Total net periodic (income)/cost of defined benefit plans 195 218 206 Non-U.S. Nonpension Postretirement Benefit Plans Components of net periodic (income)/cost of the retirement-related benefit plans Service cost 5 7 7 Interest cost 51 50 63 Expected return on plan assets (6) (7) (9)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Amortization of transition assets 0 0 0 Amortization of prior service costs/(credits) (5) (5) (5) Recognized actuarial losses 9 10 11 Curtailments and settlements (38) 0 0 Total net periodic (income)/cost of defined benefit plans $ 16 $ 55 $ 66

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 1 Months Ended 12 Months Ended BENEFITS - Changes in Benefit Obligation and Plan Sep. 30, Jun. 30, Dec. 31, Dec. 31, Dec. 31, Assets (Details) - USD ($) 2013 2011 2016 2015 2014 $ in Millions U.S. Pension Plans Changes in benefit obligation Benefit obligation, balance at beginning of period $ 53,120 $ 56,643 Interest cost 2,048 2,028 $ 2,211 Actuarial losses/(gains) 602 (1,920) Benefits paid from trust (3,430) (3,514) Direct benefit payments (123) (117) Benefit obligation, balance at end of period 52,218 53,120 56,643 Change in plan assets Fair value of plan assets, balance at beginning of period 51,716 55,772 Actual return on plan assets 3,118 (542) Benefits paid from trust (3,430) (3,514) Fair value of plan assets, balance at end of period 51,405 51,716 55,772 Funded status (814) (1,405) Accumulated benefit obligation 52,218 53,120 Non-US Pension Plans Changes in benefit obligation Benefit obligation, balance at beginning of period 44,717 49,834 Service cost 420 454 449 Interest cost 1,035 1,075 1,533 Plan participants' contributions 30 34 Acquisitions/divestitures, net (63) 39 Actuarial losses/(gains) 3,217 (861) Benefits paid from trust (1,792) (1,784) Direct benefit payments (381) (402) Foreign exchange impact (2,222) (3,907) Amendments/curtailments/settlements/other 20 235 Benefit obligation, balance at end of period 44,981 44,717 49,834 Change in plan assets Fair value of plan assets, balance at beginning of period 35,748 39,543 Actual return on plan assets 3,828 417 Employer contributions 464 474 Acquisitions/divestitures, net (73) 53 Plan participants' contributions 30 34 Benefits paid from trust (1,792) (1,784) Foreign exchange impact (2,175) (3,004) Amendments/curtailments/settlements/other (10) 14 Fair value of plan assets, balance at end of period 36,020 35,748 39,543 Funded status (8,960) (8,969)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Accumulated benefit obligation 44,514 44,071 Non-US Pension Plans | Brazil Change in plan assets Return of Brazil plan assets resulting from 2011 and 2013 23 33 government rulings Period for return of plan assets to entity 3 years 3 years U.S. Nonpension Postretirement Benefit Plans Changes in benefit obligation Benefit obligation, balance at beginning of period 4,652 5,053 Service cost 17 24 26 Interest cost 165 163 187 Plan participants' contributions 50 52 Acquisitions/divestitures, net 0 (8) Actuarial losses/(gains) 16 (204) Benefits paid from trust (400) (406) Direct benefit payments (30) (23) Medicare/Government subsidies 1 Amendments/curtailments/settlements/other 0 Benefit obligation, balance at end of period 4,470 4,652 5,053 Change in plan assets Fair value of plan assets, balance at beginning of period 71 16 Actual return on plan assets 0 0 Employer contributions 305 409 Acquisitions/divestitures, net 0 0 Plan participants' contributions 50 52 Benefits paid from trust (400) (406) Fair value of plan assets, balance at end of period 26 71 16 Funded status (4,444) (4,582) Non-U.S. Nonpension Postretirement Benefit Plans Changes in benefit obligation Benefit obligation, balance at beginning of period 618 817 Service cost 5 7 7 Interest cost 51 50 63 Acquisitions/divestitures, net 0 0 Actuarial losses/(gains) 16 (52) Benefits paid from trust (5) (5) Direct benefit payments (27) (26) Foreign exchange impact 35 (174) Amendments/curtailments/settlements/other 0 0 Benefit obligation, balance at end of period 692 618 817 Change in plan assets Fair value of plan assets, balance at beginning of period 59 84 Actual return on plan assets 8 7 Employer contributions 0 0

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Acquisitions/divestitures, net 0 0 Benefits paid from trust (5) (5) Foreign exchange impact 9 (26) Amendments/curtailments/settlements/other 0 (1) Fair value of plan assets, balance at end of period 71 59 $ 84 Funded status $ (622) $ (558)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED BENEFITS - Net Funded Dec. 31, Dec. 31, Status (Details) - USD ($) 2016 2015 $ in Millions Net funded status recognized in the Consolidated Statement of Financial Position Prepaid pension assets $ 3,034 $ 1,734 Current liabilities - compensation and benefits (3,577) (3,560) Noncurrent liabilities - retirement and nonpension postretirement benefit obligations (17,070) (16,504) U.S. Pension Plans Net funded status recognized in the Consolidated Statement of Financial Position Prepaid pension assets 1,002 429 Current liabilities - compensation and benefits (118) (116) Noncurrent liabilities - retirement and nonpension postretirement benefit obligations (1,698) (1,718) Funded Status (814) (1,405) Non-US Pension Plans Net funded status recognized in the Consolidated Statement of Financial Position Prepaid pension assets 2,032 1,304 Current liabilities - compensation and benefits (303) (297) Noncurrent liabilities - retirement and nonpension postretirement benefit obligations (10,689) (9,976) Funded Status (8,960) (8,969) U.S. Nonpension Postretirement Benefit Plans Net funded status recognized in the Consolidated Statement of Financial Position Prepaid pension assets 0 0 Current liabilities - compensation and benefits (368) (320) Noncurrent liabilities - retirement and nonpension postretirement benefit obligations (4,076) (4,262) Funded Status (4,444) (4,582) Non-U.S. Nonpension Postretirement Benefit Plans Net funded status recognized in the Consolidated Statement of Financial Position Prepaid pension assets 0 0 Current liabilities - compensation and benefits (15) (11) Noncurrent liabilities - retirement and nonpension postretirement benefit obligations (607) (547) Funded Status $ (622) $ (558)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 3 Months 12 Months Ended BENEFITS - OCI and AOCI Ended (Details) - USD ($) Dec. 31, Dec. 31, Dec. 31, Dec. 31, $ in Millions 2016 2016 2015 2014 Changes in AOCI for retirement-related benefits Current period loss/(gain) $ 2,490 $ 2,963 $ 9,799 Curtailments and settlements 16 (33) (24) Amortization of net loss included in net periodic (income)/cost (2,764) (3,304) (2,531) Current period prior service costs/(credits) (6) (1) Amortization of prior service (credits)/costs included in net periodic 107 100 114 (income)/cost U.S. Pension Plans Changes in AOCI for retirement-related benefits Net loss at beginning of period 19,363 18,442 Current period loss/(gain) 1,173 2,576 Amortization of net loss included in net periodic (income)/cost (1,314) (1,654) Net loss at end of period $ 19,222 19,222 19,363 18,442 Prior service costs/(credits) at beginning of period 101 110 Amortization of prior service (credits)/costs included in net periodic (10) (10) (income)/cost Prior service costs/(credits) at end of period 90 90 101 110 Total loss recognized in accumulated other comprehensive income/(loss) 19,313 19,313 19,464 Amounts that will be amortized from AOCI into net periodic (income)/cost Estimated net loss that will be amortized from AOCI into net periodic 1,348 cost Estimated prior service costs/(credits) that will be amortized from AOCI 16 into net periodic (income)/cost Non-US Pension Plans Changes in AOCI for retirement-related benefits Net loss at beginning of period 20,724 21,676 Current period loss/(gain) 1,251 661 Curtailments and settlements (22) (33) Amortization of net loss included in net periodic (income)/cost (1,408) (1,581) Net loss at end of period 20,544 20,544 20,724 21,676 Prior service costs/(credits) at beginning of period (294) (386) Current period prior service costs/(credits) (6) Curtailments and settlements 0 Amortization of prior service (credits)/costs included in net periodic 106 98 (income)/cost Prior service costs/(credits) at end of period (188) (188) (294) (386) Transition (assets)/liabilities at beginning of period 0 0 Amortization of transition assets/(liabilities) included in net periodic 0 0 (income)/cost

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Transition (assets)/liabilities at end of period 0 0 0 0 Total loss recognized in accumulated other comprehensive income/(loss) 20,356 20,356 20,429 Amounts that will be amortized from AOCI into net periodic (income)/cost Estimated net loss that will be amortized from AOCI into net periodic 1,434 cost Estimated prior service costs/(credits) that will be amortized from AOCI (93) into net periodic (income)/cost Estimated transition (assets)/liabilities that will be amortized from AOCI 0 into net periodic (income)/cost Retirement-related plans cost Multi-employer plans/other costs 126 293 217 Non-US Pension Plans | SG&A expense | Litigation in Spain regarding defined benefit and defined contribution plans Retirement-related plans cost Multi-employer plans/other costs 56 56 233 148 U.S. Nonpension Postretirement Benefit Plans Changes in AOCI for retirement-related benefits Net loss at beginning of period 609 852 Current period loss/(gain) 16 (204) Amortization of net loss included in net periodic (income)/cost (20) (39) Net loss at end of period 605 605 609 852 Prior service costs/(credits) at beginning of period 30 23 Amortization of prior service (credits)/costs included in net periodic 7 7 (income)/cost Prior service costs/(credits) at end of period 37 37 30 23 Total loss recognized in accumulated other comprehensive income/(loss) 642 642 639 Amounts that will be amortized from AOCI into net periodic (income)/cost Estimated net loss that will be amortized from AOCI into net periodic 21 cost Estimated prior service costs/(credits) that will be amortized from AOCI (7) into net periodic (income)/cost Non-U.S. Nonpension Postretirement Benefit Plans Changes in AOCI for retirement-related benefits Net loss at beginning of period 128 189 Current period loss/(gain) 14 (51) Curtailments and settlements 20 0 Amortization of net loss included in net periodic (income)/cost (9) (10) Net loss at end of period 154 154 128 189 Prior service costs/(credits) at beginning of period (21) (26) Current period prior service costs/(credits) 0 Curtailments and settlements 18 Amortization of prior service (credits)/costs included in net periodic 5 5 (income)/cost

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Prior service costs/(credits) at end of period 1 1 (21) (26) Transition (assets)/liabilities at beginning of period 0 0 Amortization of transition assets/(liabilities) included in net periodic 0 0 (income)/cost Transition (assets)/liabilities at end of period 0 0 0 $ 0 Total loss recognized in accumulated other comprehensive income/(loss) $ 154 154 $ 106 Amounts that will be amortized from AOCI into net periodic (income)/cost Estimated net loss that will be amortized from AOCI into net periodic 6 cost Estimated prior service costs/(credits) that will be amortized from AOCI 0 into net periodic (income)/cost Estimated transition (assets)/liabilities that will be amortized from AOCI $ 0 into net periodic (income)/cost

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS - Assumptions Dec. Dec. Dec. Dec. Dec. (Details) - USD ($) 31, 31, 31, 31, 31, $ in Millions 2017 2016 2015 2014 2013 Discount Rate Increase (decrease) in retirement related benefit plan obligation due to $ $ change in discount rate 4,800 (2,400) Pension Plans Expected Long-Term Returns on Plan Assets Period over which changes in fair value of plan assets recognized 5 years U.S. Pension Plans Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Discount rate 4.00%3.70% 4.50% Expected long-term returns on plan assets 7.00%7.50% 8.00% Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.80%4.00% 3.70% Discount Rate Increase (decrease) in net periodic income from change in discount rate $ 103 $ (286) $ 275 Increase (decrease) in retirement related benefit plan obligation due to 998 (1,621) change in discount rate Expected Long-Term Returns on Plan Assets Increase (decrease) in net periodic income due to change in expected long- $ $ (264) $ 0 term rate of return on plan assets (268) Increase (decrease) in projected long-term rate of return due to change in 1.25% investment strategy (as a percent) U.S. Pension Plans | Expected Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Expected long-term returns on plan assets 5.75% Personal Pension Plan (PPP) Interest Crediting Rate Percentage interest rate added to average interest from August to October of the one-year U.S. Treasury Constant Maturity yield for computation of 1.00% interest crediting rate (as a percent) Interest crediting rate 1.30%1.10% 1.10% 1.20% Increase (decrease) in net periodic income from change in interest crediting $ (7) $ 0 $ 8 rate Non-US Pension Plans Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Discount rate 2.40%2.34% 3.32% Expected long-term returns on plan assets 5.53%5.67% 6.08%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Rate of compensation increase 2.40%2.49% 2.52% Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 1.80%2.40% 2.34% Rate of compensation increase 2.45%2.40% 2.49% Nonpension Postretirement Plans Healthcare Cost Trend Rate Health care cost trend rate assumed for next fiscal year 6.75% Ultimate healthcare cost trend rate 5.00% Year that rate reaches ultimate trend rate 2024 Effect of one percentage point increase on net periodic cost Effect of one percentage point decrease on net periodic cost Effect of one percentage point increase on benefit obligation Effect of one percentage point decrease on benefit obligation U.S. Nonpension Postretirement Benefit Plans Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Discount rate 3.70%3.40% 4.10% Expected long-term returns on plan assets Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 3.60%3.70% 3.40% Discount Rate Increase (decrease) in APBO due to changes in discount rate $ 33 $ (109) Non-U.S. Nonpension Postretirement Benefit Plans Weighted-average assumptions used to measure net periodic (income)/ cost for the year ended December 31 Discount rate 7.06%7.51% 7.78% Expected long-term returns on plan assets 9.95%10.17%10.22% Weighted-average assumptions used to measure benefit obligations at December 31 Discount rate 8.26%7.06% 7.51% U.S. Retirement-related Plans Expected Long-Term Returns on Plan Assets Increase (decrease) in benefit obligations due to change in mortality rate $ $ (700) assumptions (600)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months BENEFITS - Investment Ended Strategy (Details) - USD ($) Dec. 31, Dec. 31, Dec. 31, $ in Millions 2016 2015 2014 Qualified PPP Investment Policies And Strategies Fair Value of plan assets $ 51,405 $ 51,716 Qualified PPP | Equity securities Investment Policies And Strategies Target allocation (as a percent) 20.00% Qualified PPP | Fixed-income securities Investment Policies And Strategies Target allocation (as a percent) 70.00% Qualified PPP | Real estate Investment Policies And Strategies Target allocation (as a percent) 5.00% Qualified PPP | Other investments Investment Policies And Strategies Target allocation (as a percent) 5.00% Qualified PPP | Private equities and private real estate investments Investment Policies And Strategies Fair Value of plan assets $ 5,010 Commitments for future investments in private markets 2,142 Non-US Pension Plans Investment Policies And Strategies Fair Value of plan assets $ 36,020 $ 35,748 $ 39,543 Non-US Pension Plans | Maximum Investment Policies And Strategies Percentage of board members, elected by employees and retirees for 50.00% managing investments (as a percent) Non-US Pension Plans | Equity securities Investment Policies And Strategies Target allocation (as a percent) 25.00% Non-US Pension Plans | Fixed-income securities Investment Policies And Strategies Target allocation (as a percent) 60.00% Non-US Pension Plans | Real estate Investment Policies And Strategies Target allocation (as a percent) 3.00% Non-US Pension Plans | Other investments Investment Policies And Strategies Target allocation (as a percent) 12.00%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months BENEFITS - Plan Assets Ended (Details) - USD ($) Dec. 31, Dec. 31, Dec. 31, $ in Millions 2016 2015 2014 Qualified PPP RETIREMENT-RELATED BENEFITS Subtotal $ 41,969 $ 41,680 Investments measured at net asset value using the NAV expedient 9,641 10,179 Other (205) (143) Fair value of plan assets 51,405 51,716 Qualified PPP | Equity securities RETIREMENT-RELATED BENEFITS Subtotal 5,779 11,211 Value of IBM securities included in plan assets $ 28 $ 34 Percentage of IBM securities included in plan assets 0.10% 0.10% Qualified PPP | Equity mutual funds RETIREMENT-RELATED BENEFITS Subtotal $ 93 $ 99 Qualified PPP | Government and related RETIREMENT-RELATED BENEFITS Subtotal 14,897 9,854 Qualified PPP | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 18,164 17,090 Value of IBM securities included in plan assets $ 4 $ 23 Percentage of IBM securities included in plan assets 0.01% 0.04% Qualified PPP | Mortgage and asset-backed securities RETIREMENT-RELATED BENEFITS Subtotal $ 656 $ 643 Qualified PPP | Fixed income mutual funds RETIREMENT-RELATED BENEFITS Subtotal 359 313 Qualified PPP | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 1,982 2,549 Qualified PPP | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 38 (80) Qualified PPP | Level 1 RETIREMENT-RELATED BENEFITS Subtotal 6,303 11,784 Fair value of plan assets 6,303 11,784 Qualified PPP | Level 1 | Equity securities

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED BENEFITS Subtotal 5,778 11,210 Qualified PPP | Level 1 | Equity mutual funds RETIREMENT-RELATED BENEFITS Subtotal 93 99 Qualified PPP | Level 1 | Fixed income mutual funds RETIREMENT-RELATED BENEFITS Subtotal 359 313 Qualified PPP | Level 1 | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 55 244 Qualified PPP | Level 1 | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 18 (82) Qualified PPP | Level 2 RETIREMENT-RELATED BENEFITS Subtotal 35,560 29,884 Fair value of plan assets 35,560 29,884 Qualified PPP | Level 2 | Equity securities RETIREMENT-RELATED BENEFITS Subtotal 1 1 Qualified PPP | Level 2 | Government and related RETIREMENT-RELATED BENEFITS Subtotal 14,897 9,854 Qualified PPP | Level 2 | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 18,063 17,088 Qualified PPP | Level 2 | Mortgage and asset-backed securities RETIREMENT-RELATED BENEFITS Subtotal 652 633 Qualified PPP | Level 2 | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 1,927 2,305 Qualified PPP | Level 2 | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 20 2 Qualified PPP | Level 3 RETIREMENT-RELATED BENEFITS Subtotal 106 12 Fair value of plan assets 106 12 $ 24 Qualified PPP | Level 3 | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 101 2 Fair value of plan assets 101 2 4

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Qualified PPP | Level 3 | Mortgage and asset-backed securities RETIREMENT-RELATED BENEFITS Subtotal 5 10 Fair value of plan assets 5 10 20 Non-US Pension Plans RETIREMENT-RELATED BENEFITS Subtotal 17,122 16,812 Investments measured at net asset value using the NAV expedient 18,946 18,986 Other (48) (50) Fair value of plan assets 36,020 35,748 39,543 Non-US Pension Plans | Equity securities RETIREMENT-RELATED BENEFITS Subtotal 4,080 4,631 Value of IBM securities included in plan assets $ 15 $ 14 Percentage of IBM securities included in plan assets 0.04% 0.04% Non-US Pension Plans | Equity mutual funds RETIREMENT-RELATED BENEFITS Subtotal $ 35 $ 90 Non-US Pension Plans | Government and related RETIREMENT-RELATED BENEFITS Subtotal 7,593 7,499 Non-US Pension Plans | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 2,045 1,899 Value of IBM securities included in plan assets $ 1 $ 1 Percentage of IBM securities included in plan assets 0.003% 0.004% Non-US Pension Plans | Mortgage and asset-backed securities RETIREMENT-RELATED BENEFITS Subtotal $ 4 $ 6 Non-US Pension Plans | Fixed income mutual funds RETIREMENT-RELATED BENEFITS Subtotal 22 38 Non-US Pension Plans | Insurance contracts RETIREMENT-RELATED BENEFITS Subtotal 1,137 1,079 Non-US Pension Plans | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 1,001 564 Non-US Pension Plans | Real estate RETIREMENT-RELATED BENEFITS Subtotal 294 411 Non-US Pension Plans | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 796 480

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Non-US Pension Plans | Other mutual funds RETIREMENT-RELATED BENEFITS Subtotal 114 115 Non-US Pension Plans | Level 1 RETIREMENT-RELATED BENEFITS Subtotal 4,589 5,016 Fair value of plan assets 4,589 5,016 Non-US Pension Plans | Level 1 | Equity securities RETIREMENT-RELATED BENEFITS Subtotal 4,080 4,631 Non-US Pension Plans | Level 1 | Equity mutual funds RETIREMENT-RELATED BENEFITS Subtotal 35 90 Non-US Pension Plans | Level 1 | Fixed income mutual funds RETIREMENT-RELATED BENEFITS Subtotal 22 38 Non-US Pension Plans | Level 1 | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 294 142 Non-US Pension Plans | Level 1 | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 43 (1) Non-US Pension Plans | Level 1 | Other mutual funds RETIREMENT-RELATED BENEFITS Subtotal 114 115 Non-US Pension Plans | Level 2 RETIREMENT-RELATED BENEFITS Subtotal 12,223 11,366 Fair value of plan assets 12,223 11,366 Non-US Pension Plans | Level 2 | Equity securities RETIREMENT-RELATED BENEFITS Subtotal 0 0 Non-US Pension Plans | Level 2 | Government and related RETIREMENT-RELATED BENEFITS Subtotal 7,577 7,482 Non-US Pension Plans | Level 2 | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 2,045 1,896 Non-US Pension Plans | Level 2 | Mortgage and asset-backed securities RETIREMENT-RELATED BENEFITS Subtotal 4 6 Non-US Pension Plans | Level 2 | Insurance contracts RETIREMENT-RELATED BENEFITS Subtotal 1,137 1,079

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Non-US Pension Plans | Level 2 | Cash and short-term investments RETIREMENT-RELATED BENEFITS Subtotal 707 422 Non-US Pension Plans | Level 2 | Derivatives RETIREMENT-RELATED BENEFITS Subtotal 752 481 Non-US Pension Plans | Level 3 RETIREMENT-RELATED BENEFITS Subtotal 310 431 Fair value of plan assets 310 431 444 Non-US Pension Plans | Level 3 | Government and related RETIREMENT-RELATED BENEFITS Subtotal 16 16 Fair value of plan assets 16 16 32 Non-US Pension Plans | Level 3 | Corporate bonds RETIREMENT-RELATED BENEFITS Subtotal 1 4 Fair value of plan assets 1 4 1 Non-US Pension Plans | Level 3 | Real estate RETIREMENT-RELATED BENEFITS Subtotal 294 411 Fair value of plan assets 294 411 411 U.S. Nonpension Postretirement Benefit Plans RETIREMENT-RELATED BENEFITS Fair value of plan assets 26 71 16 U.S. Nonpension Postretirement Benefit Plans | Level 1 | Cash RETIREMENT-RELATED BENEFITS Fair value of plan assets 26 71 Non-U.S. Nonpension Postretirement Benefit Plans RETIREMENT-RELATED BENEFITS Fair value of plan assets 71 59 $ 84 Non-U.S. Nonpension Postretirement Benefit Plans | Level 2 | Government and related fixed income securities and corporate bonds RETIREMENT-RELATED BENEFITS Fair value of plan assets $ 71 $ 59

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS - Level 3 Reconciliation (Details) - Dec. 31, 2016Dec. 31, 2015 USD ($) $ in Millions Qualified PPP Change in plan assets Fair value of plan assets, balance at beginning of period $ 51,716 Fair value of plan assets, balance at end of period 51,405 $ 51,716 Non-US Pension Plans Change in plan assets Fair value of plan assets, balance at beginning of period 35,748 39,543 Foreign exchange impact (2,175) (3,004) Fair value of plan assets, balance at end of period 36,020 35,748 Level 3 | Qualified PPP Change in plan assets Fair value of plan assets, balance at beginning of period 12 24 Return on assets held at end of year (2) 0 Return on assets sold during the year 1 1 Purchases, sales and settlements, net 99 (7) Transfers, net (3) (6) Fair value of plan assets, balance at end of period 106 12 Level 3 | Qualified PPP | Corporate bonds Change in plan assets Fair value of plan assets, balance at beginning of period 2 4 Return on assets held at end of year (3) 0 Return on assets sold during the year 0 1 Purchases, sales and settlements, net 103 (5) Transfers, net (2) 2 Fair value of plan assets, balance at end of period 101 2 Level 3 | Qualified PPP | Mortgage and asset-backed securities Change in plan assets Fair value of plan assets, balance at beginning of period 10 20 Return on assets held at end of year 0 0 Return on assets sold during the year 1 0 Purchases, sales and settlements, net (5) (2) Transfers, net (2) (8) Fair value of plan assets, balance at end of period 5 10 Level 3 | Non-US Pension Plans Change in plan assets Fair value of plan assets, balance at beginning of period 431 444 Return on assets held at end of year (21) 26 Return on assets sold during the year 35 42 Purchases, sales and settlements, net (72) (58)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Transfers, net 0 Foreign exchange impact (63) (23) Fair value of plan assets, balance at end of period 310 431 Level 3 | Non-US Pension Plans | Government and related Change in plan assets Fair value of plan assets, balance at beginning of period 16 32 Return on assets held at end of year 1 (2) Return on assets sold during the year 0 0 Purchases, sales and settlements, net 0 (10) Transfers, net 0 Foreign exchange impact 0 (3) Fair value of plan assets, balance at end of period 16 16 Level 3 | Non-US Pension Plans | Corporate bonds Change in plan assets Fair value of plan assets, balance at beginning of period 4 1 Return on assets held at end of year 0 0 Return on assets sold during the year 0 0 Purchases, sales and settlements, net (3) 3 Foreign exchange impact 0 0 Fair value of plan assets, balance at end of period 1 4 Level 3 | Non-US Pension Plans | Real estate Change in plan assets Fair value of plan assets, balance at beginning of period 411 411 Return on assets held at end of year (22) 28 Return on assets sold during the year 35 42 Purchases, sales and settlements, net (68) (51) Foreign exchange impact (62) (20) Fair value of plan assets, balance at end of period $ 294 $ 411

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months BENEFITS - Contributions, Ended Defined Benefit Plans Dec. Dec. (Details) - USD ($) 31, 31, $ in Millions 2016 2015 Non-U.S. Defined Benefit and Multi-Employer Plans Pension Contributions Estimated cash contributions to the defined benefit plans in next fiscal year $ 500 Non-US Pension Plans Pension Contributions Contributions by employer to defined benefit plans 464 $ 474 Contributions by employer - Cash 169 474 Contributions by employer - Noncash 295 Multi-employer Plans - Non U.S. Plans Pension Contributions Cash contribution by employer to non-U.S. multi-employer plans $ 43 40 U.S. Defined Benefit Plans Pension Contributions Period over which company may smooth the change in value of pension assets under revised 24 funding requirements in Worker, Retiree and Employer Recovery Act of 2008 months Nonpension Postretirement Plans Pension Contributions Employer contributions, excluding the Medicare-related subsidy $ 305 408 Contributions by employer - Cash 80 328 Contributions by employer - Noncash $ 225 $ 80

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED 12 Months Ended BENEFITS - Contributions, Defined Contribution Plans Dec. 31, Dec. 31, (Details) - USD ($) 2016 2015 $ in Millions RETIREMENT-RELATED BENEFITS Cash contribution by employer to defined contribution plans $ 1,046 $ 1,117 Estimated future employer contributions to defined contribution plans in next fiscal $ 1,000 year

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED BENEFITS - Expected Dec. 31, 2016 Benefit Payments (Details) USD ($) $ in Millions Pension Plans Expected Benefit Payments Expected benefit payments, 2017 $ 5,634 Expected benefit payments, 2018 5,646 Expected benefit payments, 2019 5,668 Expected benefit payments, 2020 5,809 Expected benefit payments, 2021 5,806 Expected benefit payments, 2022-2026 28,762 Qualified U.S. Pension Plan Expected Benefit Payments Expected benefit payments, 2017 3,519 Expected benefit payments, 2018 3,519 Expected benefit payments, 2019 3,504 Expected benefit payments, 2020 3,589 Expected benefit payments, 2021 3,525 Expected benefit payments, 2022-2026 16,970 Nonqualified U.S. Pension Plans Expected Benefit Payments Expected benefit payments, 2017 120 Expected benefit payments, 2018 121 Expected benefit payments, 2019 121 Expected benefit payments, 2020 122 Expected benefit payments, 2021 123 Expected benefit payments, 2022-2026 594 Qualified Non-U.S. Pension Plans Expected Benefit Payments Expected benefit payments, 2017 1,689 Expected benefit payments, 2018 1,705 Expected benefit payments, 2019 1,730 Expected benefit payments, 2020 1,741 Expected benefit payments, 2021 1,783 Expected benefit payments, 2022-2026 9,077 Nonqualified Non-U.S. Pension Plans Expected Benefit Payments Expected benefit payments, 2017 306 Expected benefit payments, 2018 301 Expected benefit payments, 2019 312 Expected benefit payments, 2020 358 Expected benefit payments, 2021 376 Expected benefit payments, 2022-2026 2,121

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Nonpension Postretirement Plans Expected Benefit Payments Expected benefit payments, 2017 432 Expected benefit payments, 2018 435 Expected benefit payments, 2019 443 Expected benefit payments, 2020 448 Expected benefit payments, 2021 441 Expected benefit payments, 2022-2026 1,998 U.S. Nonpension Postretirement Benefit Plans Expected Benefit Payments Expected benefit payments, 2017 396 Expected benefit payments, 2018 397 Expected benefit payments, 2019 403 Expected benefit payments, 2020 405 Expected benefit payments, 2021 395 Expected benefit payments, 2022-2026 1,743 Qualified Non-U.S. Nonpension Postretirement Benefit Plans Expected Benefit Payments Expected benefit payments, 2017 6 Expected benefit payments, 2018 6 Expected benefit payments, 2019 6 Expected benefit payments, 2020 6 Expected benefit payments, 2021 7 Expected benefit payments, 2022-2026 36 Nonqualified Non-U.S. Nonpension Postretirement Benefit Plans Expected Benefit Payments Expected benefit payments, 2017 30 Expected benefit payments, 2018 32 Expected benefit payments, 2019 34 Expected benefit payments, 2020 37 Expected benefit payments, 2021 39 Expected benefit payments, 2022-2026 $ 219

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document RETIREMENT-RELATED BENEFITS - ABO in Excess Dec. 31, Dec. 31, of Plan Assets (Details) - 2016 2015 USD ($) $ in Millions Defined Benefit Plan, Pension and Non-Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets Plans with PBO in excess of plan assets, Benefit Obligation $ 34,344 $ 35,054 Plans with PBO in excess of plan assets, Plan Assets 16,470 17,807 Plans with assets in excess of PBO, Benefit Obligation 68,017 68,053 Plans with assets in excess of PBO, Plan Assets 71,051 69,786 Pension Plans Defined Benefit Plan, Pension and Non-Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets Plans with PBO in excess of plan assets, Benefit Obligation 29,182 29,784 Plans with PBO in excess of plan assets, Plan Assets 16,374 17,677 Plans with ABO in excess of plan assets, Benefit Obligation 28,770 29,135 Plans with ABO in excess of plan assets, Plan Assets 16,272 17,492 Plans with assets in excess of PBO, Benefit Obligation 68,017 68,053 Plans with assets in excess of PBO, Plan Assets $ 71,051 $ 69,786

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION - Results of Dec. 31, 2016 Continuing Operations Dec. 31, 2015Dec. 31, 2014 USD ($) (Details) USD ($) USD ($) segment $ in Millions Segment Information Number of business segments (in segments) | segment 5 Revenue (excluding other revenue not allocated to segments) $ 79,630 $ 81,535 $ 92,418 Revenue 79,919 81,741 92,793 Pre-tax income from continuing operations 12,330 15,945 19,986 Cognitive Solutions Segment Information Revenue (excluding other revenue not allocated to segments) 18,187 17,841 19,689 Global Business Services Segment Information Revenue (excluding other revenue not allocated to segments) 16,700 17,166 19,512 Technology Services & Cloud Platforms Segment Information Revenue (excluding other revenue not allocated to segments) 35,337 35,142 38,889 Systems Segment Information Revenue (excluding other revenue not allocated to segments) 7,714 9,547 12,294 Global Financing Segment Information Revenue (excluding other revenue not allocated to segments) 1,692 1,840 2,034 Business Segments Segment Information Revenue 85,936 88,361 99,512 Pre-tax income from continuing operations $ 15,380 $ 19,602 $ 22,219 Revenue year-to-year change (as a percent) (2.70%) (11.20%) (5.10%) Pre-tax income year-to-year change (as a percent) (21.50%) (11.80%) (6.20%) Pre-tax income margin (as a percent) 17.90% 22.20% 22.30% Business Segments | Cognitive Solutions Segment Information Revenue $ 20,817 $ 20,055 $ 21,906 Pre-tax income from continuing operations $ 6,352 $ 7,245 $ 8,215 Revenue year-to-year change (as a percent) 3.80% (8.40%) (0.10%) Pre-tax income year-to-year change (as a percent) (12.30%) (11.80%) (5.20%) Pre-tax income margin (as a percent) 30.50% 36.10% 37.50% Business Segments | Global Business Services Segment Information Revenue $ 17,109 $ 17,664 $ 20,055 Pre-tax income from continuing operations $ 1,732 $ 2,602 $ 3,347 Revenue year-to-year change (as a percent) (3.10%) (11.90%) (8.50%)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Pre-tax income year-to-year change (as a percent) (33.40%) (22.30%) (2.90%) Pre-tax income margin (as a percent) 10.10% 14.70% 16.70% Business Segments | Technology Services & Cloud Platforms Segment Information Revenue $ 36,052 $ 35,840 $ 39,729 Pre-tax income from continuing operations $ 4,707 $ 5,669 $ 7,084 Revenue year-to-year change (as a percent) 0.60% (9.80%) (0.90%) Pre-tax income year-to-year change (as a percent) (17.00%) (20.00%) (7.30%) Pre-tax income margin (as a percent) 13.10% 15.80% 17.80% Business Segments | Systems Segment Information Revenue $ 8,464 $ 10,325 $ 13,300 Pre-tax income from continuing operations $ 933 $ 1,722 $ 1,384 Revenue year-to-year change (as a percent) (18.00%) (22.40%) (19.80%) Pre-tax income year-to-year change (as a percent) (45.80%) 24.40% (21.50%) Pre-tax income margin (as a percent) 11.00% 16.70% 10.40% Business Segments | Global Financing Segment Information Revenue $ 3,494 $ 4,477 $ 4,522 Pre-tax income from continuing operations $ 1,656 $ 2,364 $ 2,189 Revenue year-to-year change (as a percent) (22.00%) (1.00%) 5.10% Pre-tax income year-to-year change (as a percent) (29.90%) 8.00% 0.80% Pre-tax income margin (as a percent) 47.40% 52.80% 48.40% Internal transactions Segment Information Revenue $ (6,307) $ (6,826) $ (7,093) Pre-tax income from continuing operations (1,160) (1,675) (1,746) Internal transactions | Cognitive Solutions Segment Information Revenue (2,630) (2,215) (2,216) Internal transactions | Global Business Services Segment Information Revenue (409) (499) (543) Internal transactions | Technology Services & Cloud Platforms Segment Information Revenue (715) (698) (840) Internal transactions | Systems Segment Information Revenue (750) (778) (1,006) Internal transactions | Global Financing Segment Information Revenue $ (1,802) $ (2,637) $ (2,488)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION - Revenue Reconciliation (Details) - Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 USD ($) $ in Millions Revenue Revenue $ 79,919 $ 81,741 $ 92,793 Business Segments Revenue Revenue 85,936 88,361 99,512 Other revenue Revenue Revenue 289 206 374 Internal transactions Revenue Revenue $ (6,307) $ (6,826) $ (7,093)

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION - Pre-Tax Income Reconciliation Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions Pre-tax Income from continuing operations Amortization of acquired intangible assets $ (998) $ (677) $ (791) Acquisition-related charges (5) (26) (12) Non-operating retirement-related (costs)/income (598) (1,050) (353) Income from continuing operations before income taxes 12,330 15,945 19,986 Business Segments Pre-tax Income from continuing operations Income from continuing operations before income taxes 15,380 19,602 22,219 Internal transactions Pre-tax Income from continuing operations Income from continuing operations before income taxes (1,160) (1,675) (1,746) Unallocated corporate amounts Pre-tax Income from continuing operations Income from continuing operations before income taxes $ (290) $ (230) $ 668

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 12 Months Ended SEGMENT Dec. 31, INFORMATION - Assets Dec. 31, Dec. 31, 2016 and Other Items (Details) 2015 2014 USD ($) $ in Millions USD ($) USD ($) segment Segment Information Number of business segments to which assets are assigned when ownership is 1 shared between several segments | segment Assets $ $ $ 117,470 110,495 117,271 Interest expense 630 468 484 Business Segments Segment Information Assets 98,534 91,999 93,933 Depreciation/amortization of intangibles 4,248 3,610 4,308 Capital expenditures/investments in intangibles 3,764 3,830 3,921 Interest income 1,547 1,720 1,951 Interest expense 371 469 518 Business Segments | Cognitive Solutions Segment Information Assets 25,517 20,017 19,525 Depreciation/amortization of intangibles 1,228 921 1,040 Capital expenditures/investments in intangibles 495 448 413 Business Segments | Global Business Services Segment Information Assets 8,628 8,327 8,831 Depreciation/amortization of intangibles 104 81 98 Capital expenditures/investments in intangibles 55 86 79 Business Segments | Technology Services & Cloud Platforms Segment Information Assets 24,085 23,530 22,512 Depreciation/amortization of intangibles 2,224 1,944 1,982 Capital expenditures/investments in intangibles 2,382 2,619 2,321 Business Segments | Systems Segment Information Assets 3,812 3,967 4,219 Depreciation/amortization of intangibles 375 321 734 Capital expenditures/investments in intangibles 453 321 627 Business Segments | Global Financing Segment Information Assets 36,492 36,157 38,845 Depreciation/amortization of intangibles 317 343 455 Capital expenditures/investments in intangibles 380 356 482 Interest income 1,547 1,720 1,951

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Interest expense $ 371 $ 469 $ 518

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT INFORMATION - Asset Reconciliation (Details) - Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 USD ($) $ in Millions Segment Reporting, Asset Reconciling Item Assets $ 117,470 $ 110,495 $ 117,271 Deferred tax assets 5,224 4,822 Plant, other property and equipment 10,830 10,727 Pension assets 3,034 1,734 Business Segments Segment Reporting, Asset Reconciling Item Assets 98,534 91,999 93,933 Internal transactions Segment Reporting, Asset Reconciling Item Assets (5,670) (4,709) (5,193) Unallocated amounts Segment Reporting, Asset Reconciling Item Cash and marketable securities 6,752 6,634 7,182 Notes and accounts receivable 2,660 2,333 4,253 Deferred tax assets 5,078 4,693 6,465 Plant, other property and equipment 2,656 2,650 2,169 Pension assets 3,034 1,734 2,160 Other $ 4,425 $ 5,161 $ 6,303

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION - Dec. 31, Dec. 31, Dec. 31, Geographic Information 2016 2015 2014 (Details) USD ($) USD ($) USD ($) $ in Millions customer customer customer Segment Information Revenue $ 79,919 $ 81,741 $ 92,793 Net property, plant and equipment 10,830 10,727 Plant and other property Segment Information Net property, plant and equipment $ 10,308 $ 10,176 $ 10,078 Revenue | Major Client Segment Information Number of clients representing 10% or more of the company's total revenue | 0 0 0 customer U.S. | Revenue | Geographic Information Segment Information Revenue $ 30,194 $ 30,514 $ 32,021 U.S. | Revenue | Geographic Information | Minimum Segment Information Concentration Risk, Percentage 10.00% 10.00% 10.00% U.S. | Plant and Other Property - Net | Geographic Information | Minimum Segment Information Concentration Risk, Percentage 10.00% 10.00% 10.00% U.S. | Plant and Other Property - Net | Geographic Information | Plant and other property Segment Information Net property, plant and equipment $ 4,701 $ 4,644 $ 4,388 Japan | Revenue | Geographic Information Segment Information Revenue $ 8,339 7,544 8,382 Japan | Revenue | Geographic Information | Minimum Segment Information Concentration Risk, Percentage 10.00% Other Countries | Revenue | Geographic Information Segment Information Revenue $ 41,386 43,683 52,390 Non-U.S. | Plant and Other Property - Net | Geographic Information | Plant and other property Segment Information Net property, plant and equipment $ 5,607 $ 5,532 $ 5,690

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SEGMENT 12 Months Ended INFORMATION - Revenue by Product or Service Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 (Details) - USD ($) $ in Millions Revenue by Classes of Similar Products or Services Revenue $ 79,919 $ 81,741 $ 92,793 Cognitive Solutions | Software Revenue by Classes of Similar Products or Services Revenue 13,969 14,557 16,502 Cognitive Solutions | Services Revenue by Classes of Similar Products or Services Revenue 4,111 3,175 3,143 Cognitive Solutions | Systems Revenue by Classes of Similar Products or Services Revenue 107 108 44 Global Business Services | Software Revenue by Classes of Similar Products or Services Revenue 179 164 186 Global Business Services | Services Revenue by Classes of Similar Products or Services Revenue 16,399 16,851 19,202 Global Business Services | Systems Revenue by Classes of Similar Products or Services Revenue 121 151 124 Technology Services & Cloud Platforms | Software Revenue by Classes of Similar Products or Services Revenue 3,818 3,907 4,332 Technology Services & Cloud Platforms | Services Revenue by Classes of Similar Products or Services Revenue 24,311 23,947 26,462 Technology Services & Cloud Platforms | Maintenance Revenue by Classes of Similar Products or Services Revenue 5,862 6,085 6,790 Technology Services & Cloud Platforms | Systems Revenue by Classes of Similar Products or Services Revenue 1,346 1,203 1,304 Systems | Servers Revenue by Classes of Similar Products or Services Revenue 3,567 5,032 7,177 Systems | Storage Revenue by Classes of Similar Products or Services Revenue 2,083 2,325 2,641 Systems | Software

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Revenue by Classes of Similar Products or Services Revenue 1,586 1,749 2,053 Systems | Services Revenue by Classes of Similar Products or Services Revenue 478 442 423 Global Financing | Financing Revenue by Classes of Similar Products or Services Revenue 1,231 1,386 1,543 Global Financing | Used equipment sales Revenue by Classes of Similar Products or Services Revenue $ 461 $ 454 $ 491

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SUBSEQUENT EVENTS (Details) - Subsequent events - USD ($) Jan. 31, 2017 Jan. 24, 2017 $ / shares in Units, $ in Millions SUBSEQUENT EVENTS: Dividend declared (in dollars per share) $ 1.40 Dividend declared, date Jan. 31, 2017 Dividend payable, date Mar. 10, 2017 Shareholders of record, date Feb. 10, 2017 Bonds issued January 2017 SUBSEQUENT EVENTS: Bonds issued $ 2,750 3-year floating rate bonds SUBSEQUENT EVENTS: Bonds issued $ 500 Maturity term 3 years 3-year floating rate bonds | LIBOR SUBSEQUENT EVENTS: Interest rate margin (as a percent) 0.23% 3-year fixed rate bonds with 1.9 percent coupon rate SUBSEQUENT EVENTS: Bonds issued $ 750 Maturity term 3 years Coupon rate (as a percent) 1.90% 5-year fixed-rate bonds with 2.5 percent coupon rate SUBSEQUENT EVENTS: Bonds issued $ 1,000 Maturity term 5 years Coupon rate (as a percent) 2.50% 10-year fixed rate bonds with 3.3 percent coupon rate SUBSEQUENT EVENTS: Bonds issued $ 500 Maturity term 10 years Coupon rate (as a percent) 3.30%

Copyright © 2013 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document SCHEDULE II 12 Months Ended VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Details) - Dec. 31, 2016Dec. 31, 2015Dec. 31, 2014 USD ($) $ in Millions Allowance for Credit Losses - Current Movement in Valuation and Qualifying Accounts and Reserves Balance at the Beginning of the Period $ 909 $ 829 $ 636 Additions, charged to expense and cost accounts 87 226 276 Writeoffs (307) (92) (48) Other (13) (55) (35) Balance at the End of the Period 675 909 829 Allowance for Credit Losses - Noncurrent Movement in Valuation and Qualifying Accounts and Reserves Balance at the Beginning of the Period 118 126 80 Additions, charged to expense and cost accounts (2) 8 57 Writeoffs (7) (1) (4) Other (8) (14) (7) Balance at the End of the Period 101 118 126 Allowance for Inventory Losses Movement in Valuation and Qualifying Accounts and Reserves Balance at the Beginning of the Period 483 564 623 Additions, charged to expense and cost accounts 178 165 211 Writeoffs (150) (230) (232) Other 14 (15) (38) Balance at the End of the Period 525 483 564 Revenue Based Provisions Movement in Valuation and Qualifying Accounts and Reserves Balance at the Beginning of the Period 505 616 827 Additions, charged to revenue accounts 1,377 1,658 2,519 Writeoffs (1,392) (1,741) (2,693) Other (9) (28) (37) Balance at the End of the Period $ 481 $ 505 $ 616

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