10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2013

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

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

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

914-499-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  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 xNo o

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 x	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 Rule 12b-2 of the Exchange Act).  Yes o  No x

The registrant has 1,095,425,823 shares of common stock outstanding at June 30, 2013.

Index

	Page
Part I - Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statement of Earnings for the three and six months ended June 30, 2013 and 2012	3
Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	4
Consolidated Statement of Financial Position at June 30, 2013 and December 31, 2012	5
Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012	7
Consolidated Statement of Changes in Equity for the six months ended June 30, 2013 and 2012	8
Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	41
Item 4. Controls and Procedures	82
Part II - Other Information:
Item 1. Legal Proceedings	82
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	82
Item 6. Exhibits	83

2

PART I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions except per share amounts)	2013			2012			2013			2012
Revenue:
Services	$	14,312		$	14,833		$	28,586		$	29,653
Sales	10,119			10,426			18,748			19,782
Financing	493			523			998			1,021
Total revenue	24,924			25,783			48,332			50,456
Cost:
Services	9,326			9,785			18,852			19,770
Sales	3,202			3,435			6,133			6,761
Financing	264			282			537			526
Total cost	12,792			13,502			25,522			27,056
Gross profit	12,132			12,281			22,810			23,400
Expense and other income:
Selling, general and administrative	6,680			5,837			12,257			11,723
Research, development and engineering	1,548			1,587			3,193			3,188
Intellectual property and custom development income	(247		)	(289		)	(430		)	(545		)
Other (income) and expense	(91		)	(132		)	(151		)	(190		)
Interest expense	98			117			192			226
Total expense and other income	7,988			7,120			15,060			14,403
Income before income taxes	4,144			5,161			7,750			8,997
Provision for income taxes	918			1,280			1,492			2,049
Net income	$	3,226		$	3,881		$	6,258		$	6,948
Earnings per share of common stock:
Assuming dilution	$	2.91		$	3.34		$	5.60		$	5.95
Basic	$	2.93		$	3.38		$	5.65		$	6.02
Weighted-average number of common shares outstanding: (millions)
Assuming dilution	1,109.4			1,161.9			1,116.7			1,168.1
Basic	1,100.9			1,149.0			1,107.3			1,154.1
Cash dividend per common share	$	0.95		$	0.85		$	1.80		$	1.60

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

3

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013			2012			2013			2012
Net income	$	3,226		$	3,881		$	6,258		$	6,948
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments	(936		)	(724		)	(1,341		)	(337		)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0			(3		)	(2		)	3
Reclassification of (gains)/losses to net income	0			(2		)	0			(16		)
Subsequent changes in previously impaired securities arising during the period	0			9			1			27
Total net changes related to available-for-sale securities	0			4			(1		)	14
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	(10		)	68			350			119
Reclassification of (gains)/losses to net income	(47		)	(111		)	(103		)	(135		)
Total unrealized gains/(losses) on cash flow hedges	(57		)	(42		)	247			(16		)
Retirement-related benefit plans:
Prior service costs/(credits)	0			0			33			0
Net (losses)/gains arising during the period	210			70			195			65
Curtailments and settlements	0			0			0			0
Amortization of prior service (credits)/costs	(28		)	(37		)	(58		)	(74		)
Amortization of net (gains)/losses	864			613			1,750			1,232
Total retirement-related benefit plans	1,045			647			1,920			1,223
Other comprehensive income/(loss), before tax	53			(115		)	826			884
Income tax (expense)/benefit related to items of other comprehensive income	(361		)	(268		)	(842		)	(497		)
Other comprehensive income/(loss)	(309		)	(383		)	(16		)	387
Total comprehensive income/(loss)	$	2,917		$	3,498		$	6,242		$	7,335

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

4

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)

ASSETS

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Assets:
Current assets:
Cash and cash equivalents	$	9,558	$	10,412
Marketable securities	799		717
Notes and accounts receivable — trade (net of allowances of $258 in 2013 and $255 in 2012)	10,277		10,667
Short-term financing receivables (net of allowances of $279 in 2013 and $288 in 2012)	16,661		18,038
Other accounts receivable (net of allowances of $25 in 2013 and $17 in 2012)	1,898		1,873
Inventories, at lower of average cost or market:
Finished goods	482		475
Work in process and raw materials	1,906		1,812
Total inventories	2,389		2,287
Deferred taxes	1,584		1,415
Prepaid expenses and other current assets	4,746		4,024
Total current assets	47,911		49,433
Property, plant and equipment	39,552		40,501
Less: Accumulated depreciation	26,196		26,505
Property, plant and equipment — net	13,356		13,996
Long-term financing receivables (net of allowances of $64 in 2013 and $66 in 2012)	11,828		12,812
Prepaid pension assets	922		945
Deferred taxes	4,150		3,973
Goodwill	28,846		29,247
Intangible assets — net	3,418		3,787
Investments and sundry assets	4,721		5,021
Total assets	$	115,153	$	119,213

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

5

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

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

LIABILITIES AND EQUITY

(Dollars in millions)	At June 30, 2013			At December 31, 2012
Liabilities:
Current liabilities:
Taxes	$	4,708		$	4,948
Short-term debt	7,830			9,181
Accounts payable	6,821			7,952
Compensation and benefits	4,223			4,745
Deferred income	12,241			11,952
Other accrued expenses and liabilities	5,214			4,847
Total current liabilities	41,037			43,625
Long-term debt	26,292			24,088
Retirement and nonpension postretirement benefit obligations	17,962			20,418
Deferred income	4,166			4,491
Other liabilities	7,812			7,607
Total liabilities	97,269			100,229
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital	50,886			50,110
Shares authorized: 4,687,500,000
Shares issued: 2013 - 2,204,928,599
2012 - 2,197,561,159
Retained earnings	121,883			117,641
Treasury stock - at cost	(129,239		)	(123,131		)
Shares: 2013 - 1,109,502,777
2012 - 1,080,193,483
Accumulated other comprehensive income/(loss)	(25,774		)	(25,759		)
Total IBM stockholders’ equity	17,756			18,860
Noncontrolling interests	127			124
Total equity	17,883			18,984
Total liabilities and equity	$	115,153		$	119,213

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

6

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

	Six Months Ended June 30,
(Dollars in millions)	2013			2012
Cash flows from operating activities:
Net income	$	6,258		$	6,948
Adjustments to reconcile net income to cash provided by operating activities
Depreciation	1,632			1,706
Amortization of intangibles	657			627
Stock-based compensation	305			328
Net (gain)/loss on asset sales and other	(10		)	(118		)
Changes in operating assets and liabilities, net of acquisitions/divestitures	(1,644		)	(764		)
Net cash provided by operating activities	7,197			8,726
Cash flows from investing activities:
Payments for property, plant and equipment	(1,574		)	(2,135		)
Proceeds from disposition of property, plant and equipment	181			175
Investment in software	(275		)	(320		)
Acquisition of businesses, net of cash acquired	(179		)	(1,925		)
Divestitures of businesses, net of cash transferred	12			13
Non-operating finance receivables — net	336			686
Purchases of marketable securities and other investments	(3,135		)	(1,655		)
Proceeds from disposition of marketable securities and other investments	2,759			1,247
Net cash used in investing activities	(1,876		)	(3,913		)
Cash flows from financing activities:
Proceeds from new debt	6,694			7,559
Payments to settle debt	(4,876		)	(4,069		)
Short-term borrowings/(repayments) less than 90 days — net	(376		)	(2,236		)
Common stock repurchases	(6,145		)	(6,002		)
Common stock transactions — other	657			918
Cash dividends paid	(1,996		)	(1,848		)
Net cash used in financing activities	(6,043		)	(5,678		)
Effect of exchange rate changes on cash and cash equivalents	(133		)	(193		)
Net change in cash and cash equivalents	(854		)	(1,058		)
Cash and cash equivalents at January 1	10,412			11,922
Cash and cash equivalents at June 30	$	9,558		$	10,864

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

7

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

	Common
	Stock and								Accumulated
	Additional								Other			Total IBM			Non-
	Paid-in		Retained			Treasury			Comprehensive			Stockholders’			Controlling		Total
(Dollars in millions)	Capital		Earnings			Stock			Income/(Loss)			Equity			Interests		Equity
Equity - January 1, 2013	$	50,110	$	117,641		$	(123,131	)	$	(25,759	)	$	18,860		$	124	$	18,984
Net income plus other comprehensive income/(loss)
Net income			6,258									6,258					6,258
Other comprehensive income/(loss)									(16		)	(16		)			(16		)
Total comprehensive income/(loss)												$	6,242				$	6,242
Cash dividends declared — common stock			(1,996		)							(1,996		)			(1,996		)
Common stock issued under employee plans (7,367,440 shares)	668											668					668
Purchases (1,399,751 shares) and sales (1,480,251 shares) of treasury stock under employee plans — net			(19		)	(113		)				(132		)			(132		)
Other treasury shares purchased, not retired (29,389,794 shares)						(5,994		)				(5,994		)			(5,994		)
Changes in other equity	108											108					108
Changes in noncontrolling interests															4		4
Equity - June 30, 2013	$	50,886	$	121,883		$	(129,239	)	$	(25,774	)	$	17,756		$	127	$	17,883

	Common
	Stock and								Accumulated
	Additional								Other			Total IBM			Non-
	Paid-in		Retained			Treasury			Comprehensive			Stockholders’			Controlling			Total
(Dollars in millions)	Capital		Earnings			Stock			Income/(Loss)			Equity			Interests			Equity
Equity - January 1, 2012	$	48,129	$	104,857		$	(110,963	)	$	(21,885	)	$	20,138		$	97		$	20,236
Net income plus other comprehensive income/(loss)
Net income			6,948									6,948						6,948
Other comprehensive income/(loss)									387			387						387
Total comprehensive income/(loss)												$	7,335					$	7,335
Cash dividends declared — common stock			(1,848		)							(1,848		)				(1,848		)
Common stock issued under employee plans (10,092,817 shares)	780											780						780
Purchases (1,905,803 shares) and sales (2,034,612 shares) of treasury stock under employee plans — net			(29		)	(146		)				(174		)				(174		)
Other treasury shares purchased, not retired (30,629,597 shares)						(6,007		)				(6,007		)				(6,007		)
Changes in other equity	248											248						248
Changes in noncontrolling interests															(6		)	(6		)
Equity - June 30, 2012	$	49,157	$	109,928		$	(117,116	)	$	(21,498	)	$	20,472		$	92		$	20,563

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

8

Notes to Consolidated Financial Statements:

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See the company’s 2012 Annual Report on pages 59 to 61 for a discussion of the company’s critical accounting estimates.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2012 Annual Report.

Noncontrolling interest amounts in income of $0.9 million and $2.0 million, net of tax, for the three months ended June 30, 2013 and 2012, respectively, and $2.3 million and $5.7 million, net of tax, for the six months ended June 30, 2013 and 2012, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

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

2. Accounting Changes: In July 2013, the Financial Accounting Standards Board (FASB) issued guidance allowing the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to interest rates on direct Treasury obligations of the United States government and the LIBOR. In addition, the guidance removes the restriction on using different benchmark rates for similar hedges. The guidance became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and is not expected to have a material impact in the consolidated financial results.

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

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

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

9

Notes to Consolidated Financial Statements — (continued)

3. Financial Instruments:

Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. See Note A, “Significant Accounting Policies,” on pages 76 to 86 in the company’s 2012 Annual Report for further information. There were no material impairments of non-financial assets for the six months ended June 30, 2013 and 2012, respectively.

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

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012.

10

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions) At June 30, 2013	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,532	$	—	$	3,532
Commercial paper	—		1,230		—		1,230
Money market funds	1,170		—		—		1,170
U.S. government securities	—		950		—		950
Canada government securities	—		465		—		465
Other securities	—		22		—		22
Total	1,170		6,199		—		7,369		(6)
Debt securities - current (2)	—		799				799		(6)
Debt securities - noncurrent (3)	2		7		—		9
Available-for-sale equity investments (3)	17		0		—		17
Derivative assets (4)
Interest rate contracts	—		392		—		392
Foreign exchange contracts	—		544		—		544
Equity contracts	—		1		—		1
Total	—		937		—		937		(7)
Total assets	$	1,189	$	7,942	$	—	$	9,131	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	448	$	—	$	448
Equity contracts	—		33		—		33
Total liabilities	$	—	$	481	$	—	$	481	(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 June 30, 2013 were $553 million and $384 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 June 30, 2013 were $366 million and $115 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 $256 million each.

11

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
At December 31, 2012	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,694	$	—	$	3,694
Commercial paper	—		2,098		—		2,098
Money market funds	1,923		—		—		1,923
Other securities	—		30		—		30
Total	1,923		5,823		—		7,746		(6)
Debt securities - current (2)	—		717		—		717		(6)
Debt securities - noncurrent (3)	2		8		—		10
Available-for-sale equity investments (3)	34		—		—		34
Derivative assets (4)
Interest rate contracts	—		604		—		604
Foreign exchange contracts	—		305		—		305
Equity contracts	—		9		—		9
Total	—		918		—		918		(7)
Total assets	$	1,959	$	7,466	$	—	$	9,424	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	496	$	—	$	496
Equity contracts	—		7		—		7
Total liabilities	$	—	$	503	$	—	$	503	(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, 2012 were $333 million and $585 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, 2012 were $426 million and $78 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 $262 million each.

There were no transfers between Levels 1 and 2 for the six months ended June 30, 2013 and the year ended December 31, 2012.

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 June 30, 2013 and December 31, 2012, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

12

Notes to Consolidated Financial Statements — (continued)

Long-term Debt

Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt is $26,292 million and $24,088 million and the estimated fair value is $28,243 million and $27,119 million at June 30, 2013 and December 31, 2012, 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.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At June 30, 2013:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	7	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	13	$	4	$	0	$	17

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

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2012:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	8	$	2	$	—	$	10
Available-for-sale equity investments(1)	$	31	$	4	$	1	$	34

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

Based on an evaluation of available evidence as of June 30, 2013 and December 31, 2012, the company believes that unrealized losses on debt and available-for-sale equity investments were temporary and did not represent a need for an other-than-temporary impairment.

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

(Dollars in millions)
For the three months ended June 30:	2013		2012
Proceeds	$	2	$	6
Gross realized gains (before taxes)	1		2
Gross realized losses (before taxes)	0		0

(Dollars in millions)
For the six months ended June 30:	2013		2012
Proceeds	$	20	$	51
Gross realized gains (before taxes)	4		16
Gross realized losses (before taxes)	4		0

The after-tax net unrealized holding gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) for the period and after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:

13

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)
For the three months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	0		$	4
Net unrealized (gains)/losses reclassified to net income*	(0		)	(1		)

*There were no significant writedowns for the three months ended June 30, 2013 and 2012, respectively.

(Dollars in millions)
For the six months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	(0	)	$	18
Net unrealized (gains)/losses reclassified to net income*	0			(10		)

* There were no significant writedowns for the six months ended June 30, 2013 and 2012, respectively.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at June 30, 2013.

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 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 June 30, 2013 and December 31, 2012 was $55 million and $94 million, respectively, for which no collateral was posted at June 30, 2013 and December 31, 2012.  Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of June 30, 2013 and December 31, 2012 was $937 million and $918 million, respectively. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure was reduced by $256 million and $262 million at June 30, 2013 and December 31, 2012, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at June 30, 2013 and December 31, 2012, this exposure was reduced by $33 million and $69 million of cash collateral, respectively, received by the company. At June 30, 2013 and December 31, 2012, the net exposure related to derivative assets recorded in the Statement of Financial Position was $648 million and $587 million respectively.  At June 30, 2013 and December 31, 2012, the net amount related to derivative liabilities recorded in the Statement of Financial Position was $225 million and $242 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 June 30, 2013 or December 31, 2012 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation

14

Notes to Consolidated Financial Statements — (continued)

to return cash collateral totaled $33 million and $69 million at June 30, 2013 and December 31, 2012, 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 June 30, 2013 or at December 31, 2012. Additionally, the company’s exposure is further reduced by holding non-cash collateral. At June 30, 2013, no amounts of non-cash collateral were held, and at December 31, 2012, $31 million was held in U.S. Treasury securities.  Per accounting guidance, non-cash collateral is not recorded on the 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, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

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

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

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolios. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2013 and December 31, 2012, the total notional amount of the company’s interest rate swaps was $3.0 billion and $4.3 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2013 and December 31, 2012 was approximately 6.6 years and 5.1 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 June 30, 2013 and December 31, 2012.

At June 30, 2013 and December 31, 2012, net gains of approximately $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, gains of less than $1 million, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments designated as net investment hedges was $4.6 billion and $3.3 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2013 and December 31, 2012 was approximately 0.3 years and 0.4 years, respectively.

15

Notes to Consolidated Financial Statements — (continued)

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is four years. At June 30, 2013 and December 31, 2012, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.8 billion and $10.7 billion, respectively, with a weighted-average remaining maturity of 0.7 years and 0.7 years, respectively.

At June 30, 2013 and December 31, 2012, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $109 million and net losses of $138 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $205 million of gains and $79 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At June 30, 2013 and December 31, 2012, no instruments relating to this program were outstanding.

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 June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $13.4 billion and $12.9 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion for 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 June 30, 2013 and December 31, 2012.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company utilizes 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 June 30, 2013 and December 31, 2012.

16

Notes to Consolidated Financial Statements — (continued)

The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of June 30, 2013 and December 31, 2012, as well as for the three and six months ended June 30, 2013 and 2012, respectively:

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

As of June 30, 2013 and December 31, 2012

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	6/30/2013		12/31/2012		Classification	6/30/2013		12/31/2012
Designated as hedging instruments:
Interest rate contracts:	Prepaid expenses and other current assets	$	26	$	47	Other accrued expenses and liabilities	$	—	$	—
	Investments and sundry assets	366		557		Other liabilities	—		—
Foreign exchange contracts:	Prepaid expenses and other current assets	393		135		Other accrued expenses and liabilities	150		267
	Investments and sundry assets	—		5		Other liabilities	115		78
Fair value of derivative Assets		$	785	$	744	Fair value of derivative liabilities	$	265	$	345
Not designated as hedging instruments:
Foreign exchange contracts:	Prepaid expenses and other current assets	$	133	$	142	Other accrued expenses and liabilities	$	183	$	152
	Investments and sundry assets	18		23		Other liabilities	—		—
Equity contracts:	Prepaid expenses and other current assets	1		9		Other accrued expenses and liabilities	33		7
Fair value of derivative Assets		$	152	$	174	Fair value of derivative liabilities	$	216	$	159
Total debt designated as hedging instruments:
	Short-term debt	N/A		N/A			$	1,176	$	578
	Long-term debt	N/A		N/A			2,226		3,035
Total		$	937	$	918		$	3,883	$	4,116

N/A-not applicable

17

Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

For the three months ended June 30, 2013 and 2012

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the three months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(68	)	$	80		$	92	$	(47	)
	Interest expense	(44		)	65			59		(39		)
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(80		)	(122		)	N/A		N/A
Equity contracts	SG&A expense	(26		)	(35		)	N/A		N/A
Total		$	(218	)	$	(12	)	$	151	$	(86	)

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
													(Ineffectiveness) and
	Effective Portion					Consolidated	Effective Portion Reclassified						Amounts Excluded from
For the three months	Recognized in OCI					Statement of	from AOCI						Effectiveness Testing(3)
ended June 30:	2013			2012		Earnings Line Item	2013			2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—		$	—	Interest expense	$	—		$	(2	)	$	—		$	—
Foreign exchange Contracts	(10		)	68		Other (income) and expense	48			86			(1		)	1
						Cost of sales	(7		)	11			—			—
						SG&A expense	5			15			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	62			149		Interest expense	—			—			3			1
Total	$	52		$	217		$	47		$	111		$	2		$	2

N/A-not applicable

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

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

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

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

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

18

Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

For the six months ended June 30, 2013 and 2012

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the six months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(88	)	$	56		$	138	$	8
	Interest expense	(56		)	45			88		7
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(519		)	(204		)	N/A		N/A
Equity contracts	SG&A expense	60			63			N/A		N/A
Total		$	(603	)	$	(40	)	$	226	$	15

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
											(Ineffectiveness) and
	Effective Portion				Consolidated	Effective Portion Reclassified					Amounts Excluded from
For the six months	Recognized in OCI				Statement of	from AOCI					Effectiveness Testing(3)
ended June 30:	2013		2012		Earnings Line Item	2013		2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Interest expense	$	—	$	(4	)	$	—		$	—
Foreign exchange Contracts	350		119		Other (income) and expense	85		106			(1		)	2
					Cost of sales	2		16			—			—
					SG&A expense	15		16			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	282		112		Interest expense	—		—			2			3
Total	$	632	$	231		$	103	$	134		$	1		$	5

N/A-not applicable

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

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

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

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

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

For the three and six months ending June 30, 2013 and 2012, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Refer to the company’s 2012 Annual Report, Note A, “Significant Accounting Policies,” on page 83 for additional information on the company’s use of derivative financial instruments.

19

Notes to Consolidated Financial Statements — (continued)

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

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Current:
Net investment in sales-type and direct financing leases	$	3,947	$	3,862
Commercial financing receivables	6,467		7,750
Client loan receivables	5,101		5,395
Installment payment receivables	1,145		1,031
Total	$	16,661	$	18,038
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,610	$	6,107
Commercial financing receivables	—		5
Client loan receivables	5,591		5,966
Installment payment receivables	627		733
Total	$	11,828	$	12,812

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 $745 million and $794 million at June 30, 2013 and December 31, 2012, respectively, and is reflected net of unearned income of $698 million and $728 million, and net of the allowance for credit losses of $111 million and $114 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $31 million and $46 million at June 30, 2013 and December 31, 2012, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan receivables, net of allowance for credit losses of $165 million and $155 million at June 30, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.

Installment payment receivables, net of allowance for credit losses of $35 million and $39 million at June 30, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

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

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $731 million and $650 million at June 30, 2013 and December 31, 2012, respectively.

The company did not have any financing receivables held for sale as of June 30, 2013 and December 31, 2012.

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 June 30, 2013 and December 31, 2012. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. For additional information on the company’s accounting policies for the allowance for credit losses, see the company’s 2012 Annual Report beginning on page 85.

20

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)	Major			Growth
At June 30, 2013	Markets			Markets			Total
Financing receivables:
Lease receivables	$	6,776		$	2,049		$	8,826
Loan receivables	8,894			3,774			12,668
Ending balance	$	15,670		$	5,824		$	21,494
Collectively evaluated for impairment	$	15,561		$	5,671		$	21,232
Individually evaluated for impairment	$	109		$	153		$	262
Allowance for credit losses:
Beginning balance at January 1, 2013
Lease receivables	$	59		$	55		$	114
Loan receivables	121			84			204
Total	$	180		$	138		$	318
Write-offs	(20		)	(4		)	(23		)
Provision	(14		)	37			23
Other	(3		)	(4		)	(7		)
Ending balance at June 30, 2013	$	144		$	168		$	311
Lease receivables	$	48		$	63		$	111
Loan receivables	$	96		$	104		$	200
Collectively evaluated for impairment	$	50		$	31		$	81
Individually evaluated for impairment	$	94		$	136		$	230

(Dollars in millions)	Major			Growth
At December 31, 2012	Markets			Markets			Total
Financing receivables:
Lease receivables	$	7,036		$	2,138		$	9,174
Loan receivables	9,666			3,670			13,336
Ending balance	$	16,701		$	5,808		$	22,510
Collectively evaluated for impairment	$	16,570		$	5,684		$	22,254
Individually evaluated for impairment	$	131		$	125		$	256
Allowance for credit losses:
Beginning balance at January 1, 2012
Lease receivables	$	79		$	40		$	118
Loan receivables	125			64			189
Total	$	203		$	104		$	307
Write-offs	(14		)	(1		)	(15		)
Provision	(9		)	38			28
Other	0			(2		)	(2		)
Ending balance at December 31, 2012	$	180		$	138		$	318
Lease receivables	$	59		$	55		$	114
Loan receivables	$	121		$	84		$	204
Collectively evaluated for impairment	$	69		$	29		$	98
Individually evaluated for impairment	$	111		$	109		$	220

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

21

Notes to Consolidated Financial Statements — (continued)

Financing Receivables on Non-Accrual Status

Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts 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.

The following table presents the recorded investment in financing receivables which are on non-accrual status at June 30, 2013 and December 31, 2012.

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Major markets	$	24	$	27
Growth markets	31		21
Total lease receivables	$	55	$	47
Major markets	$	41	$	67
Growth markets	62		25
Total loan receivables	$	104	$	92
Total receivables	$	159	$	139

Impaired Loans

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

The following tables present impaired client loan receivables.

	At June 30, 2013				At December 31, 2012
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	71	$	67	$	88	$	77
Growth markets	95		86		72		65
Total	$	166	$	153	$	160	$	143

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2013:	Investment		Recognized*		Cash Basis
Major markets	$	70	$	0	$	0
Growth markets	90		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2012:	Investment		Recognized*		Cash Basis
Major markets	$	81	$	0	$	0
Growth markets	64		0		0
Total	$	145	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

22

Notes to Consolidated Financial Statements — (continued)

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2013:	Investment		Recognized*		Cash Basis
Major markets	$	76	$	0	$	0
Growth markets	84		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2012:	Investment		Recognized*		Cash Basis
Major markets	$	91	$	0	$	0
Growth markets	63		0		0
Total	$	154	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

Credit Quality Indicators

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

The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at June 30, 2013 and December 31, 2012. Receivables with a credit quality indicator ranging from AAA to BBB- are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At June 30, 2013:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	577	$	90	$	757	$	165
A+ – A-	1,559		205		2,046		378
BBB+ – BBB-	2,398		818		3,147		1,506
BB+ – BB	1,231		309		1,616		568
BB- – B+	542		405		711		746
B – B-	381		163		500		300
CCC+ – D-	89		60		117		110
Total	$	6,776	$	2,049	$	8,894	$	3,774

At June 30, 2013, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (38 percent), Government (16 percent), Manufacturing (13 percent), Services (9 percent), Retail (8 percent), Communications (6 percent), Healthcare (6 percent) and Other (4 percent).

23

Notes to Consolidated Financial Statements — (continued)

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At December 31, 2012:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	646	$	86	$	887	$	148
A+ – A-	1,664		223		2,286		382
BBB+ – BBB-	2,285		776		3,139		1,333
BB+ – BB	1,367		450		1,878		773
BB- – B+	552		418		758		718
B – B-	399		127		548		218
CCC+ – D	124		58		170		99
Total	$	7,036	$	2,138	$	9,666	$	3,670

At December 31, 2012, the industries which made up Global Financing’s receivables portfolio consisted of:  Financial (38 percent), Government (16 percent), Manufacturing (14 percent), Retail (9 percent), Services (7 percent), Healthcare (6 percent), Communications (6 percent) and Other (4 percent).

Past Due Financing Receivables

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

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At June 30, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	11	$	6,766	$	6,776	$	7
Growth markets	16		2,033		2,049		11
Total lease receivables	$	27	$	8,799	$	8,826	$	17
Major markets	$	18	$	8,875	$	8,894	$	10
Growth markets	43		3,731		3,774		28
Total loan receivables	$	61	$	12,607	$	12,668	$	38
Total	$	88	$	21,406	$	21,494	$	55

* Does not include accounts that are fully reserved.

24

Notes to Consolidated Financial Statements — (continued)

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2012:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	7,028	$	7,036	$	5
Growth markets	11		2,127		2,138		8
Total lease receivables	$	20	$	9,154	$	9,174	$	13
Major markets	$	27	$	9,639	$	9,666	$	8
Growth markets	36		3,634		3,670		31
Total loan receivables	$	63	$	13,273	$	13,336	$	39
Total	$	82	$	22,428	$	22,510	$	52

* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

The company did not have any troubled debt restructurings during the six months ended June 30, 2013 and for the year ended December 31, 2012.

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013			2012			2013			2012
Cost	$	30		$	30		$	61		$	64
Selling, general and administrative	115			117			214			236
Research, development and engineering	15			12			30			27
Pre-tax stock-based compensation cost	161			160			305			328
Income tax benefits	(56		)	(56		)	(106		)	(116		)
Total stock-based compensation cost	$	105		$	104		$	199		$	212

The increase in pre-tax stock-based compensation cost for the three months ended June 30, 2013, as compared to the corresponding period in the prior year, was due to increases related to restricted stock units ($4 million) and performance share units ($1 million), partially offset by a decrease in the company’s assumption of stock-based awards previously issued by acquired entities ($4 million). The decrease in pre-tax stock-based compensation cost for the six months ended June 30, 2013, as compared to the corresponding period in the prior year, was due to decreases related to performance share units ($11 million), the company’s assumption of stock-based awards previously issued by acquired entities ($7 million) and restricted stock units ($5 million).

As of June 30, 2013, the total unrecognized compensation cost of $1,287 million related to non-vested awards 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 June 30, 2013 and 2012.

6. Segments:  The tables on pages 26 and 27 reflect the results of operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income. These results are used, in part, by senior management, both in evaluating the performance of, and in allocating resources to, each of the segments.

25

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the three months ended June 30, 2013:
External revenue	$	9,536		$	4,606		$	6,423		$	3,758		$	487		$	24,809
Internal revenue	292			188			738			135			575			1,928
Total revenue	$	9,828		$	4,795		$	7,161		$	3,893		$	1,061		$	26,737
Pre-tax income	$	1,514		$	623		$	2,443		$	(141	)	$	550		$	4,989
Revenue year-to-year change	(4.5		)%	(1.1		)%	3.1		%	(11.9		)%	2.9		%	(2.9		)%
Pre-tax income year-to-year change	(13.8		)%	(22.4		)%	(2.0		)%	nm			4.2		%	(14.2		)%
Pre-tax income margin	15.4		%	13.0		%	34.1		%	(3.6		)%	51.8		%	18.7		%

nm - not meaningful

For the three months ended June 30, 2012:
External revenue	$	9,995		$	4,667		$	6,171		$	4,259		$	517		$	25,608
Internal revenue	291			180			776			159			515			1,921
Total revenue	$	10,286		$	4,847		$	6,946		$	4,418		$	1,032		$	27,529
Pre-tax income	$	1,757		$	803		$	2,493		$	234		$	528		$	5,814
Pre-tax income margin	17.1		%	16.6		%	35.9		%	5.3		%	51.1		%	21.1		%

Reconciliations to IBM as Reported:

(Dollars in millions)
For the three months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	26,737		$	27,529
Eliminations of internal transactions	(1,928		)	(1,921		)
Other revenue adjustments	115			175
Total IBM Consolidated	$	24,924		$	25,783
Pre-tax income:
Total reportable segments	$	4,989		$	5,814
Amortization of acquired intangible assets	(178		)	(173		)
Acquisition-related charges	(4		)	(7		)
Non-operating retirement-related (costs)/income	(262		)	(94		)
Eliminations of internal transactions	(379		)	(343		)
Unallocated corporate amounts	(22		)	(36		)
Total IBM Consolidated	$	4,144		$	5,161

26

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the six months ended June 30, 2013:
External revenue	$	19,140		$	9,091		$	11,995		$	6,864		$	985		$	48,075
Internal revenue	540			368			1,569			255			1,116			3,847
Total revenue	$	19,680		$	9,459		$	13,563		$	7,118		$	2,101		$	51,922
Pre-tax income	$	3,099		$	1,326		$	4,457		$	(546	)	$	1,088		$	9,425
Revenue year-to-year change	(4.5		)%	(2.2		)%	1.3		%	(14.4		)%	4.7		%	(3.8		)%
Pre-tax income year-to-year change	(4.3		)%	(5.6		)%	0.4		%	nm			4.6		%	(8.0		)%
Pre-tax income margin	15.7		%	14.0		%	32.9		%	(7.7		)%	51.8		%	18.2		%

nm - not meaningful

For the six months ended June 30, 2012:
External revenue	$	20,031		$	9,304		$	11,770		$	8,008		$	1,006		$	50,120
Internal revenue	584			363			1,615			309			1,000			3,872
Total revenue	$	20,615		$	9,667		$	13,386		$	8,317		$	2,006		$	53,991
Pre-tax income	$	3,237		$	1,404		$	4,438		$	130		$	1,040		$	10,248
Pre-tax income margin	15.7		%	14.5		%	33.2		%	1.6		%	51.8		%	19.0		%

Reconciliations to IBM as Reported:

(Dollars in millions)
For the six months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	51,922		$	53,991
Eliminations of internal transactions	(3,847		)	(3,872		)
Other revenue adjustments	257			336
Total IBM Consolidated	$	48,332		$	50,456
Pre-tax income:
Total reportable segments	$	9,425		$	10,248
Amortization of acquired intangible assets	(361		)	(339		)
Acquisition-related charges	(15		)	(14		)
Non-operating retirement-related (costs)/income	(546		)	(197		)
Eliminations of internal transactions	(718		)	(627		)
Unallocated corporate amounts	(35		)	(74		)
Total IBM Consolidated	$	7,750		$	8,997

27

Notes to Consolidated Financial Statements — (continued)

7. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(936	)	$	(23	)	$	(959	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	0			0			0
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(10	)	$	9		$	(1	)
Reclassification of (gains)/losses to:
Cost of sales	7			(2		)	4
SG&A expense	(5		)	2			(3		)
Other (income) and expense	(48		)	19			(30		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	(57	)	$	28		$	(29	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	0			0			0
Net (losses)/gains arising during the period	210			(71		)	138
Amortization of prior service (credits)/costs	(28		)	10			(18		)
Amortization of net (gains)/losses	864			(304		)	559
Total retirement-related benefit plans	$	1,045		$	(366	)	$	679
Other comprehensive income/(loss)	$	53		$	(361	)	$	(309	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

28

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(724	)	$	(58	)	$	(782	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(3	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	(2		)	1			(1		)
Subsequent changes in previously impaired securities arising during the period	9			(3		)	6
Total net changes related to available-for-sale securities	$	4		$	(1	)	$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	68		$	(15	)	$	53
Reclassification of (gains)/losses to:
Cost of sales	(12		)	0			(11		)
SG&A expense	(15		)	4			(11		)
Other (income) and expense	(86		)	33			(53		)
Interest expense	2			(1		)	1
Total unrealized gains/(losses) on cash flow hedges	$	(42	)	$	21		$	(21	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	70			(26		)	45
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(37		)	13			(24		)
Amortization of net (gains)/losses	613			(217		)	397
Total retirement-related benefit plans	$	647		$	(229	)	$	418
Other comprehensive income/(loss)	$	(115	)	$	(268	)	$	(383	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

29

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(1,341	)	$	(107	)	$	(1,448	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	1			0			1
Total net changes related to available-for-sale securities	$	(1	)	$	1		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	350		$	(119	)	$	231
Reclassification of (gains)/losses to:
Cost of sales	(3		)	1			(2		)
SG&A expense	(15		)	6			(10		)
Other (income) and expense	(85		)	33			(52		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	247		$	(79	)	$	168
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	33		$	(11	)	$	21
Net (losses)/gains arising during the period	195			(67		)	129
Amortization of prior service (credits)/costs	(58		)	20			(38		)
Amortization of net (gains)/losses	1,750			(597		)	1,153
Total retirement-related benefit plans	$	1,920		$	(655	)	$	1,265
Other comprehensive income/(loss)	$	826		$	(842	)	$	(16	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

30

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(337	)	$	(48	)	$	(385	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	3		$	(1	)	$	2
Reclassification of (gains)/losses to other (income) and expense	(16		)	6			(10		)
Subsequent changes in previously impaired securities arising during the period	27			(10		)	17
Total net changes related to available-for-sale securities	$	14		$	(5	)	$	9
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	119		$	(45	)	$	74
Reclassification of (gains)/losses to:
Cost of sales	(16		)	0			(16		)
SG&A expense	(16		)	4			(12		)
Other (income) and expense	(106		)	41			(65		)
Interest expense	4			(2		)	2
Total unrealized gains/(losses) on cash flow hedges	$	(16	)	$	(1	)	$	(17	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	65			(23		)	41
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(74		)	27			(47		)
Amortization of net (gains)/losses	1,232			(446		)	786
Total retirement-related benefit plans	$	1,223		$	(443	)	$	780
Other comprehensive income/(loss)	$	884		$	(497	)	$	387

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

31

Notes to Consolidated Financial Statements — (continued)

Accumulated Other Comprehensive Income/(Loss) (net of Tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2013	$	(90	)	$	1,733		$	(27,406	)	$	4	$	(25,759	)
Other comprehensive income before reclassifications	231			(1,448		)	150			0		(1,067		)
Amount reclassified from accumulated other comprehensive income	(63		)	0			1,115			0		1,050
Total change for the period	168			(1,448		)	1,265			0		(16		)
June 30, 2013	$	78		$	284		$	(26,141	)	$	4	$	(25,774	)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2012	$	71		$	1,767		$	(23,737	)	$	13		$	(21,885	)
Other comprehensive income before reclassifications	74			(385		)	41			18			(252		)
Amount reclassified from accumulated other comprehensive income	(91		)	0			739			(10		)	638
Total change for the period	(17		)	(385		)	780			9			387
June 30, 2012	$	54		$	1,382		$	(22,956	)	$	22		$	(21,498	)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax

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

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	636	$	459	38.5	%
Nonpension postretirement plans — cost	71		89		(21.0	)
Total	$	706	$	548	28.8	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	1,310	$	991	32.2	%
Nonpension postretirement plans — cost	151		174		(13.3	)
Total	$	1,460	$	1,164	25.4	%

32

Notes to Consolidated Financial Statements — (continued)

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

Cost/(Income) of Pension Plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	120		$	111
Interest cost	494			548			376			444
Expected return on plan assets	(995		)	(1,011		)	(537		)	(573		)
Amortization of prior service costs/(credits)	2			3			(29		)	(38		)
Recognized actuarial losses	444			330			394			256
Curtailments and settlements	—			—			0			0
Multi-employer plans/other costs	—			—			25			23
Total net periodic pension (income)/cost of defined benefit plans	(55		)	(131		)	349			222
Cost of defined contribution plans	193			212			148			156
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	138		$	81		$	497		$	378

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the six months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	251		$	224
Interest cost	990			1,098			758			894
Expected return on plan assets	(1,991		)	(2,022		)	(1,091		)	(1,153		)
Amortization of prior service costs/(credits)	5			5			(60		)	(77		)
Recognized actuarial losses	895			665			798			515
Curtailments and settlements	—			—			—			1
Multi-employer plan/other costs	—			—			55			46
Total net periodic pension (income)/cost of defined benefit plans	(101		)	(254		)	711			449
Cost of defined contribution plans	399			477			300			319
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	298		$	223		$	1,011		$	768

In 2013, the company expects to contribute to its non-U.S. defined benefit and multi-employer plans approximately $600 million, which will be mainly contributed to the defined benefit pension plans in Japan, the UK and Switzerland. This amount represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first six months of 2013 were $290 million.

The following table provides the components of the cost/(income) for the company’s nonpension postretirement plans:

Cost of Nonpension Postretirement Plans

(Dollars in millions)	U.S. Plan					Non-U.S. Plans
For the three months ended June 30:	2013			2012		2013			2012
Service cost	$	9		$	9	$	2		$	2
Interest cost	40			51		15			16
Expected return on plan assets	(0		)	—		(2		)	(2		)
Amortization of prior service costs/(credits)	—			—		(1		)	(1		)
Recognized actuarial losses	2			10		6			4
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	51		$	70	$	20		$	19

33

Notes to Consolidated Financial Statements — (continued)

	U.S. Plans					Non-U.S. Plans
For the six months ended June 30:	2013			2012		2013			2012
Service cost	$	17		$	18	$	5		$	5
Interest cost	82			100		31			33
Expected return on plan assets	(1		)	—		(5		)	(5		)
Amortization of prior service credits	—			—		(2		)	(2		)
Recognized actuarial losses	11			16		12			9
Curtailments and settlements	—			—		0			—
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	109		$	134	$	41		$	39

The company received a $10.0 million subsidy in the second quarter of 2013 and a $16.2 million subsidy for the first half of 2013 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this subsidy is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants. For further information related to the Medicare Prescription Drug Act, see page 133 in the company’s 2012 Annual Report.

9. Acquisitions/Divestitures:

Acquisitions: During the six months ended June 30, 2013, the company completed three acquisitions at an aggregate cost of $101 million.

The Software segment completed acquisitions of three privately held companies: in the first quarter, StoredIQ Inc. (StoredIQ) and Star Analytics, Inc. (Star Analytics); and in the second quarter, UrbanCode Inc. (UrbanCode).

The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2013:

	Amortization	Total
(Dollars in millions)	Life (in yrs.)	Acquisitions
Current assets		$	7
Fixed assets/noncurrent assets		14
Intangible assets:
Goodwill	N/A	75
Completed technology	5-7	11
Patents/trademarks	3-7	4
Total assets acquired		111
Current liabilities		(3		)
Noncurrent liabilities		(7		)
Total liabilities assumed		(10		)
Total purchase price		$	101

N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. The acquisition of StoredIQ advances the company’s efforts to help clients derive value from big data. The combination of the company’s and Star Analytics’ software will advance the company’s business analytics initiatives. UrbanCode automates the delivery of software, helping businesses quickly release and update mobile, social, big data and cloud applications. Purchase price consideration for these acquisitions as reflected in the table above, is paid in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled work-force, neither of which qualify as an amortizable intangible asset. The overall weighted-average life of the identified amortizable intangible assets acquired is 6.6

34

Notes to Consolidated Financial Statements — (continued)

years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $75 million has been assigned to the Software segment. It is expected that approximately 8 percent of the goodwill will be deductible for tax purposes.

On July 8, 2013, the company announced that it had completed the acquisition of SoftLayer Technologies, Inc. (SoftLayer), based in Dallas, Texas, the world’s largest privately held cloud computing infrastructure company. Softlayer will enable the company to deliver the security, privacy and reliability attributes of private clouds with the economy and speed of public clouds. At the date of issuance of the financial statements, the initial business combination accounting (purchase price of approximately $2.0 billion) was not complete for this acquisition.

On July 9, 2013, the company announced that it had entered into a definitive agreement to acquire CSL International (CSL), a privately held company based in Herzliya Pituach, Israel. CSL is a leading provider of virtualization management technology for the company’s zEnterprise system. The acquisition is expected to close in the third quarter of 2013.

Divestitures: During the first quarter of 2013, the company completed the divestiture of its Showcase Reporting product set to Help/Systems. Showcase Reporting, which was acquired by IBM through the SPSS acquisition in 2009, is an enterprise-class business intelligence platform that enables customers to build and manage analytical reporting environments. This transaction was not material to the Consolidated Financial Statements.

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

	At June 30, 2013
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,522	$	(677	)	$	845
Client relationships	2,059		(1,068		)	991
Completed technology	2,483		(1,050		)	1,433
In-process R&D	15		—			15
Patents/trademarks	280		(149		)	131
Other(a)	8		(5		)	2
Total	$	6,367	$	(2,949	)	$	3,418

	At December 31, 2012
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,527	$	(665	)	$	861
Client relationships	2,103		(961		)	1,142
Completed technology	2,709		(1,112		)	1,597
In-process R&D	28		—			28
Patents/trademarks	281		(127		)	154
Other(a)	31		(27		)	3
Total	$	6,679	$	(2,892	)	$	3,787

(a)   Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased $369 million during the first half of 2013, primarily due to amortization. The aggregate intangible amortization expense was $326 million and $657 million for the second quarter and first six months of 2013, respectively, versus $318 million and $627 million for the second quarter and first six months of 2012, respectively. In addition, in the first half of 2013, the company retired $598 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 June 30, 2013:

35

Notes to Consolidated Financial Statements — (continued)

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2013 (for Q3-Q4)	$	280	$	369	$	648
2014	388		630		1,018
2015	158		502		660
2016	20		463		483
2017	—		345		345

The change in the goodwill balances by reportable segment, for the six months ended June 30, 2013 and for the year ended December 31, 2012 are as follows:

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/13		Additions		Adjustments			Divestitures			Adjustments			6/30/13
Global Business Services	$	4,357	$	—	$	(0	)	$	—		$	(121	)	$	4,236
Global Technology Services	2,916		—		5			—			(76		)	2,844
Software	20,405		75		(27		)	(2		)	(289		)	20,164
Systems and Technology	1,568		—		33			—			(0		)	1,602
Total	$	29,247	$	75	$	11		$	(2	)	$	(486	)	$	28,846

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/12		Additions		Adjustments			Divestitures			Adjustments		12/31/12
Global Business Services	$	4,313	$	5	$	(0	)	$	(2	)	$	42	$	4,357
Global Technology Services	2,646		264		—			(0		)	6		2,916
Software	18,121		2,182		(30		)	(6		)	137		20,405
Systems and Technology	1,133		443		(0		)	(14		)	6		1,568
Total	$	26,213	$	2,894	$	(30	)	$	(22	)	$	192	$	29,247

Purchase price adjustments recorded in the first six months of 2013 and full year 2012 were related to acquisitions that were completed on or prior to December 31, 2012 or December 31, 2011, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded during the first six months of 2013 or the full year of 2012 and the company has no accumulated impairment losses.

11. Restructuring-Related Liabilities: The following table provides a roll forward of the current and noncurrent liability balances for special actions taken in the following periods: (1) the second quarter of 2005 associated with Global Services, primarily in Europe, (2) the fourth quarter of 2002 associated with the acquisition of the PricewaterhouseCoopers consulting business, (3) the second quarter of 2002 associated with the Microelectronics Division and the rebalancing of the company’s workforce and leased space resources, (4) the 2002 actions associated with the hard disk drive business for reductions in workforce, manufacturing capacity and space, (5) the actions taken in 1999, and (6) the actions that were executed prior to 1994.

36

Notes to Consolidated Financial Statements — (continued)

	Liability								Liability
	as of					Other			as of
(Dollars in millions)	01/01/13		Payments			Adjustments*			6/30/2013
Current:
Workforce	$	28	$	(15	)	$	14		$	28
Space	2		(0		)	(0		)	1
Total current	$	30	$	(15	)	$	14		$	29
Noncurrent:
Workforce	$	430	$	—		$	(12	)	$	417
Space	0		—			(0		)	0
Total noncurrent	$	430	$	—		$	(12	)	$	417

*   Principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion.

12. Contingencies: As a company with a substantial employee population and with clients in more than 170 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended June 30, 2013, were not material to the Consolidated Financial Statements.

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

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this Note, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions 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

37

Notes to Consolidated Financial Statements — (continued)

company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

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

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

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. The State terminated the contract, claiming that IBM was in breach, and the State is seeking damages. IBM believes the State’s claims against it are without merit and is seeking payment of termination amounts specified in the contract. Trial began in late February 2012 in Marion County, Indiana Superior Court and concluded in early April. On July 18, 2012, the court rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. The parties have each appealed portions of the court’s ruling.

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. The trial in the High Court concluded in April 2013 and the company is awaiting a ruling from the Court. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK and are currently stayed pending resolution of the above-referenced High Court proceedings.

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

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 activities by employees of IBM Korea, LG IBM, IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., during the period from 1998 through 2009, allegedly in violation of the Foreign Corrupt Practices Act of 1977. As part of that settlement, IBM consented to the entry of a judgment relating to the books and records and internal control provisions of the securities laws, and also agreed to pay a total of $10 million, categorized by the SEC as follows: (i) $5.3 million, representing profits gained as a result of the conduct alleged in the SEC’s complaint, (ii) prejudgment interest on that amount of $2.7 million, and (iii) a civil penalty of $2 million. 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

38

Notes to Consolidated Financial Statements — (continued)

on certain matters, including those relating to compliance with the FCPA. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

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

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

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters include claims for taxes on the importation of computer software. In November 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this decision. The total potential amount related to the remaining matters for all applicable years is approximately $650 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

13. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $4,889 million and $4,719 million at June 30, 2013 and December 31, 2012, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $1,566 million and $1,513 million at June 30, 2013 and December 31, 2012, respectively.

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

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of non-financial 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, which procedures 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

39

Notes to Consolidated Financial Statements — (continued)

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 $58 million and $65 million at June 30, 2013 and December 31, 2012, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

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

Standard Warranty Liability

(Dollars in millions)	2013			2012
Balance at January 1	$	394		$	407
Current period accruals	163			181
Accrual adjustments to reflect actual experience	11			(9		)
Charges incurred	(192		)	(199		)
Balance at June 30	$	376		$	380

Extended Warranty Liability

(Dollars in millions)	2013			2012
Aggregate deferred revenue at January 1	$	606		$	636
Revenue deferred for new extended warranty contracts	119			127
Amortization of deferred revenue	(148		)	(155		)
Other*	(11		)	(6		)
Aggregate deferred revenue at June 30	$	567		$	602
Current portion	$	271		$	288
Noncurrent portion	296			314
Aggregate deferred revenue at June 30	$	567		$	602

* Other primarily consists of foreign currency translation adjustments.

14. Subsequent Events: On July 30, 2013, the company announced that the Board of Directors approved a quarterly dividend of $0.95 per common share. The dividend is payable September 10, 2013 to shareholders of record on August 9, 2013.

On July 29, 2013, the company offered and priced $1.5 billion of ten-year fixed-rate bonds with a 3.375 percent coupon, and $650 million of 2-year floating-rate bonds priced at three month London Interbanks Offered Rate (LIBOR) plus three basis points. Both series of bonds will be issued on August 1, 2013.

40

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013

Snapshot

Financial Results Summary:

							Yr. to Yr.
							Percent/
(Dollars in millions except per share amounts)							Margin
For the three months ended June 30:	2013			2012			Change
Revenue	$	24,924		$	25,783		(3.3	)%*
Gross profit margin	48.7		%	47.6		%	1.0	pts.
Total expense and other income	$	7,988		$	7,120		12.2	%
Total expense and other income to revenue ratio	32.0		%	27.6		%	4.4	pts.
Provision for income taxes	$	918		$	1,280		(28.3	)%
Net income	$	3,226		$	3,881		(16.9	)%
Net income margin	12.9		%	15.1		%	(2.1	)pts.
Earnings per share:
Assuming dilution	$	2.91		$	3.34		(12.9	)%
Basic	$	2.93		$	3.38		(13.3	)%
Weighted-average shares outstanding:
Assuming dilution	1,109.4			1,161.9			(4.5	)%
Basic	1,100.9			1,149.0			(4.2	)%

* 1.4 percent decrease adjusted for currency

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. Certain financial results are adjusted based on a simple mathematical model that translates current period results in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. See “Currency Rate Fluctuations” on page 71 for additional information.

Operating (non-GAAP) Earnings:

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

41

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

The following tables provide the company’s non-GAAP operating earnings for the second quarter and first six months of 2013 and 2012.

					Yr. to Yr.
(Dollars in millions except per share amounts)					Percent
For the three months ended June 30:	2013		2012		Change
Net income as reported	$	3,226	$	3,881	(16.9	)%
Non-operating adjustments (net of tax):
Acquisition-related charges	173		132		31.3
Non-operating retirement-related costs/(income)	180		64		181.7
Operating (non-GAAP) earnings*	$	3,579	$	4,077	(12.2	)%
Diluted operating (non-GAAP) earnings per share	$	3.22	$	3.51	(8.3	)%

* See pages 80 and 81 for a more detailed reconciliation of net income to operating earnings.

					Yr. to Yr.
(Dollars in millions except per share amounts)					Percent
For the six months ended June 30:	2013		2012		Change
Net income as reported	$	6,258	$	6,948	(9.9	)%
Non-operating adjustments (net of tax):
Acquisition-related charges	313		258		21.2
Non-operating retirement-related costs/(income)	384		137		181.2
Operating (non-GAAP) earnings*	$	6,955	$	7,342	(5.3	)%
Diluted operating (non-GAAP) earnings per share	$	6.23	$	6.29	(1.0	)%

* See pages 80 and 81 for a more detailed reconciliation of net income to operating earnings.

Financial Performance Summary:

In the second quarter of 2013, the company reported $24.9 billion in revenue and diluted earnings per share of $2.91 as reported and $3.22 on an operating (non-GAAP) basis. In April 2013, the company indicated that it expected to take most of its workforce rebalancing actions for the year in the second quarter as opposed to the prior year when these charges were distributed across the quarters. These actions resulted in a charge to pre-tax income of $1,011 million in the second quarter of 2013 compared to $155 million in the second quarter of 2012. Excluding the workforce rebalancing charges in both years, second quarter 2013 operating (non-GAAP) diluted earnings per share was $3.91, an increase of 8.3 percent compared to the second quarter of 2012. The company generated $3.2 billion in cash from operations and $2.7 billion in free cash flow in the second quarter driving shareholder returns of $4.6 billion in gross common stock repurchases and dividends.

The company had good performance in the second quarter in its higher value, higher margin businesses which contributed to sequential improvement in its year-to-year revenue performance and to gross margin expansion. Software revenue returned to mid-single digit growth at 4.1 percent (5 percent adjusted for currency); the best constant currency growth in Software since the first quarter of 2012. Performance was led by key branded middleware which increased 9.1 percent (10 percent adjusted for currency) versus the prior year with share growth in all five brands. Within Global Services, Global Business Services declined 1.3 percent, however revenue performance improved by 2 points from the first quarter and returned to growth at constant currency, increasing 2 percent compared to the second quarter of 2012. Global Technology Services revenue decreased 4.6 percent (2 percent adjusted for currency) with performance consistent with the first quarter. With a significant amount of new contracts in the second quarter, the total estimated Global Services backlog increased 3.2 percent, 7 percent at constant currency, compared to the June 30, 2012 balance, to $141 billion. This was the strongest backlog growth at constant currency in four years. Systems and Technology revenue performance was mixed in the second quarter. The System z mainframe business delivered strong performance with revenue increasing 9.9 percent (11 percent

42

adjusted for currency). Power Systems and Storage had modest improvement in their year-to-year revenue performance compared to the first quarter; however both brands still declined versus the prior year. Across the company’s segments, Smarter Planet was up over 25 percent and cloud increased over 70 percent in the first six months of 2013 versus the prior year. Business analytics revenue increased 11 percent in the second quarter with good performance across Global Business Services and Software. These initiatives address key market trends including mobile, social and big data. From a geographic perspective, revenue performance in the growth markets was consistent with the first quarter, increasing 0.5 percent as reported and 1 percent at constant currency. The major markets declined 4.7 percent (2 percent adjusted for currency), however performance improved from the first quarter revenue growth rate. Overall, the company improved its performance in several areas of the business in the second quarter. With first half 2013 operating (non-GAAP) earnings per share of $6.23 down only 1.0 percent year to year, including the second quarter workforce rebalancing charge, the company is on a good footing entering the second half of the year.

In April 2013, the company indicated that its expectation for the full year 2013 was GAAP earnings of at least $15.53 and operating (non-GAAP) earnings of at least $16.70 per diluted share. This expectation was based on an “all in” view of the business taking into account operational performance, benefits from workforce rebalancing activity and gains/charges. The company also indicated in April that excluding the expected second quarter workforce rebalancing charge and second half gains, the company was confident that it could achieve at least $16.70 of operating (non-GAAP) earnings per share for the full year 2013.

In July 2013, the company updated its full year 2013 expectations for new information. First, the substantial second half gain that the company was expecting in its “all in” view of earnings per share will not likely close by end of the year, although the company remains in active discussions. The company follows a very disciplined mergers and acquisitions process and will not undervalue or expedite a divestiture simply to close a transaction in the current year. As a result, the company will need to fully absorb the second quarter workforce rebalancing charge of $1 billion in its “all in” view without an offset from this potential gain.

Based on its performance in the second quarter, solid prospects for its growth initiatives, tough decisions on spending and potential tax settlements, the company increased its expectation for full year operating (non-GAAP) earnings per share, excluding the second quarter workforce rebalancing charge, by $0.20 to at least $16.90. As a result, the company has updated its “all in” view for the full year, expecting GAAP earnings of at least $15.08 and operating (non-GAAP) earnings of at least $16.25, with the net impact of $0.45 driven by the elongated discussions related to the larger divestiture project, partially offset by the improved operational performance.

In the second quarter, total consolidated revenue decreased 3.3 percent, 1 percent at constant currency. The constant currency performance reflects a 2 point improvement from the first quarter rate and was driven by Global Services, Software and Systems and Technology. The company entered the quarter with a modest currency headwind which became more pronounced with the strengthening of the dollar. Overall, currency impacted the company’s revenue growth by 2 points. At current spot rates, the company expects a 3 point currency impact to revenue in the second half of the year.

The consolidated gross profit margin increased 1.0 points versus the second quarter of 2012 to 48.7 percent. The operating (non-GAAP) gross margin increased 1.4 points to 49.7 percent. Performance was driven by margin expansion in Global Services and a mix to the more profitable segments.

Total expense and other (income) increased 12.2 percent in the second quarter compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 11.2 percent compared to the second quarter of 2012. Normalizing for the workforce rebalancing charges recorded in the second quarter of 2013 and 2012, operating (non-GAAP) total expense and other (income) declined 1.0 percent compared to the second quarter of 2012. The key drivers of the year-to-year change in total expense and other (income) were approximately:

43

		Total		Operating
		Consolidated		(non-GAAP)
·	Currency *	(1)	point	(1)	point
·	Acquisitions**	2	points	1	point
·	Base expense	11	points	10	points
·	Base expense normalized***			(2)	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.

***Normalized for workforce rebalancing charges in the second-quarter 2013/2012.

Pre-tax income declined 19.7 percent year to year and the pre-tax margin was 16.6 percent. Net income decreased 16.9 percent and the net income margin was 12.9 percent, a decrease of 2.1 points year to year. The effective tax rate for the second quarter was 22.1 percent, compared with 24.8 percent in the prior year. The tax rate in the second quarter includes a discrete tax benefit associated with a tax agreement received in the quarter. Operating (non-GAAP) pre-tax income declined 15.6 percent year to year and the pre-tax margin was 18.4 percent, a decrease of 2.7 points versus the prior year. Operating (non-GAAP) net income decreased 12.2 percent and the operating (non-GAAP) net income margin of 14.4 percent decreased 1.5 points versus the prior year. The operating (non-GAAP) effective tax rate was 22.0 percent versus 25.0 percent in the second quarter of 2012.

The workforce rebalancing charges in the second quarter of 2013 and 2012 impacted the company’s operating (non-GAAP) pre-tax and net income dynamics in the period. Excluding the second quarter workforce rebalancing charges in both 2013 and 2012, operating (non-GAAP) pre-tax income increased 0.2 percent, and the operating (non-GAAP) pre-tax margin of 22.5 percent increased 0.8 points. Operating (non-GAAP) net income increased 3.5 percent, and the operating (non-GAAP) net income margin of 17.4 percent increased 1.1 points.

Diluted earnings per share declined 12.9 percent versus the prior year. Operating (non-GAAP) diluted earnings per share declined 8.3 percent compared to the prior year. Normalized for the workforce rebalancing charges, operating (non-GAAP) diluted earnings per share increased 8.3 percent compared to the second quarter of 2012. In the second quarter of 2013, the company repurchased 17.1 million shares of its common stock.

Operating (non-GAAP) diluted earnings per share of $3.22 decreased $0.29 versus the second quarter of 2012 driven by the following factors:

·	Revenue decrease at actual rates:	$	(0.12	)
·	Margin expansion excluding workforce rebalancing:	$	0.24
·	Workforce rebalancing:	$	(0.59	)
·	Common stock repurchases:	$	0.18

The company generated $3,175 million in cash flow provided by operating activities, a decrease of $1,260 million compared to the second quarter of 2012, driven primarily by higher income tax payments in the second quarter of 2013 versus 2012. Net cash used in investing activities of $864 million decreased $820 million primarily due to less cash used for acquisitions ($485 million) and lower net capital expenditures ($315 million). Net cash used in financing activities of $3,327 million decreased $36 million compared to the prior year, primarily due to higher net cash proceeds from total debt ($668 million), partially offset by increased cash used for common stock repurchases ($564 million) and dividends ($70 million).

44

Financial Results Summary:

							Yr. to Yr.
							Percent/
(Dollars in millions except per share amounts)							Margin
For the six months ended June 30:	2013			2012			Change
Revenue	$	48,332		$	50,456		(4.2	)%*
Gross profit margin	47.2		%	46.4		%	0.8	pts.
Total expense and other income	$	15,060		$	14,403		4.6	%
Total expense and other income to revenue ratio	31.2		%	28.5		%	2.6	pts.
Provision for income taxes	$	1,492		$	2,049		(27.2	)%
Net income	$	6,258		$	6,948		(9.9	)%
Net income margin	12.9		%	13.8		%	(0.8	)pts.
Earnings per share:
Assuming dilution	$	5.60		$	5.95		(5.9	)%
Basic	$	5.65		$	6.02		(6.1	)%
Weighted-average shares outstanding:
Assuming dilution	1,116.7			1,168.1			(4.4	)%
Basic	1,107.3			1,154.1			(4.1	)%
	6/30/13			12/31/12
Assets	$	115,153		$	119,213		(3.4	)%
Liabilities	$	97,269		$	100,229		(3.0	)%
Equity	$	17,883		$	18,984		(5.8	)%

* 2.3 percent decrease adjusted for currency

Financial Performance Summary:

In the first six months of 2013, the company reported revenue of $48.3 billion and diluted earnings per share of $5.60 as reported and $6.23 on an operating (non-GAAP) basis. Excluding the second quarter 2013 and 2012 workforce rebalancing charges, operating (non-GAAP) diluted earnings per share was $6.90, an increase of 8.2 percent compared to the first half of 2012. The company generated $7.2 billion in cash from operations and $4.4 billion in free cash flow in the first half driving shareholder returns of $8.1 billion in gross common stock repurchases and dividends.

Total revenue decreased 4.2 percent (2 percent adjusted for currency) compared to the first six months of 2012. Software revenue increased 1.9 percent (3 percent adjusted for currency) driven by key branded middleware which increased 5.3 percent (6 percent adjusted for currency). Within Global Services, Global Technology Services declined 4.4 percent (2 percent adjusted for currency), while Global Business Services decreased 2.3 percent as reported, but, increased 1 percent at constant currency. Systems and Technology revenue declined 14 percent (14 percent adjusted for currency) and Global Financing revenue decreased 2.1 percent (flat adjusted for currency). On a geographic basis, revenue in the growth markets was flat as reported and up 1 percent at constant currency, while the major markets declined 5.4 percent (3 percent adjusted for currency).

The consolidated gross margin increased 0.8 points versus the first six months of 2012 to 47.2 percent. The operating (non-GAAP) gross margin increased 1.2 points to 48.2 percent compared to the prior year. The improvement in gross margin in the first six months was driven by Global Services and an improving segment mix.

Total expense and other (income) increased 4.6 percent in the first six months of 2013 compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 3.3 percent compared to the first six months of 2012. Normalizing for the workforce rebalancing charges recorded in the second quarter of 2013 and 2012, operating (non-GAAP) total expense and other (income) declined 2.7 percent compared to the first six months of 2012. The key drivers of the year-to-year change in total expense and other (income) were approximately:

45

		Total		Operating
		Consolidated		(non-GAAP)
·	Currency *	(1)	point	(1)	point
·	Acquisitions**	2	points	2	points
·	Base expense	4	points	3	points
·	Base expense normalized***			(3)	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.

*** Normalized for workforce rebalancing charges in the second-quarter 2012/2013.

Pre-tax income declined 13.9 percent year to year and the pre-tax margin was 16.0 percent, a decrease of 1.8 points year to year. Net income decreased 9.9 percent and the net income margin was 12.9 percent, a decrease of 0.8 points year to year. The effective tax rate for the first six months was 19.2 percent, compared with 22.8 percent in the prior year. Operating (non-GAAP) pre-tax income declined 9.2 percent year to year and the pre-tax margin was 17.9 percent, a decrease of 1.0 points versus the prior year. Operating (non-GAAP) net income decreased 5.3 percent and the operating (non-GAAP) net income margin of 14.4 percent decreased 0.2 points versus the prior year. The operating (non-GAAP) effective tax rate was 19.8 percent versus 23.1 percent in the second quarter of 2012.

The workforce rebalancing charges in the second quarter of 2013 and 2012 impacted the company’s operating (non-GAAP) pre-tax and net income dynamics in the first six months. Excluding the second quarter workforce rebalancing charges in both 2013 and 2012, operating (non-GAAP) pre-tax income decreased 0.2 percent, and the operating (non-GAAP) pre-tax margin of 20.0 percent increased 0.8 points. Operating (non-GAAP) net income increased 3.4 percent, and the operating (non-GAAP) net income margin of 16.0 percent increased 1.2 points.

Diluted earnings per share declined 5.9 percent versus the prior year. Operating (non-GAAP) diluted earnings per share declined 1.0 percent. Normalized for the second quarter 2013 and 2012 workforce rebalancing charges, operating (non-GAAP) diluted earnings per share increased 8.2 percent compared to the first six months of 2012. In the first six months of 2013, the company repurchased 29.4 million shares of its common stock.

Operating (non-GAAP) diluted earnings per share of $6.23 decreased $0.06 versus the first six months of 2012 driven by the following factors:

·	Revenue decrease at actual rates:	$	(0.27	)
·	Margin expansion excluding workforce rebalancing:	$	0.49
·	Workforce rebalancing:	$	(0.58	)
·	Common stock repurchases:	$	0.30

At June 30, 2013, the company’s balance sheet and liquidity positions remain strong and are well-positioned to support the business over the long term. Cash and marketable securities at quarter end were $10,356 million, a decrease of $772 million from December 31, 2012. Key drivers in the balance sheet and total cash flows are highlighted below.

Total assets decreased $4,060 million ($968 million adjusted for currency) from December 31, 2012 driven by:

·Decreases in total receivables ($2,726 million), cash and cash equivalents ($854 million), property, plant and equipment — net ($640 million), goodwill ($401 million), intangible assets ($369 million) and investments and sundry assets ($300 million); partially offset by

·Increased prepaid expenses and other current assets ($722 million) and total deferred taxes ($346 million).

Total liabilities decreased $2,960 million ($704 million adjusted for currency) from December 31, 2012 driven by:

·Decreases in retirement and nonpension postretirement ($2,455 million), accounts payable ($1,131 million) and compensation and benefits ($523 million); partially offset by

·Increased total debt ($853 million) and other accrued expenses and liabilities ($367 million).

Total equity of $17,883 million decreased $1,101 million from December 31, 2012 as a result of:

·Increased treasury stock ($6,107 million) driven by share repurchases; partially offset by

46

·Higher retained earnings ($4,243 million) and common stock ($776 million).

The company generated $7,197 million in cash flow provided by operating activities, a decrease of $1,529 million when compared to the first six months of 2012, primarily driven by an increase in cash used due to higher income tax payments ($709 million), a decrease in cash provided by accounts receivable driven by lower collections ($685 million), an increase in the use of cash related to the fulfillment of services contracts ($366 million) and a decrease in operational net income. These decreases were partially offset by cash savings from the deferral of the 401(k) matching contribution ($439 million) and a decrease in cash used for vendor payables ($248 million).  Net cash used in investing activities of $1,876 million was $2,037 million lower than the first six months of 2012, primarily due to decreased cash used for acquisitions ($1,745 million). Net cash used in financing activities of $6,043 million was $364 million higher, compared to the first six months of 2012, primarily due to lower cash provided by common stock transactions ($404 million) and increased dividend payments ($148 million), partially offset by increased proceeds from net debt transactions ($187 million).

47

Second Quarter in Review

Results of Operations

Segment Details

The following is an analysis of the second quarter and first six months of 2013 versus the second quarter and first six months of 2012 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

									Yr. to Yr.
									Percent
							Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For
For the three months ended June 30:	2013			2012			Change		Currency
Revenue:
Global Technology Services	$	9,536		$	9,995		(4.6	)%	(2.1	)%
Gross margin	37.8		%	36.3		%	1.5	pts.
Global Business Services	4,606			4,667			(1.3	)%	2.1	%
Gross margin	31.2		%	30.7		%	0.4	pts.
Software	6,423			6,171			4.1	%	5.2	%
Gross margin	88.8		%	88.4		%	0.4	pts.
Systems and Technology	3,758			4,259			(11.8	)%	(11.2	)%
Gross margin	36.7		%	38.3		%	(1.6	)pts.
Global Financing	487			517			(5.8	)%	(4.1	)%
Gross margin	46.3		%	46.0		%	0.4	pts.
Other	115			175.0			(34.2	)%	(33.9	)%
Gross margin	(190.5		)%	(60.0		)%	(130.5	)pts.
Total consolidated revenue	$	24,924		$	25,783		(3.3	)%	(1.4	)%
Total consolidated gross profit	$	12,132		$	12,281		(1.2	)%
Total consolidated gross margin	48.7		%	47.6		%	1.0	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	90			93			(2.9	)%
Acquisition-related charges	1			0			nm
Retirement-related costs/(income)	156			66			137.0
Operating (non-GAAP) gross profit	$	12,379		$	12,440		(0.5	)%
Operating (non-GAAP) gross margin	49.7		%	48.2		%	1.4	pts.

nm - not meaningful

48

									Yr. to Yr.
									Percent
							Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For
For the six months ended June 30:	2013			2012			Change		Currency
Revenue:
Global Technology Services	$	19,140		$	20,031		(4.4	)%	(2.0	)%
Gross margin	37.3		%	35.8		%	1.5	pts.
Global Business Services	9,091			9,304			(2.3	)%	0.9	%
Gross margin	29.9		%	29.4		%	0.5	pts.
Software	11,995			11,770			1.9	%	3.0	%
Gross margin	88.1		%	87.7		%	0.3	pts.
Systems and Technology	6,864			8,008			(14.3	)%	(13.7	)%
Gross margin	34.7		%	36.4		%	(1.6	)pts.
Global Financing	985			1,006			(2.1	)%	(0.1	)%
Gross margin	46.0		%	48.3		%	(2.2	)pts.
Other	257			336			(23.7	)%	(23.4	)%
Gross margin	(172.8		)%	(67.1		)%	(105.6	)pts.
Total consolidated revenue	$	48,322		$	50,456		(4.2	)%	(2.3	)%
Total consolidated gross profit	$	22,810		$	23,400		(2.5	)%
Total consolidated gross margin	47.2		%	46.4		%	0.8	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	184			181			1.5	%
Acquisition-related charges	3			0			nm
Retirement-related costs/(income)	320			137			134.3
Operating (non-GAAP) gross profit	$	23,316		$	23,718		(1.7	)%
Operating (non-GAAP) gross margin	48.2		%	47.0		%	1.2	pts.

nm - not meaningful

The following table presents each reportable segment’s external revenue as a percentage of total segment external  revenue.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Global Technology Services	38.4	%	39.0	%	39.8	%	40.0	%
Global Business Services	18.6		18.2		18.9		18.6
Total Global Services	57.0		57.3		58.7		58.5
Software	25.9		24.1		24.9		23.5
Systems and Technology	15.1		16.6		14.3		16.0
Global Financing	2.0		2.0		2.0		2.0
Total	100	%	100	%	100	%	100	%

49

The following table presents each reportable segment’s pre-tax income as a percentage of total segment pre-tax income.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Global Technology Services	30.4	%	30.2	%	32.9	%	31.6	%
Global Business Services	12.5		13.8		14.1		13.7
Total Global Services	42.8		44.0		46.9		45.3
Software	49.0		42.9		47.3		43.3
Systems and Technology	(2.8	)	4.0		(5.8	)	1.3
Global Financing	11.0		9.1		11.5		10.2
Total	100.0	%	100.0	%	100.0	%	100.0	%

In April 2013, the company indicated that it expected to take most of its workforce rebalancing actions for the year in the second quarter as opposed to the prior year when these charges were distributed across the quarters. These actions resulted in a charge to pre-tax income of $1,011 million in the second quarter of 2013 compared to $155 million in the second quarter of 2012. In the segment analysis below and in the Global Financing analysis on pages 74 and 75, each segment’s pre-tax income and pre-tax margin for the second quarter and first six months of 2013 and 2012 is presented on an as-reported basis and on a basis normalized for these actions in the second quarter of both years to provide a better perspective of the underlying operational performance of the segments.

Global Services

In the second quarter of 2013, the Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS), delivered revenue of $14,142 million, a decrease of 3.5 percent (1 percent adjusted for currency) year to year. The revenue performance in the quarter reflected a one point sequential improvement at constant currency from the first quarter of 2013. Pre-tax profit in the second quarter of 2013 declined 16.5 percent year to year driven by a higher level of workforce rebalancing charges. Normalizing for the workforce rebalancing charges in both periods, pre-tax profit increased 2.4 percent with a pre-tax margin of 18.6 percent, up 1.1 points year to year. The Services segments continued to have good performance in the growth initiatives of Smarter Planet, cloud and business analytics, and continued to invest to accelerate the shift toward higher value content. Total outsourcing revenue of $6,503 million decreased 5.1 percent (2 percent adjusted for currency) and total transactional revenue of $5,861 million decreased 1.5 percent as reported, but increased 1 percent adjusted for currency year over year.

In the first six months of 2013, total Global Services revenue was $28,231 million, a decrease of 3.8 percent (1 percent adjusted for currency) year to year. Revenue in the growth markets increased 1.0 percent (3 percent adjusted for currency), while the major markets decreased 5.0 percent (2 percent adjusted for currency) year to year. Total outsourcing revenue of $13,103 million decreased 5.1 percent (2 percent adjusted for currency) and total transactional revenue of $11,581 million decreased 2.1 percent as reported, but increased 1 percent at constant currency year to year.

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2013		2012		Change		Currency
Global Services external revenue:	$	14,142	$	14,662	(3.5	)%	(0.7	)%
Global Technology Services	$	9,536	$	9,995	(4.6	)%	(2.1	)%
Outsourcing	5,471		5,812		(5.9	)	(3.3	)
Integrated Technology Services	2,287		2,328		(1.8	)	0.8
Maintenance	1,777		1,855		(4.2	)	(1.8	)
Global Business Services	$	4,606	$	4,667	(1.3	)%	2.1	%
Outsourcing	1,032		1,045		(1.2	)	2.8
Consulting and Systems Integration	3,574		3,622		(1.3	)	1.9

50

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2013		2012		Change		Currency
Global Services external revenue:	$	28,231	$	29,335	(3.8	)%	(1.1	)%
Global Technology Services	$	19,140	$	20,031	(4.4	)%	(2.0	)%
Outsourcing	11,029		11,715		(5.9	)	(3.4	)
Integrated Technology Services	4,564		4,623		(1.3	)	1.2
Maintenance	3,547		3,692		(3.9	)	(1.8	)
Global Business Services	$	9,091	$	9,304	(2.3	)%	0.9	%
Outsourcing	2,073		2,093		(1.0	)	2.8
Consulting and Systems Integration	7,017		7,211		(2.7	)	0.3

Global Technology Services revenue of $9,536 million decreased 4.6 percent (2 percent adjusted for currency) in the second quarter of 2013 year to year and decreased 4.4 percent (2 percent adjusted for currency) to $19,140 million in the first six months of 2013. GTS Outsourcing revenue decreased 5.9 percent (3 percent adjusted for currency) in both the second quarter and the first six months of 2013 year to year, respectively, and continued to be impacted by the work previously done to restructure and improve the profitability of lower margin outsourcing contracts. This initiative helped improve GTS Outsourcing margin performance again in the second quarter, and is estimated to have had an impact of approximately 1.5 points of year-to-year revenue growth to GTS, and 1 point to Global Services in total. The impacts to year-to-year revenue growth from this initiative will mitigate in the second half of 2013, although GTS will continue to operate at this higher profit base. Integrated Technology Services (ITS) revenue decreased 1.8 percent (increased 1 percent adjusted for currency) in the second quarter and decreased 1.3 percent (increased 1 percent adjusted for currency) in the first six months of 2013. Revenue growth at constant currency was led by Japan with its third consecutive quarter of double-digit growth. In July 2013, the company closed the acquisition of SoftLayer Technologies Inc., the world’s largest privately held cloud computing infrastructure provider. With SoftLayer, the company will accelerate the build-out of its public cloud infrastructure to give clients the broadest choice of cloud offerings to drive business innovation.

Global Business Services revenue of $4,606 million decreased 1.3 percent as reported, but increased 2 percent adjusted for currency in the second quarter of 2013, representing an approximate 2 point sequential improvement at constant currency from the first quarter of 2013. On a geographic basis, North America led the second quarter sequential improvement and was up mid-single digits at constant currency. The growth markets and Japan continued to drive solid performance, and Europe slowed its rate of decline compared to the first quarter of 2013. In the first six months of 2013, GBS revenue of $9,091 million decreased 2.3 percent as reported, but increased 1 percent adjusted for currency year to year. On an offering basis, GBS had good results across its portfolio. In its solutions that address the Digital Front Office, GBS delivered double-digit growth across the initiatives: business analytics, Smarter Planet and cloud. In addition, within the traditional back office solutions that address the Globally Integrated Enterprise, implementation services that support the traditional packaged applications returned to growth in the second quarter of 2013 at constant currency. Application Outsourcing revenue decreased 1.2 percent (increased 3 percent adjusted for currency) in the second quarter and decreased 1.0 percent (increased 3 percent adjusted for currency) in the first six months of 2013. Consulting and Systems Integration (C&SI) revenue decreased 1.3 percent as reported but increased 2 percent adjusted for currency in the second quarter of 2013, a 3 point sequential improvement at constant currency from the first quarter of 2013. C&SI revenue decreased 2.7 percent (flat adjusted for currency) in the first six months of 2013 year to year.

51

							Yr. to Yr
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2013			2012			Change
Global Technology Services:
External gross profit	$	3,607		$	3,629		(0.6	)%
External gross profit margin	37.8		%	36.3		%	1.5	pts.
Pre-tax income	$	1,514		$	1,757		(13.8	)%
Pre-tax margin	15.4		%	17.1		%	(1.7	)pts.
Pre-tax income — normalized	$	1,866		$	1,818		2.7	%
Pre-tax margin — normalized	19.0		%	17.7		%	1.3	pts.
Global Business Services:
External gross profit	$	1,436		$	1,434		0.1	%
External gross profit margin	31.2		%	30.7		%	0.4	pts.
Pre-tax income	$	623		$	803		(22.4	)%
Pre-tax margin	13.0		%	16.6		%	(3.6	)pts.
Pre-tax income — normalized	$	856		$	840		1.9	%
Pre-tax margin — normalized	17.9		%	17.3		%	0.5	pts.

							Yr. to Yr
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2013			2012			Change
Global Technology Services:
External gross profit	$	7,137		$	7,169		(0.4	)%
External gross profit margin	37.3		%	35.8		%	1.5	pts.
Pre-tax income	$	3,099		$	3,237		(4.3	)%
Pre-tax margin	15.7		%	15.7		%	0.0	pts.
Pre-tax income — normalized	$	3,451		$	3,298		4.6	%
Pre-tax margin — normalized	17.5		%	16.0		%	1.5	pts.
Global Business Services:
External gross profit	$	2,719		$	2,735		(0.6	)%
External gross profit margin	29.9		%	29.4		%	0.5	pts.
Pre-tax income	$	1,326		$	1,404		(5.6	)%
Pre-tax margin	14.0		%	14.5		%	(0.5	)pts.
Pre-tax income — normalized	$	1,559		$	1,441		8.2	%
Pre-tax margin — normalized	16.5		%	14.9		%	1.6	pts.

GTS gross profit margin improved 1.5 points in both the second quarter and the first six months of 2013 versus the prior year with margin expansion across all lines of business. Pre-tax income decreased 13.8 percent to $1,514 million and the pre-tax margin declined 1.7 points to 15.4 percent in the second quarter of 2013 year to year. Normalized for workforce rebalancing charges of $352 million and $61 million in the second quarter of 2013 and 2012, respectively, GTS pre-tax income was up 2.7 percent and pre-tax margin expanded 1.3 points. GTS pre-tax income for the first six months of 2013 decreased 4.3 percent to $3,099 million and pre-tax margin of 15.7 percent was flat year to year. Normalized for the workforce rebalancing charges in the second quarter of 2013 and 2012, GTS pre-tax income for the first six months of 2013 was up 4.6 percent and pre-tax margin expanded 1.5 points year to year. Margin expansion in both periods reflected improved efficiency and productivity, as well as a strong focus on spending reductions.

GBS gross profit margin improved 0.4 points and 0.5 points in the second quarter and first six months, respectively, versus the prior year. GBS pre-tax income of $623 million in the second quarter of 2013 decreased 22.4 percent with a pre-tax margin of 13.0 percent, a decline of 3.6 points year to year. Normalized for workforce rebalancing charges of $233 million and $37 million in the second quarter of 2013 and 2012, respectively, GBS pre-tax income was up 1.9 percent and pre-tax margin expanded 0.5 points. GBS pre-tax income in the first six months of 2013 decreased 5.6 percent to $1,326 million and pre-tax margin of 14.0 percent declined 0.5 points year to year. Normalized for the workforce rebalancing charges in the second quarter of 2013 and 2012, respectively, GBS pre-tax income for the first six months of 2013 was up 8.2 percent and pre-tax margin improved 1.6 points year to year.

52

Global Services Backlog

The estimated Global Services backlog at June 30, 2013 was $141 billion, an increase of 3.2 percent (7 percent adjusted for currency) compared to the June 30, 2012 balance, the strongest growth in the backlog at constant currency in the last four years. The year-to-year backlog growth was primarily driven by new business in the quarter and both the transactional and outsourcing businesses improved versus the prior year. The company signed 15 deals over $100 million in the second quarter, including a multi-billion dollar outsourcing deal with UniCredit in Europe. The estimated transactional backlog at June 30, 2013 increased 8.3 percent (12 percent adjusted for currency) and the estimated outsourcing backlog increased 2.7 percent (7 percent adjusted for currency), respectively, from the June 30, 2012 levels. Total growth markets backlog at June 30, 2013 increased 5.6 percent (11 percent year to year adjusted for currency), and the major markets backlog increased 2.6 percent (6 percent adjusted for currency), an improvement from the constant currency growth rate in the first quarter of 2013.

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
	At June 30,		At June 30,		Percent		Adjusted For
(Dollars in billions)	2013		2012		Change		Currency
Backlog:
Total backlog	$	140.5	$	136.1	3.2	%	6.9	%
Outsourcing backlog	$	90.3	$	87.9	2.7	%	6.7	%

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

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

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

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

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2013		2012		Change		Currency
Total signings:	$	16,418	$	13,688	19.9	%	22.4	%
Outsourcing signings	$	8,901	$	6,785	31.2	%	31.5	%
Transactional signings	7,517		6,904		8.9		13.5

53

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2013		2012		Change		Currency
Total signings:	$	33,349	$	25,464	31.0	%	34.4	%
Outsourcing signings	$	19,634	$	12,241	60.4	%	63.6	%
Transactional signings	13,715		13,223		3.7		7.4

Software

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2013		2012		Change		Currency
Software external revenue:	$	6,423	$	6,171	4.1	%	5.2	%
Middleware:	$	5,320	$	5,046	5.4	%	6.5	%
Key branded middleware:	4,302		3,944		9.1		10.1
WebSphere Family					9.0		10.0
Information Management					5.2		6.2
Social Workforce Solutions*					22.0		23.1
Tivoli					13.0		14.0
Rational					12.0		13.1
Other middleware	1,018		1,102		(7.6	)	(6.3	)
Operating systems	606		628		(3.5	)	(2.1	)
Other	496		497		(0.1	)	0.6

* Formerly Lotus

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2013		2012		Change		Currency
Software external revenue:	$	11,995	$	11,770	1.9	%	3.0	%
Middleware:	$	9,868	$	9,585	3.0	%	4.0	%
Key branded middleware:	7,806		7,413		5.3		6.3
WebSphere Family					7.5		8.5
Information Management					1.9		2.9
Social Workforce Solutions*					15.0		16.3
Tivoli					7.6		8.7
Rational					5.5		6.6
Other middleware	2,062		2,172		(5.1	)	(3.9	)
Operating systems	1,184		1,218		(2.8	)	(1.5	)
Other	943		968		(2.5	)	(1.7	)

* Formerly Lotus

Software revenue of $6,423 million increased 4.1 percent (5 percent adjusted for currency) in the second quarter, representing the highest constant currency growth since the first quarter of 2012. Performance was led by double-digit constant currency growth in key branded middleware with all five brands gaining share in the quarter. Software revenue in the first six months of 2013 increased 1.9 percent (3 percent adjusted for currency) year to year to $11,995 million.

Key branded middleware revenue, which accounted for 67 percent of total Software revenue in the second quarter of 2013, increased 9.1 percent (10 percent adjusted for currency) year to year. In the first six months of 2013, key branded middleware revenue increased 5.3 percent (6 percent adjusted for currency) year to year and accounted for 65 percent of total Software revenue. Both periods reflected good performance in the key areas of smarter commerce, social business, security

54

and storage management. The Software business has built a portfolio of solutions that target the faster growing segments of the market — including mobile, social and security. Differentiated by advanced analytics, these solutions provide value to a new set of information technology buyers in the front office. Many of these solutions are delivered through the company’s SaaS offerings which were up over 50 percent in the second quarter versus the prior year.

WebSphere revenue increased 9.0 percent (10 percent adjusted for currency) and 7.5 percent (8 percent adjusted for currency) in the second quarter and first six months of 2013 year to year, respectively. Revenue performance included double-digit growth in Smarter Commerce and mobile. The company’s Smarter Commerce initiative helps clients transform their business processes to rapidly respond to shifting customer demands in today’s digitally-transformed marketplace. The company’s mobile portfolio, led by MobileFirst, combines security, analytics and application development software to manage clients mobile infrastructure, regardless of device.

Information Management revenue increased 5.2 percent (6 percent adjusted for currency) and 1.9 percent (3 percent adjusted for currency) in the second quarter and first six months of 2013 year to year, respectively. Performance in both periods was driven by growth in the business analytics offerings. Analytics runs through the company’s full portfolio of solutions, enabling clients to develop and execute a big data strategy that connects their existing business data to new data sources — delivering business insights in real time.

Tivoli revenue increased 13.0 percent (14 percent adjusted for currency) in the second quarter and 7.6 percent (9 percent adjusted for currency) in the first six months of 2013, compared to the prior year periods with growth in each of the three key business areas. Tivoli security revenue increased 19 percent (20 percent adjusted for currency) in the second quarter of 2013 and 16 percent (18 percent adjusted for currency) in the first half of 2013. In the age of mobile access and cloud infrastructure, Security Intelligence is critical to safeguarding data, transactions and everyday business operations. Tivoli storage, which enables customers to manage their rapidly growing data, was up 16 percent (17 percent adjusted for currency) in the second quarter and 13 percent (15 percent adjusted for currency) in the first half of 2013 year to year, respectively. This was the 10th consecutive quarter of double-digit constant currency growth in storage software.

Social Workforce Solutions revenue increased 22.0 percent (23 percent adjusted for currency) in the second quarter and 15.0 percent (16 percent adjusted for currency) in the first six months of 2013, respectively. Performance in both periods was driven by the recent acquisition of Kenexa and the company’s existing Smarter Workforce offerings. In the second quarter of 2013, the company was ranked as the top enterprise social software vendor for the fourth consecutive year by International Data Corporation (IDC).

Rational revenue increased 12.0 percent (13 percent adjusted for currency) year to year in the second quarter and 5.5 percent (7 percent adjusted for currency) in the first six months of 2013.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2013			2012			Change
Software:
External gross profit	$	5,703		$	5,455		4.5	%
External gross profit margin	88.8		%	88.4		%	0.4	pts.
Pre-tax income	$	2,443		$	2,493		(2.0	)%
Pre-tax margin	34.1		%	35.9		%	(1.8	)pts.
Pre-tax income — normalized	$	2,662		$	2,520		5.6	%
Pre-tax margin — normalized	37.2		%	36.3		%	0.9	pts.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2013			2012			Change
Software:
External gross profit	$	10,562		$	10,325		2.3	%
External gross profit margin	88.1		%	87.7		%	0.3	pts.
Pre-tax income	$	4,457		$	4,438		0.4	%
Pre-tax margin	32.9		%	33.2		%	(0.3	)pts.
Pre-tax income — normalized	$	4,676		$	4,465		4.7	%
Pre-tax margin — normalized	34.5		%	33.4		%	1.1	pts.

55

The Software gross profit margin improved 0.4 points to 88.8 percent, and 0.3 points to 88.1 percent year to year in the second quarter and first six month periods of 2013, respectively. Software pre-tax income of $2,443 in the second quarter of 2013 decreased 2.0 percent year to year, with a pre-tax margin of 34.1 percent, a decline of 1.8 points. Normalized for workforce rebalancing charges of $219 million and $27 million in the second quarter of 2013 and 2012, respectively, Software pre-tax income was up 5.6 percent and the pre-tax margin expanded 0.9 points. Segment pre-tax income for the first six months of 2013 increased 0.4 percent to $4,457 million with a pre-tax margin of 32.9 percent. Normalized for the workforce rebalancing charges in the second quarter of 2013 and 2012, Software pre-tax income in the first six months of 2013 was up 4.7 percent and the pre-tax margin expanded 1.1 points.

Systems and Technology

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2013		2012		Change		Currency
Systems and Technology external revenue:	$	3,758	$	4,259	(11.8	)%	(11.2	)%
System z					9.9	%	10.9	%
Power Systems					(24.6	)	(24.1	)
System x					(10.8	)	(10.4	)
Storage					(6.5	)	(5.8	)
Total Systems excluding RSS					(9.5	)	(8.9	)
Microelectronics OEM					6.3		6.3
Total Systems and Technology excluding RSS					(8.0	)	(7.4	)
Retail Stores Solutions (Divested)					(99.2	)	(99.2	)

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2013		2012		Change		Currency
Systems and Technology external revenue:	$	6,864	$	8,008	(14.3	)%	(13.7	)%
System z					8.7	%	9.7	%
Power Systems					(28.0	)	(27.5	)
System x					(10.0	)	(9.4	)
Storage					(8.8	)	(7.8	)
Total Systems excluding RSS					(11.3	)	(10.6	)
Microelectronics OEM					(4.9	)	(4.9	)
Total Systems and Technology excluding RSS					(10.7	)	(10.1	)
Retail Stores Solutions (Divested)					(99.3	)	(99.3	)

Systems and Technology revenue decreased 11.8 percent (11 percent adjusted for currency) and 14.3 percent (14 percent adjusted for currency) in the second quarter and first six months of 2013, respectively, versus the same periods in 2012. Adjusting for the divested Retail Store Solutions (RSS) business, revenue declined 8.0 percent (7 percent adjusted for currency) and 10.7 percent (10 percent adjusted for currency) in the second quarter and first six months of 2013, respectively, versus the same periods in 2012. In the second quarter, the company delivered strong performance in the System z mainframe business, and Power Systems and Storage had some modest improvement in year-to-year performance, however, both brands still declined year to year. Systems and Technology returned to profitability in the second quarter excluding workforce rebalancing charges.

System z revenue increased 9.9 percent and 8.7 percent (11 percent and 10 percent adjusted for currency) in the second quarter and first six months of 2013 versus the second quarter and first six months of 2012, respectively. MIPS (millions of instructions per second) shipments increased 23 percent and 25 percent in the second quarter and first six months of 2013 versus the same periods of 2012, respectively. The increase in MIPS in both periods was driven by specialty engines, which continue to be more than 50 percent of the volumes and have increased double digits year to year.

The company continues to see gains in PureSystems, its expert integrated systems. The company has completed its first five quarters of operations for PureSystems, and has sold over 6,000 systems in over 100 countries.

56

Power Systems revenue decreased 24.6 percent and 28.0 percent (24 percent and 27 percent adjusted for currency) in the second quarter and first six months of 2013 versus the second quarter and first six months of 2012, respectively. The second quarter decline at constant currency represented a 7 point improvement from last quarter’s rate. The Power platform continued to outperform the UNIX competition as the company gained market share again this quarter. The company is continuing to expand its Power platform to address the Linux opportunity.

System x revenue decreased 10.8 percent and 10.0 percent (10 percent and 9 percent adjusted for currency) in the second quarter and first six months of 2013 versus the second quarter and first six months of 2012, respectively. High-end System x revenue decreased 18.8 percent and 13.7 percent (18 percent and 13 percent adjusted for currency) in the second quarter and first six months of 2013 versus the comparable periods of 2012, respectively.

Storage revenue decreased 6.5 percent and 8.8 percent (6 percent and 8 percent adjusted for currency) in the second quarter and first six months of 2013 versus the comparable periods in 2012, respectively. Strong double-digit growth in the mid-range Storwize products in both periods was more than offset by declines in the company’s legacy OEM offerings and softness in high-end offerings. The company’s flash product offerings contributed two points of year-to-year growth to total Storage revenue in the second quarter. The value in storage solutions continues to shift to software, as storage software revenue, which is reported in Tivoli, increased 17 percent and 15 percent adjusted for currency, in the second quarter and first six months of 2013, compared to prior year periods.

Microelectronics OEM revenue increased 6.3 percent and decreased 4.9 percent (up 6 percent and down 5 percent adjusted for currency) in the second quarter and first six months of 2013 versus the comparable periods of 2012, respectively.

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2013			2012			Change
Systems and Technology:
External gross profit	$	1,379		$	1,630		(15.4	)%
External gross profit margin	36.7		%	38.3		%	(1.6	) pts.
Pre-tax income	$	(141	)	$	234		nm
Pre-tax margin	(3.6		)%	5.3		%	(8.9	) pts.
Pre-tax income — normalized	$	62		$	261		(76.3	)%
Pre-tax margin — normalized	1.6		%	5.9		%	(4.3	) pts.

nm - not meaningful

							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2013			2012			Change
System and Technology:
External gross profit	$	2,382		$	2,911		(18.2	)%
External gross profit margin	34.7		%	36.4		%	(1.6	) pts.
Pre-tax income	$	(546	)	$	130		nm
Pre-tax margin	(7.7		)%	1.6		%	(9.2	) pts.
Pre-tax income — normalized	$	(343	)	$	156		nm
Pre-tax margin — normalized	(4.8		)%	1.9		%	(6.7	) pts.

nm - not meaningful

Systems and Technology’s gross profit margin decreased 1.6 points in the second quarter of 2013 versus the prior year. The decrease was driven by lower margins in Power Systems (1.0 points), System x (0.7 points) and Microelectronics (0.4 points), partially offset by an improvement due to revenue mix (0.7 points). Gross margin for the first six months of 2013 decreased 1.6 points compared to the first six months of 2012. The decrease was driven by lower margins in System x (1.1 points), Microelectronics (0.7 points) and Power Systems (0.6 points), partially offset by an improvement due to revenue mix (0.7 points).

57

Systems and Technology’s pre-tax income decreased $375 million to a loss of $141 million in the second quarter and $675 million to a loss of $546 million for the first six months of 2013, when compared to the prior year periods. Pre-tax margin decreased 8.9 points in the second quarter and 9.2 points in the first six months, respectively, versus the prior year periods. Normalized for workforce rebalancing charges of $203 million and $27 million in the second quarter of 2013 and 2012, respectively, Systems and Technology’s second quarter pre-tax income was $62 million and the pre-tax margin declined 4.3 points versus the prior year. Normalized for the workforce rebalancing charges in the second quarter of 2013 and 2012, Systems and Technology’s pre-tax income for the first six months of 2013 declined $499 million to a loss of $343 million and the pre-tax margin declined 6.7 points compared to the prior year.

Global Financing

See pages 74 to 79 for a discussion of Global Financing’s segment results.

Geographic Revenue

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

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2013		2012		Change		Currency
Total Revenue	$	24,924	$	25,783	(3.3	)%	(1.4	)%
Geographies:	$	24,385	$	25,271	(3.5	)%	(1.5	)%
Americas	10,709		11,081		(3.4	)	(2.9	)
Europe/Middle East/Africa (EMEA)	7,839		7,869		(0.4	)	(1.0	)
Asia Pacific	5,838		6,321		(7.6	)	0.3
Major markets					(4.7	)%	(2.4	)%
Growth markets					0.5	%	1.5	%
BRIC countries					(0.3	)%	0.5	%

							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2013		2012		Change		Currency
Total Revenue	$	48,332	$	50,456	(4.2	)%	(2.3	)%
Geographies:	$	47,367	$	49,435	(4.2	)%	(2.2	)%
Americas	20,751		21,558		(3.7	)	(3.1	)
Europe/Middle East/Africa (EMEA)	15,117		15,447		(2.1	)	(2.5	)
Asia Pacific	11,499		12,430		(7.5	)	(0.4	)
Major markets					(5.4	)%	(3.3	)%
Growth markets					0.0	%	1.3	%
BRIC countries					(0.6	)%	1.5	%

Total geographic revenue decreased 3.5 percent (1 percent adjusted for currency) in the second quarter of 2013 compared to the prior year. Excluding the divested RSS business, revenue decreased 2.8 percent as reported and 1 percent on a constant currency basis. A year-to-year revenue decrease in the major markets was partially offset by a modest increase in the growth markets for the quarter, although the major markets improved their constant currency growth rate by 2 points compared to the first quarter of 2013.

Across all geographies, growth markets revenue increased 0.5 percent year to year as reported. Adjusted for currency, the growth markets grew 1 percent, consistent with the first quarter of 2013. This represented a constant currency growth rate approximately 4 points higher than the major markets. Within the BRIC countries of Brazil, Russia, India and China,

58

combined revenue decreased 0.3 percent as reported, but increased 1 percent adjusted for currency. This growth was led by Brazil which had strong performance and increased 11.3 percent (16 percent adjusted for currency). China declined 1.2 percent (3 percent adjusted for currency) compared to a strong second quarter of 2012 in which revenue grew 24 percent at constant currency. Russia declined 27.2 percent (27 percent adjusted for currency) also compared to a strong second quarter of 2012 in which revenue grew 39 percent at constant currency. India declined 2.7 percent, but increased 1 percent adjusted for currency. China, Russia and Australia (down 8.4 percent, 6 percent adjusted for currency) collectively accounted for approximately 40 percent of total growth markets revenue; excluding these countries, the growth markets revenue would have increased 6 percent (7 percent adjusted for currency) in the second quarter versus the prior year.

Americas revenue decreased 3.4 percent (3 percent adjusted for currency) compared to the second quarter of 2012. Within the major market countries, the U.S. was down 4.3 percent and Canada was down 6.4 percent (5 percent adjusted for currency). While the U.S. and Canada continue to report year-to-year decreases, both countries have improved their revenue growth rate slightly from the first quarter of 2013. Revenue in the Latin America growth markets increased 8.5 percent (12 percent adjusted for currency) led by the strong performance in Brazil. Most other Latin America counties reported year-to-year growth in the quarter, including Mexico which grew 8.4 percent (8 percent adjusted for currency).

Europe/Middle East/Africa (EMEA) revenue decreased 0.4 percent (1 percent adjusted for currency) year to year in the second quarter of 2013. At constant currency, this represented a 3 point improvement in the growth rate compared to the first quarter of 2013. An improved growth rate was reported in several of the major market countries including the UK and Spain which both increased revenue year to year. The UK returned to modest growth up 2.0 percent (5 percent adjusted for currency), and Spain grew for a second consecutive quarter at 4.8 percent (3 percent adjusted for currency). Germany decreased 2.8 percent (4 percent adjusted for currency), France increased 1.0 percent (decreased 1 percent adjusted for currency) and Italy decreased 2.9 percent (5 percent adjusted for currency). Revenue in the EMEA growth markets decreased 0.1 percent (increased 2 percent adjusted for currency). Middle East Africa increased 5.2 percent (11 percent adjusted for currency).

Asia Pacific second quarter revenue decreased 7.6 percent (flat adjusted for currency) year over year. Japan revenue decreased 16.0 percent as reported, but increased 3 percent on a constant currency basis, with good performance across hardware, software and services. Adjusted for currency, this is the third consecutive quarter of revenue growth in Japan. The Asia Pacific growth markets decreased 1.9 percent (2 percent adjusted for currency).

Total geographic revenue of $47,367 for the first six months of 2013 decreased 4.2 percent (2 percent adjusted for currency) compared to the prior year. Excluding the divested RSS business, revenue decreased 3.5 percent as reported and 2 percent on a constant currency basis. Major markets decreased 5.4 percent (3 percent adjusted for currency). Total revenue from the growth markets, which represented approximately 24 percent of the total geographic revenue for the first six months of the year, was flat on a year-to-year basis (up 1 percent adjusted for currency). Within the BRIC countries, combined revenue was down slightly year to year at 0.6 percent, but up 2 percent adjusted for currency. In the first half of the year, the company had strength in Latin America and the Middle East and Africa region. However, declines in some of the larger growth markets, for example China and Australia, have impacted the overall performance in the growth markets.

Americas revenue for the first six months of 2013 decreased 3.7 percent (3 percent adjusted for currency) compared to the prior year. The major market countries were down 5.2 percent (5 percent adjusted for currency), partially offset by an increase in the Latin America growth markets of 7.9 percent (13 percent adjusted for currency). Within the major market countries, the U.S. was down 4.8 percent and Canada was down 7.3 percent (6 percent adjusted for currency). Within the Latin America growth market countries, Brazil increased 6.5 percent (13 percent adjusted for currency) and Mexico increased 10.2 percent (10 percent adjusted for currency).

Europe/Middle East/Africa (EMEA) revenue decreased 2.1 percent (2 percent adjusted for currency) for the first six months of 2013 compared to the prior year. The major market countries were down 2.5 percent (3 percent adjusted for currency), while the growth market countries were up 1.0 percent (3 percent adjusted for currency). In the major market countries, the UK decreased 4.0 percent (2 percent adjusted for currency), Germany decreased 3.5 percent (5 percent adjusted for currency), France decreased 0.9 percent (2 percent adjusted for currency), Italy decreased 2.7 percent (4 percent adjusted for currency), while Spain increased 3.4 percent (2 percent adjusted for currency).

Asia Pacific revenue decreased 7.5 percent (flat adjusted for currency) year to year for the first six months of 2013. Japan revenue decreased 13.9 percent as reported, but increased 3 percent on a constant currency basis. The Asia Pacific growth markets decreased 2.9 percent (3 percent adjusted for currency), with China down 1.4 percent (3 percent adjusted for currency).

59

OEM revenue increased 5.1 percent (6 percent adjusted for currency) and decreased 5.6 percent (5 percent adjusted for currency) year to year in the second quarter and first six months of 2013, respectively, driven by the Microelectronics OEM business.

Expense

Total Expense and Other Income

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended June 30:	2013			2012			Change
Total consolidated expense and other (income)	$	7,988		$	7,120		12.2	%
Non-operating adjustments:
Amortization of acquired intangible assets	(88		)	(81		)	9.0
Acquisition-related charges	(3		)	(7		)	(55.8	)
Non-operating retirement-related (costs)/income	(106		)	(28		)	277.5
Total operating (non-GAAP) expense and other (income)	$	7,791		$	7,004		11.2	%
Total consolidated expense-to-revenue ratio	32.0		%	27.6		%	4.4	pts.
Operating (non-GAAP) expense-to-revenue ratio	31.3		%	27.2		%	4.1	pts.

							Yr. to Yr.
(Dollars in millions)							Percent
For the six months ended June 30:	2013			2012			Change
Total consolidated expense and other (income)	$	15,060		$	14,403		4.6	%
Non-operating adjustments:
Amortization of acquired intangible assets	(177		)	(158		)	12.0
Acquisition-related charges	(13		)	(14		)	(9.7	)
Non-operating retirement-related (costs)/income	(226		)	(60		)	276.8
Total operating (non-GAAP) expense and other (income)	$	14,644		$	14,171		3.3	%
Total consolidated expense-to-revenue ratio	31.2		%	28.5		%	2.6	pts.
Operating (non-GAAP) expense-to-revenue ratio	30.3		%	28.1		%	2.2	pts.

Total expense and other (income) increased 12.2 percent in the second quarter and 4.6 percent in the first six months of 2013 compared to the prior year periods. Total operating (non-GAAP) expense and other (income) increased 11.2 percent in the second quarter and 3.3 percent in the first six months of 2013 compared to the second quarter and first six months of 2012, respectively. Excluding the workforce rebalancing charges recorded in the second quarter of 2013 and 2012, total operating (non-GAAP) expense and other (income) decreased 1.0 percent in the second quarter versus the prior year, and decreased 2.7 percent in the first half versus the prior year. The key drivers of the year-to-year change in total expense and other (income) were approximately:

	Total Consolidated				Operating (non-GAAP)
For the three and six months ended June 30, 2013:	Three Months		Six Months		Three Months		Six Months
Currency*	(1	) pt.	(1	) pt.	(1	) pt.	(1	) pt.
Acquisitions**	2	pts.	2	pts.	1	pt.	2	pts.
Base expense	11	pts.	4	pts.	10	pts.	3	pts.
Base expense normalized***					(2	) pts.	(3	) pts.

*      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.

*** Normalized for workforce rebalancing charges in the second-quarter 2013/2012.

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

60

Selling, general and administrative expense

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended June 30:	2013			2012			Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	4,850		$	4,944		(1.9	)%
Advertising and promotional expense	348			344			1.3
Workforce rebalancing charges	1,011			155			552.2
Retirement-related costs	244			193			26.6
Amortization of acquired intangible assets	88			81			9.0
Stock-based compensation	115			117			(2.0	)
Bad debt expense	24			4			480.6
Total consolidated selling, general and administrative expense	$	6,680		$	5,837		14.4	%
Non-operating adjustments:
Amortization of acquired intangibles assets	(88		)	(81		)	9.0
Acquisition-related charges	(3		)	(6		)	(53.4	)
Non-operating retirement-related (costs)/income	(93		)	(33		)	178.9
Operating (non-GAAP) selling, general and administrative expense	$	6,496		$	5,717		13.6	%

							Yr. to Yr.
(Dollars in millions)							Percent
For the six months ended June 30:	2013			2012			Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	9,609		$	9,866		(2.6	)%
Advertising and promotional expense	671			659			1.8
Workforce rebalancing charges	1,030			381			170.6
Retirement-related costs	509			409			24.2
Amortization of acquired intangible assets	177			158			12.0
Stock-based compensation	214			236			(9.5	)
Bad debt expense	47			14			242.4
Total consolidated selling, general and administrative expense	$	12,257		$	11,723		4.6	%
Non-operating adjustments:
Amortization of acquired intangibles assets	(177		)	(158		)	12.0
Acquisition-related charges	(6		)	(12		)	(54.1	)
Non-operating retirement-related (costs)/income	(197		)	(69		)	182.9
Operating (non-GAAP) selling, general and administrative expense	$	11,878		$	11,483		3.4	%

Total Selling, general and administrative (SG&A) expense increased 14.4 percent (15 percent adjusted for currency) in the second quarter of 2013 versus the second quarter of 2012. The increase was primarily driven by higher base expense (14 points) and acquisition-related spending (1 point), partially offset by the effects of currency (1 point). Operating (non-GAAP) SG&A expense increased 13.6 percent (15 percent adjusted for currency) primarily driven by higher base spending (14 points) and acquisition-related spending (1 point), partially offset by the effects of currency (1 point). The increase in base expense was driven by the higher level of workforce rebalancing charges in 2013. The company expects to see some of the benefit from these actions in the second half of 2013.

Total SG&A expense increased 4.6 percent (6 percent adjusted for currency) in the first six months of 2013 versus the first six months of 2012. The increase was driven by higher base spending (4 points) due to increased workforce rebalancing charges and acquisition-related spending (2 points), partially offset by currency impacts (1 point). Operating (non-GAAP) SG&A expense increased 3.4 percent (5 percent adjusted for currency) primarily driven by the same factors. Bad debt expense increased $33 million for the first six months of 2013. The accounts receivable provision coverage was 1.5 percent at June 30, 2013, an increase of 10 basis points from year-end 2012.

61

Other (income) and expense

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended June 30:	2013			2012			Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(79	)	$	(106	)	(25.5	)%
(Gains)/losses on derivative instruments	33			35			(5.4	)
Interest income	(19		)	(31		)	(38.6	)
Net (gains)/losses from securities and investment assets	(1		)	(12		)	(94.4	)
Other	(25		)	(17		)	43.1
Total consolidated other (income) and expense	$	(91	)	$	(132	)	(31.0	)%
Non-operating adjustment:
Acquisition-related charges	(0		)	(1		)	(71.2	)
Operating (non-GAAP) other (income) and expense	$	(91	)	$	(133	)	(31.3	)%

							Yr. to Yr.
(Dollars in millions)							Percent
For the six months ended June 30:	2013			2012			Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(494	)	$	(177	)	178.7	%
(Gains)/losses on derivative instruments	435			95			357.2
Interest income	(42		)	(62		)	(31.6	)
Net (gains)/losses from securities and investment assets	(5		)	(18		)	(70.7	)
Other	(44		)	(28		)	57.4
Total consolidated other (income) and expense	$	(151	)	$	(190	)	(20.4	)%
Non-operating adjustment:
Acquisition-related charges	(7		)	(2		)	319.3
Operating (non-GAAP) other (income) and expense	$	(158	)	$	(192	)	(17.4	)%

Other (income) and expense was income of $91 million and $132 million in the second quarter of 2013 and 2012, respectively. The decrease in income of $41 million in the second quarter of 2013 was primarily driven by lower gains from foreign currency transactions ($27 million) due to foreign currency rate volatility year to year, and lower interest income ($12 million) due to lower average cash balances and lower rates in 2013 versus 2012.

Other (income) and expense was income of $151 million and $190 million in the first six months of 2013 and 2012, respectively. The decrease in income of $39 million in the first six months of 2013 was primarily driven by higher losses on derivative instruments ($340 million) and lower interest income ($20 million) due to lower average cash balances and lower rates in 2013 versus 2012. These losses were partially offset by higher gains from foreign currency transactions ($317 million) due to foreign currency rate volatility year to year.

Research, Development and Engineering

						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended June 30:	2013			2012		Change
Total consolidated research, development and engineering	$	1,548		$	1,587	(2.4	)%
Non-operating adjustment:
Non-operating retirement-related (costs)/income	(13		)	5		nm
Operating (non-GAAP) research, development and engineering	$	1,535		$	1,592	(3.6	)%

nm - not meaningful

62

						Yr. to Yr.
(Dollars in millions)						Percent
For the six months ended June 30:	2013			2012		Change
Total consolidated research, development and engineering	$	3,193		$	3,188	0.2	%
Non-operating adjustment:
Non-operating retirement-related (costs)/income	(29		)	10		nm
Operating (non-GAAP) research, development and engineering	$	3,163		$	3,197	(1.1	)%

nm - not meaningful

Total Research, development and engineering (RD&E) expense decreased 2.4 percent in the second quarter of 2013 versus the second quarter of 2012 primarily driven by:  lower base expense (4 points), partially offset by higher expense due to acquisitions (2 points). Operating (non-GAAP) RD&E expense decreased 3.6 percent in the second quarter of 2013 compared to the prior year, primarily driven by: lower base expense (6 points), partially offset by higher expense due to acquisitions (2 points).

RD&E expense increased 0.2 percent for the first six months of 2013 versus the same period of 2012 primarily driven by: acquisitions (2 points), partially offset by lower base expense (2 points).  Operating (non-GAAP) RD&E expense decreased 1.1 percent in the first six months of 2013 compared to the prior year primarily driven by: lower base expense (3 points), partially offset by higher expense due to acquisitions (2 points).

Intellectual Property and Custom Development Income

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2013		2012		Change
Intellectual Property and Custom Development Income:
Sales and other transfers of intellectual property	$	118	$	109	7.7	%
Licensing/royalty-based fees	37		54		(31.7	)
Custom development income	92		126		(26.5	)
Total	$	247	$	289	(14.5	)%

					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2013		2012		Change
Intellectual Property and Custom Development Income:
Sales and other transfers of intellectual property	$	163	$	176	(7.6	)%
Licensing/royalty-based fees	86		120		(28.6	)
Custom development income	182		249		(26.9	)
Total	$	430	$	545	(21.0	)%

The timing and amount of Sales and other transfers of IP may vary significantly from period to period depending upon the timing of divestitures, economic conditions, industry consolidation and the timing of new patents and know-how development. There were no significant IP transactions in the second quarter and first six months of 2013 and 2012.

Interest Expense

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2013		2012		Change
Interest expense	$	98	$	117	(16.1	)%

					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2013		2012		Change
Interest expense	$	192	$	226	(15.3	)%

63

The decrease in interest expense for the second quarter and first six months of 2013 versus the same periods of 2012 was primarily driven by lower average interest rates, partially offset by higher average debt levels. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings only if the related external borrowings are to support the Global Financing external business. See page 78 for additional information regarding Global Financing debt and interest expense. Overall interest expense (excluding capitalized interest) for the second quarter and first six months of 2013 was $248 million and $491 million, respectively, a decrease of $1 million and $10 million, respectively, year to year.

Retirement-Related Plans

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

							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended June 30:	2013			2012			Change
Retirement-related plans — cost:
Service cost	$	131		$	123		6.3	%
Amortization of prior service cost/(credits)	(28		)	(37		)	(23.0	)
Cost of defined contribution plans	342			368			(7.2	)
Total operating costs	$	444		$	454		(2.3	)%
Interest cost	$	926		$	1,058		(12.5	)%
Expected return on plan assets	(1,535		)	(1,587		)	(3.3	)
Recognized actuarial losses	847			600			41.2
Plan amendments/curtailments/settlements	0			0			nm
Multi-employer plan/other costs	25			23			7.8
Total non-operating costs/(income)	$	262		$	94		179.0	%
Total retirement-related plans — cost	$	706		$	548		28.8	%

nm — not meaningful

							Yr. to Yr.
(Dollars in millions)							Percent
For the six months ended June 30:	2013			2012			Change
Retirement-related plans — cost:
Service cost	$	273		$	247		10.8	%
Amortization of prior service cost/(credits)	(58		)	(74		)	(21.9	)
Cost of defined contribution plans	699			795			(12.1	)
Total operating costs	$	914		$	968		(5.5	)%
Interest cost	$	1,861		$	2,124		(12.4	)%
Expected return on plan assets	(3,087		)	(3,180		)	(2.9	)
Recognized actuarial losses	1,716			1,205			42.3
Plan amendments/curtailments/settlements	0			1			nm
Multi-employer plan/other costs	55			46			19.2
Total non-operating costs/(income)	$	546		$	197		177.8	%
Total retirement-related plans — cost	$	1,460		$	1,164		25.4	%

nm — not meaningful

In the second quarter, total retirement-related plans cost increased by $158 million compared to the second quarter of 2012, primarily driven by an increase in recognized actuarial losses ($247 million) and lower expected return on plan assets ($52 million), partially offset by lower interest cost ($132 million). Total cost for the first six months of 2013 increased $296 million versus the first six months of 2012, primarily driven by an increase in recognized actuarial losses ($510 million) and

64

lower expected return on plan assets ($94 million), partially offset by lower interest cost ($263 million) and lower defined contribution plans cost ($96 million).

As discussed in the “Snapshot” on pages 41 and 42, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the second quarter were $444 million, a decrease of $10 million compared to the second quarter of 2012, primarily driven by lower defined contribution plans cost ($26 million), partially offset by higher service cost ($8 million) and decreased amortization of prior service cost credits ($8 million). Non-operating costs of $262 million increased $168 million in the second quarter compared to the prior year driven primarily by an increase in recognized actuarial losses ($247 million) and lower expected return on plan assets ($52 million), partially offset by lower interest cost ($132 million). For the first six months of 2013, operating retirement-related costs were $914 million, a decrease of $53 million compared to the first six months of 2012. This decrease was driven by lower defined contribution plans cost ($96 million), partially offset by higher service cost ($27 million) and decreased amortization of prior service cost credits ($16 million). Non-operating costs of $546 million increased $349 million in the first six months compared to the prior year driven primarily by an increase in recognized actuarial losses ($510 million) and lower expected return on plan assets ($94 million), partially offset by lower interest cost ($263 million).

See Note 8, “Retirement-Related Benefits,” on pages 32 to 34 for additional plan cost detail.

Taxes

The effective tax rate for the second quarter of 2013 was 22.1 percent compared to an effective tax rate of 24.8 percent for the second quarter of 2012. The effective tax rates for the six months of 2013 and 2012 were 19.2 percent and 22.8 percent, respectively. The operating (non-GAAP) tax rate for the second quarter of 2013 was 22.0 percent compared to 25.0 percent for the second quarter of 2012. The operating (non-GAAP) tax rate for the first six months of 2013 was 19.8 percent compared to 23.1 percent for the first six months of 2012.

The decline in the second quarter tax rate compared to the prior year was primarily due to a favorable tax agreement received in the period which required a reassessment of certain valuation allowances on deferred tax assets (approximately $288 million), partially offset by a tax charge related to intercompany licensing of certain intellectual property (approximately $177 million). The year-to-year decrease in the tax rate for the first six months was driven by the impacts in the second quarter, in addition to benefits reflected in the first quarter of 2013 related to the retroactive impact of the 2012 American Taxpayer Relief Act (approximately $135 million) and newly enacted state legislation (approximately $125 million). The rate for the six months of 2012 reflected a one-time benefit associated with a tax restructuring in Latin America (approximately $165 million).

With limited exception, the company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years through 2007. The years subsequent to 2007 contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at December 31, 2012 increased $57 million in the second quarter of 2013 and decreased $33 million in the first six months of 2013 to $5,639 million. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $5,059 million at June 30, 2013.

In April 2010, the company appealed the determination of a non-U.S. local taxing authority with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1,207 million, has been included in unrecognized tax benefits. This amount includes the portion of these losses that had been utilized against a prior year liability. In April 2011, the company received notification that the appeal had been denied. In June 2011, the company filed a lawsuit challenging this decision. The company’s latest brief was filed in February 2013, with the next court hearing scheduled for July 2013.

At June 30, 2013, the company has recorded $435 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 and that this amount is not a meaningful indicator of liability.

In the fourth quarter of 2011, the IRS commenced its audit of the company’s U.S. tax returns for 2008 through 2010. The company anticipates that this audit will be completed by the end of 2013.

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Earnings Per Share

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

					Yr. to Yr.
					Percent
For the three months ended June 30:	2013		2012		Change
Earnings per share of common stock:
Assuming dilution	$	2.91	$	3.34	(12.9	)%
Basic	$	2.93	$	3.38	(13.3	)%
Diluted operating (non-GAAP)	$	3.22	$	3.51	(8.3	)%
Weighted-average shares outstanding: (in millions)
Assuming dilution	1,109.4		1,161.9		(4.5	)%
Basic	1,100.9		1,149.0		(4.2	)%

					Yr. to Yr.
					Percent
For the six months ended June 30:	2013		2012		Change
Earnings per share of common stock:
Assuming dilution	$	5.60	$	5.95	(5.9	)%
Basic	$	5.65	$	6.02	(6.1	)%
Diluted operating (non-GAAP)	$	6.23	$	6.29	(1.0	)%
Weighted-average shares outstanding: (in millions)
Assuming dilution	1,116.7		1,168.1		(4.4	)%
Basic	1,107.3		1,154.1		(4.1	)%

Actual shares outstanding at June 30, 2013 were 1,095.4 million. The weighted-average number of common shares outstanding assuming dilution during the second quarter and first six months of 2013 was 52.4 million and 51.3 million shares lower, respectively, than the same periods in 2012, primarily as a result of the company’s common stock repurchase program.

Financial Position

Dynamics

At June 30, 2013, the company’s balance sheet and liquidity positions remain strong to support the business over the long term. Cash and marketable securities at quarter end were $10,356 million and the company had no holdings of European sovereign debt securities. Total debt of $34,122 million increased $853 million from prior year-end levels. The company continues to have substantial flexibility in the market. In the first six months of 2013, the company generated $7,197 million in cash from operations, a decrease of $1,529 million compared to the six months of 2012. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its $10 billion global credit facility. The company’s cash flow and substantial cash position permits the company to invest and deploy capital to areas with the most attractive long-term opportunities.

The assets and debt associated with the Global Financing business are a significant part of the company’s financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 74, are supplementary data presented to facilitate an understanding of the Global Financing business.

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Working Capital

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Current assets	$	47,911	$	49,433
Current liabilities	41,037		43,625
Working capital	$	6,874	$	5,807
Current ratio	1.17:1		1.13:1

Working capital increased $1,067 million from the year-end 2012 position. The key changes are described below:

Current assets decreased $1,522 million (a decrease of $135 million adjusted for currency), due to:

·A decline of $1,742 million ($775 million adjusted for currency) in short-term receivables primarily due to collections of higher year-end balances; and

·A decrease in cash and cash equivalents and marketable securities of $772 million; offset by

·An increase of $722 million ($891 million adjusted for currency) in prepaid expenses and other, primarily due to:

·An increase of $502 million in various prepaid expenses and other assets (taxes and prepaid services assets); and

·An increase of $220 million in derivative assets primarily as a result of changes in foreign currency rates.

Current liabilities decreased $2,589 million ($1,444 million adjusted for currency), as a result of:

·A decrease in short term debt of $1,351 million ($1,165 million adjusted for currency) (see debt analysis on page 69); and

·A decrease in accounts payable of $1,131 million ($968 million adjusted for currency) reflecting declines from typically higher year-end balances; and

·A decrease of $523 million ($389 million adjusted for currency) in compensation and benefits reflecting payments of 2012 employee bonuses in March 2013; partially offset by,

·An increase in other accrued expenses and liabilities of $367 million ($560 million adjusted for currency) driven by increases in workforce rebalancing liabilities of $646 million, partially offset by declines in other accruals.

Cash Flow

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

(Dollars in millions)
For the six months ended June 30:	2013			2012
Net cash provided by/(used in):
Operating activities	$	7,197		$	8,726
Investing activities	(1,876		)	(3,913		)
Financing activities	(6,043		)	(5,678		)
Effect of exchange rate changes on cash and cash equivalents	(133		)	(193		)
Net change in cash and cash equivalents	$	(854	)	$	(1,058	)

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Net cash from operating activities decreased by $1,529 million as compared to the six months of 2012 driven by the following factors:

·An increase in cash used of $709 million due to higher income tax payments in the first six months of 2013 as compared to the first six months of 2012; and

·A decrease in cash provided by accounts receivable of $685 million driven by lower collections; and

·An increase in the use of cash of $366 million related to the fulfillment of services contracts; partially offset by

·Cash savings of $439 million from the deferral of the 401(k) matching contribution, and

·A decrease in cash used for vendor payables of $248 million.

Net cash used in investing activities decreased $2,037 million driven by:

·A net decrease of $1,745 million in cash used for acquisitions; and

·A net decrease of  $567 million in cash used for capital expenditures, partially offset by

·A decrease in cash provided by non-operating finance receivables of $350 million.

Net cash used in financing activities increased $364 million as compared to the first six months of 2012 driven by the following factors:

·An increase of $404 million of net cash used for common stock transactions; and

·An increase in dividend payments of $148 million; partially offset by

·An increase in net cash from debt transactions (including short-term borrowings) of $187 million.

Noncurrent Assets and Liabilities

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Noncurrent assets	$	67,242	$	69,780
Long-term debt	26,292		24,088
Noncurrent liabilities (excluding debt)	29,941		32,516

The decrease in noncurrent assets of $2,539 million (a decrease of $834 million adjusted for currency) was driven by:

·A decrease of $984 million in financing receivables ($536 million adjusted for currency), and

·A decrease in plant, rental machines and other — net of $640 million ($262 million adjusted for currency) driven by lower capital expenditures, and

·A decrease in intangible assets of $369 million ($369 million adjusted for currency) primarily driven by amortization and a decrease in goodwill of $401 million primarily due to currency.

Long-term debt increased by $2,204 million ($2,375 million adjusted for currency) primarily driven by new debt issuances of $4,889 million, partially offset by reclasses to short-term debt of $2,437 million.

Other noncurrent liabilities, excluding debt, decreased $2,575 million ($1,635 million adjusted for currency) primarily driven by a decrease in retirement and nonpension benefit obligations of $2,455 million ($1,860 million adjusted for currency).

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Debt

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

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Total company debt	$	34,122	$	33,269
Total Global Financing segment debt	$	24,855	$	24,501
Debt to support external clients	21,854		21,583
Debt to support internal clients	3,001		2,919

Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Global Services, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their attributes, these Global Services assets are leveraged with the balance of the Global Financing asset base. The debt analysis above is further detailed in the Global Financing section on page 78.

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

“Core” debt-to-capitalization ratio (excluding Global Financing debt and equity) was 39.1 percent at June 30, 2013 compared to 36.1 percent at December 31, 2012. The increase was primarily driven by an increase in non-Global Financing debt of $499 million and a decrease in non-Global Financing equity of $1,062 million from December 31, 2012 balances.

Consolidated debt-to-capitalization ratio at June 30, 2013 was 65.6 percent versus 63.7 percent at December 31, 2012.

Equity

Total equity decreased by $1,101 million from December 31, 2012 as a result of an increase in treasury stock of $6,107 million related to gross common stock repurchases in the first six months of 2013, partially offset by an increase in retained earnings of $4,243 million and an increase of $776 million in common stock.

Looking Forward

The company measures the success of its business model over the long term, not any individual quarter or year. The company’s strategies, investments and actions are all taken with an objective of optimizing long-term performance.

In May 2010, the company met with investors and introduced a road map for earnings per share in 2015. The objective of the road map for growth is to achieve at least $20 of operating (non-GAAP) earnings per diluted share in 2015. The company has identified the major drivers of financial performance: revenue growth, margin expansion and common stock share repurchase. The revenue growth will come from a combination of base revenue growth, a shift to faster growing businesses and from acquisitions closed between 2010 and 2015. The contribution from margin expansion will be driven by the mix of higher margin businesses and enterprise productivity. The company will also continue to return value to its shareholders, with approximately $50 billion of gross share repurchases and $20 billion of dividends expected during the road map period.

In the second quarter of 2013, the company had good performance in its higher margin businesses, including Software and the System z mainframe. The company had continued strong performance in its growth initiatives of Smarter Planet, business analytics and cloud. Global Business Services returned to growth at constant currency, led by Consulting and Systems Integration. Global Services had the strongest backlog growth at constant currency in four years. At the same time, the company took actions to better position the business for the future. The company rebalanced the workforce to align resources to the best opportunities. The company also closed the acquisition of SoftLayer to enhance its capabilities in cloud. In the second half of 2013, the company expects to continue its progress in areas like business analytics, cloud and Smarter Planet. The company also expects to leverage the benefit from its workforce rebalancing activity, capture additional opportunities in cost and expense through net income and continue to return value to its shareholders, while continuing to deal with a more challenging currency environment.

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Taking all of this into consideration, in July 2013, the company updated its full year 2013 expectations. As discussed in the Snapshot on page 43, the company is increasing its expectation for full year operating (non-GAAP) diluted earnings per share, excluding the second quarter workforce rebalancing charge of $1 billion, by $0.20 to at least at least $16.90. In addition, since the substantial second half gain that the company was expecting in its “all in” view of diluted earnings per share will not likely close by end of the year, the company has updated its “all in” view for the full year, expecting GAAP earnings per share of at least $15.08 and operating (non-GAAP) earnings per share of at least $16.25.

The company is continuing to drive to its objective of at least $20 of operating (non-GAAP) diluted earnings per share in 2015 on an “all in” basis. The company will use the at least $16.90 operating (non-GAAP) earnings per share expectation in 2013 to provide the base for its operational trajectory into 2014. In other words, the company will position its “all in” view as if it closed the divestiture transaction this year to establish its future trajectory, since fundamentally, whether the company executes a large divestiture in 2013 or not will not have any effect on the company’s ability to achieve its 2015 objective.

From a segment perspective, the Software business delivered a strong second quarter with constant currency revenue growth of 5 percent, driven by key branded middleware which increased 10 percent adjusted for currency, and share gains in all five brands. The Software business has a very good opportunity pipeline and real momentum going into the second half of the year, and the company expects that the performance in the second quarter is a good indicator of the kind of performance the Software business should deliver in the third quarter. Within Global Services, the estimated backlog increased 3 percent at actual rates, 7 percent at constant currency. In the second quarter, Global Business Services returned to revenue growth at constant currency. The business should benefit from the backlog improvement and the company expects Global Business Services to deliver constant currency revenue growth in the mid single-digits in the third quarter compared to the prior year. Global Technology Services revenue declined 2 percent on a constant currency basis in the second quarter. The actions taken to restructure lower margin outsourcing contracts impacted revenue performance by approximately 1.5 points; adjusting for that impact, revenue was down approximately 0.5 points year to year. The impact from the restructured contracts will be less than 1 point in the third quarter, and with the improved backlog performance, the company expects Global Technology Services to deliver constant currency revenue growth in the low single-digits in the third quarter compared to the third quarter of 2012. Within the Systems and Technology business, the System z mainframe business delivered strong performance in the second quarter with constant currency revenue growth of 11 percent. The company expects the System z business to deliver double-digit constant currency revenue growth in the third quarter. Power Systems improved its revenue performance in the second quarter compared to the first quarter. The company expects the sequential improvement to continue in the second half of 2013, as acceptance of the new Power7+ products continues.  Systems and Technology returned to profitability in the second quarter, excluding workforce rebalancing charges. The company expects the business to remain profitable for the full year.

Currency movements impacted the company’s year to year revenue and earnings per share growth in the first half of 2013. Revenue growth in the second quarter and the first half was impacted by 2 points from currency. Looking forward, at current spot rates, the company expects a 3 point impact from currency on reported revenue in the second half of the year. The dollar strengthened against many currencies, but the company’s results continue to be significantly impacted by the depreciation of the Yen. Due to the fact that the company’s business in Japan is more heavily skewed to local services, the company has less ability to hedge cross border cash flows in Japan as compared to most other countries. At current spot rates, this impact would continue through the rest of 2013.

The company’s effective tax rates for the second quarter and first six months of 2013 benefitted from the recognition of discrete period tax events. The company expects in the normal course of business that its effective tax rate and operating (non-GAAP) tax rate will be approximately 25 percent for the next two quarters of 2013, and approximately 23 percent for the full year. Looking forward, the company is involved in a number of tax audits and disputes worldwide, including the 2008 through 2010 U.S Federal audit. The company expects to conclude some of these audits and disputes in the second half of 2013 which could result in a favorable settlement in the fourth quarter. The rate will change period to period based on non-recurring 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.

The company’s free cash flow performance in the first half of 2013 compared to the prior year was impacted by cash tax payments. Going forward, the company expects to face an increasing year to year impact on free cash flow from cash tax payments. This year to year impact, which was approximately $700 million in the first half, is expected to be approximately $2.0 billion for the full year 2013. As a result of this impact, the company does not expect free cash flow to increase year to year compared to the full year 2012. In addition, as a result of these increased tax payments, the company expects its cash tax rate and its effective tax rate will continue to converge on a full year basis for 2013. The company does not expect the cash

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tax payments headwind in 2013 to impact its ability to fund the expenditures related to acquisitions, gross share repurchases and dividends through the 2015 roadmap.

The economy could impact the credit quality of the company’s receivables, and therefore the allowance for credit losses. The company will continue to apply its rigorous credit policies and analysis, and will also continue to monitor the current economic environment, particularly in Europe. Total receivables in Portugal, Italy, Ireland, Greece and Spain were approximately $2.5 billion, net of allowances, and represented approximately 7 percent of total net trade and financing accounts receivables at June 30, 2013. The company will continue to monitor potential exposures in these countries in conjunction with the application of its credit policies.

The company expects 2013 pre-tax retirement-related plan cost to be approximately $2.9 billion, an increase of approximately $500 million compared to 2012. This estimate reflects current pension plan assumptions at December 31, 2012, and excludes any potential impacts from retirement-related plan litigation. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.8 billion, essentially flat versus 2012. Non-operating retirement-related plan cost is expected to be approximately $1.1 billion, an increase of approximately $600 million, compared to 2012.

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 June 30, 2013, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end 2012. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions. Further discussion of currency and hedging appears in the company’s 2012 Annual Report in Note D, “Financial Instruments,” on pages 94 to 98.

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

The company translates revenue, cost and expense in its non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple constant currency mathematical translation of local currency results using the comparable prior period’s currency conversion rate.  However, this constant currency methodology that the company utilizes to disclose this information does not incorporate any operational actions that management may take in reaction to fluctuating currency rates.  Currency movements, particularly the depreciation of the Yen, impacted the company’s year-to-year revenue and earnings per share growth in the first six months of 2013. Based on the currency rate movements in the first six months of 2013, total revenue decreased 4.2 percent as reported and decreased 2.3 percent at constant currency versus the first six months of 2012. On a pre-tax income basis, these translation impacts offset by the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $170 million in the first half of 2013. The same mathematical exercise resulted in a decrease of approximately $50 million in the first half of 2012. The company views these amounts as a theoretical maximum impact to its as-reported financial results. Considering the operational responses mentioned above, movements of exchange 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. On December 30, 2010, the official rate for essential goods was eliminated, with no change to the SITME rate. The SITME rate remained constant throughout 2012 and 2011. In February 2013, the SITME rate was eliminated, and the official rate was set at 6.3 bolivars fuerte (BsF) to the U.S. dollar. This devaluation did not have a material impact given the size of the company’s operations in Venezuela (less than 1 percent of total 2011 and 2012 revenue, respectively).

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Liquidity and Capital Resources

In the company’s 2012 Annual Report, on pages 56 to 58, there is a discussion of the company’s liquidity including two tables that present five years of data. The table presented on page 56 includes net cash from operating activities, cash and marketable securities and the size of the company’s global credit facilities for each of the past five years. For the six months ended, or as of, as applicable, June 30, 2013, those amounts are $7.2 billion for net cash from operating activities, $10.4 billion of cash and marketable securities and $10 billion in global credit facilities, respectively.

The major rating agencies’ ratings on the company’s debt securities at June 30, 2013 appear in the table below.  The agency ratings remain unchanged from December 31, 2012. The company’s debt securities do not contain any self-executing acceleration clauses which could automatically change the scheduled maturities of the obligation. In addition, 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 June 30, 2013, the fair value of those instruments that were in a liability position was $481 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the company’s outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.

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

The table appearing on page 57 of the company’s 2012 Annual Report presents the format in which management reviews cash flows for each of the past five years and is accompanied by a description of the way cash flow is managed, measured and reviewed. The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlights causes and events underlying sources and uses of cash in that format on pages 67 and 68. The following is management’s view of cash flows for the first six months of 2013 and 2012 prepared in a manner consistent with the table and description on pages 56 and 57 of the company’s 2012 Annual Report:

(Dollars in millions)
For the six months ended June 30:	2013			2012
Net cash from operating activities per GAAP:	$	7,197		$	8,726
Less: the change in Global Financing receivables	1,147			918
Net cash from operating activities, excluding Global Financing receivables	6,051			7,809
Capital expenditures, net	(1,668		)	(2,279		)
Free cash flow	4,382			5,529
Acquisitions	(179		)	(1,925		)
Divestitures	12			13
Share repurchase	(6,145		)	(6,002		)
Dividends	(1,996		)	(1,848		)
Non-Global Financing debt	205			1,590
Other (includes Global Financing receivables and Global Financing debt)	2,949			1,907
Change in cash, cash equivalents and short-term marketable securities	$	(772	)	$	(736	)

Free cash flow for the first six months of 2013 decreased $1,147 million versus the first six months of 2012. The decrease was driven by a significant increase in cash tax payments, lower accounts receivable collections and a decline in operational net income, partially offset by lower capital expenditures and a benefit associated with the timing of the company’s funding of its 401(k) Plus Plan. Also, in the first six months of 2013, $8,141 million was returned to shareholders through gross share repurchases and dividends.

Events that could temporarily change the historical cash flow dynamics discussed above and in the company’s 2012 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected

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adverse impacts from litigation or future pension funding during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in Note 12, “Contingencies,” on pages 37 to 39 of this Form 10-Q. With respect to pension funding, the company expects to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $600 million in 2013. Financial market performance and/or further weakening in the European sovereign debt credit environment in 2013 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. On July 8, 2013, the company completed the acquisition of Softlayer Technologies, Inc., the world’s largest privately held cloud computing infrastructure company for a purchase price of approximately $2 billion.

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.

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Global Financing

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

Results of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2013			2012			2013			2012
External revenue	$	487		$	517		$	985		$	1,006
Internal revenue	575			515			1,116			1,000
Total revenue	1,061			1,032			2,101			2,006
Cost	340			355			665			658
Gross profit	$	721		$	677		$	1,436		$	1,349
Gross profit margin	68.0		%	65.6		%	68.3		%	67.2		%
Pre-tax income	$	550		$	528		$	1,088		$	1,040
After-tax income*	$	369		$	354		$	733		$	697
Return on equity*	42.4		%	43.1		%	42.0		%	42.6		%

* See page 79 for the details of the after-tax income and the return on equity calculation.

The increase in revenue in the second quarter, as compared to the same period in 2012, was due to:

·Growth in internal revenue of 11.6 percent, due to an increase in used equipment sales revenue (up 20.5 percent to $477 million), partially offset by a decrease in financing revenue (down 18.0 percent to $98 million); and

·A decline in external revenue of 5.8 percent (down 4 percent adjusted for currency), due to a decrease in used equipment sales revenue (down 28.4 percent to $112 million), partially offset by an increase in financing revenue (up 4.0 percent to $374 million).

The increase in revenue in the first six months, as compared to the same period in 2012, was due to:

·Growth in internal revenue of 11.6 percent, due to an increase in used equipment sales revenue (up 23.0 percent to $910  million), partially offset by a decrease in financing revenue (down 20.8 percent to $206 million); and

·A decline in external revenue of 2.1 percent (flat adjusted for currency), due to a decrease in used equipment sales revenue (down 8.7 percent to $232 million).

The decreases in internal financing revenue in the second quarter and the first six months of 2013, compared to the same periods in 2012, were due to lower asset yields and a decrease in the average asset balance.  The increase in external financing revenue in the second quarter, compared to the same period in 2012, was due to a higher average asset balance.  For the external financing revenue in the first six months of 2013, compared to the same period in 2012, the higher average asset balance was fully offset by lower asset yields and a decrease in remarketing lease revenue.

Global Financing gross profit increased 6.6 percent in the second quarter and 6.5 percent in the first six months of 2013, respectively, compared to the same periods in 2012, due to an increase in used equipment sales gross profit, partially offset by a decrease in financing gross profit.  The gross profit margin increased 2.4 points in the second quarter and 1.1 points in the first six months of 2013, respectively, compared to the same periods in 2012, due to margin increases in used equipment sales and financing, partially offset by shift in mix toward lower margin used equipment sales.

Global Financing pre-tax income increased 4.2 percent to $550 million in the second quarter of 2013, compared to the same period in 2012, due to higher gross profit ($45 million), partially offset by an increase in financing receivables provisions ($20 million). The increase in financing receivables provisions was due to higher specific reserve requirements in the current year. Pre-tax income increased 4.6 percent to $1,088 million in the first six months of 2013, compared to the same period in 2012, due to higher gross profit ($88 million), partially offset by increases in financing receivables provisions ($33 million) and selling, general and administrative expenses ($7 million). The increase in financing receivables provisions was

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due to higher specific reserve requirements in the current year. Normalized for workforce rebalancing charges of $2 million in the second quarter of 2013, Global Financing pre-tax income increased 4.5 percent versus the prior year. Normalized for the workforce rebalancing charges in the second quarter of 2013, pre-tax income increased 4.8 percent in the first six months of 2013 compared to the prior year.

The decreases in return on equity in the second quarter and in the first six months of 2013, compared to the same periods of 2012, were due to a higher average equity balance, partially offset by the increase in after-tax income.

Financial Position

Balance Sheet

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Cash and cash equivalents	$	1,378	$	1,380
Net investment in sales-type and direct financing leases	9,599		10,008
Equipment under operating leases:
External clients (a)	1,074		1,273
Internal clients (b) (c)	0		25
Client loans	12,459		13,121
Total client financing assets	23,133		24,428
Commercial financing receivables	6,467		7,755
Intercompany financing receivables (b) (c)	4,106		4,328
Other receivables	339		459
Other assets	658		533
Total assets	$	36,080	$	38,882
Intercompany payables (b)	$	3,857	$	6,802
Debt (d)	24,855		24,501
Other liabilities	3,912		4,084
Total liabilities	32,624		35,388
Total equity	3,456		3,494
Total liabilities and equity	$	36,080	$	38,882

(a) Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in IBM’s consolidated results.

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

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

(d) Global Financing debt is comprised of intercompany loans and external debt. A portion of Global Financing debt is in support of the company’s internal business, or related to intercompany mark-up embedded in the Global Financing assets.  See table on page 78.

Sources and Uses of Funds

The primary use of funds in Global Financing is to originate client and commercial financing assets. Client financing assets for end users consist primarily of IBM systems, software and services, but also include OEM equipment, software and services to meet IBM clients’ total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans for systems, software and services with terms generally from one to seven years. Global Financing’s client loans are primarily for software and services and are unsecured. These loans are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks in the loan agreements which include covenants to protect against credit deterioration during the life of the obligation. Client financing also includes internal activity as described on page 24 of the 2012 IBM Annual Report.

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

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

At June 30, 2013, substantially all financing assets are IT related assets, and approximately 61 percent of the external portfolio was with investment grade clients with no direct exposure to consumers.

Originations

The following are total financing originations:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in millions)	2013		2012		2013		2012
Client financing	$	3,727	$	3,605	$	6,983	$	6,797
Commercial financing	9,741		8,595		18,794		17,093
Total	$	13,468	$	12,200	$	25,778	$	23,890

Total new originations exceeded cash collections of commercial financing assets in the second quarter of 2013, which resulted in a net increase in financing assets in this period. Cash collections of both commercial financing and client financing assets exceeded new financing originations in the first six months of 2013, which resulted in a net decline in financing assets from December 31, 2012. The increase in originations in both periods was due to improving volumes in client and commercial financing. Internal loan financing with Global Services is executed under a loan facility and is not considered originations.

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

Global Financing Receivables and Allowances

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

	At June 30,			At December 31,
(Dollars in millions)	2013			2012
Gross financing receivables	$	28,197		$	30,621
Specific allowance for credit losses	248			240
Unallocated allowance for credit losses	97			115
Total allowance for credit losses	345			355
Net financing receivables	$	27,852		$	30,266
Allowance for credit losses coverage	1.2		%	1.2		%

Roll Forward of  Global Financing Receivables Allowance for Credit Losses

(Dollars in millions)		Allowance			Additions/
January 1, 2013		Used*			(Reductions)		Other**			June 30, 2013
$	355	$	(23	)	$	22	$	(9	)	$	345

*   Represents reserved receivables, net of recoveries, that were disposed of during the period.

** Primarily represents translation adjustments.

The percentage of Global Financing receivables reserved was 1.2 percent at December 31, 2012 and June 30, 2013. Specific reserves increased 3 percent from $240 million at December 31, 2012 to $248 million at June 30, 2013. Unallocated reserves decreased 16 percent from $115 million at December 31, 2012 to $97 million at June 30, 2013 primarily due to the decline in gross financing receivables.

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Global Financing’s bad debt expense was an increase of $15 million for the three months ended June 30, 2013, compared to a decrease of $5 million for the same period in 2012. Global Financing’s bad debt expense was an increase of $22 million for the six months ended June 30, 2013, compared to a decrease of $10 million for the same period in 2012.  The year-to-year increases in bad debt expense in both periods were due to higher specific reserve requirements 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, which are primarily sourced from equipment returned at the end of a lease, represented 55.6 percent and 54.4 percent of Global Financing’s revenue in the second quarter and first six months, respectively, of 2013, and 53.6 percent and 49.6 percent in the second quarter and first six months, respectively, of 2012. The gross profit margins on these sales were 59.1 percent and 54.5 percent in the second quarter, and 59.0 percent and 56.6 percent in the first six months of 2013 and 2012, respectively. The increases in gross margin in both periods were driven by a shift in mix toward higher margin internal sales, partially offset by decreases in both external and internal sales margins.

The table below presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at January 1, 2013 and June 30, 2013. 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 June 30, 2013 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 $96 million and $115 million for the financing transactions originated during the quarters ended June 30, 2013 and June 30, 2012, respectively, and $226 million and $286 million for the six months ended June 30, 2013 and June 30, 2012, respectively. The aggregate asset values associated with the guarantees of direct financing leases were $59 million and $50 million for the financing transactions originated during the quarters ended June 30, 2013 and June 30, 2012, respectively, and $115 million and $95 million for the six months ended June 30, 2013 and June 30, 2012, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $5 million and $9 million for the financing transactions originated during the quarters ended June 30, 2013 and June 30, 2012, respectively, and $13 million and $19 million for the six months ended June 30, 2013 and June 30, 2012, respectively. The cost of guarantees was $0.5 million and $0.9 million for the quarters ended June 30, 2013 and June 30, 2012, respectively, and $1.3 million and $1.9 million for the six months ended June 30, 2013 and June 30, 2012, respectively.

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Unguaranteed Residual Value

							Estimated Run Out of
	At			At			June 30, 2013 Balance
	January 1,			June 30,									2016 and
(Dollars in millions)	2013			2013			2013		2014		2015		Beyond
Sales-type and direct financing leases	$	794		$	745		$	86	$	187	$	221	$	250
Operating leases	259			231			73		73		50		35
Total unguaranteed residual value	$	1,053		$	976		$	159	$	260	$	271	$	285
Related original amount financed	$	18,744		$	17,891
Percentage	5.6		%	5.5		%

Debt

	At June 30,		At December 31,
	2013		2012
Debt-to-equity ratio	7.2	x	7.0	x

The company funds Global Financing through borrowings using a debt-to-equity ratio target of approximately 7 to 1. The debt used to fund Global Financing assets is composed of intercompany loans and external debt. The terms of the intercompany loans are set by the company to substantially match the term and currency underlying the financing receivable and are based on arm’s-length pricing. Both assets and debt are presented in the Global Financing balance sheet on page 75.

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 74 and in Segment Information on pages 25 to 27.

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

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

(Dollars in millions)	At June 30, 2013					At December 31, 2012
Global Financing Segment				$	24,855				$	24,501
Debt to support external clients	$	21,854				$	21,583
Debt to support internal clients	3,001					2,919
Non-Global Financing Segments				9,267					8,767
Debt supporting operations	12,268					11,686
Intercompany activity	(3,001		)			(2,919		)
Total company debt				$	34,122				$	33,269

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.

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Return on Equity

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2013			2012			2013			2012
Numerator:
Global Financing after tax income*	$	369		$	354		$	733		$	697
Annualized after tax income (A)	$	1,477		$	1,416		$	1,466		$	1,394
Denominator:
Average Global Financing equity (B)**	$	3,488		$	3,286		$	3,490		$	3,274
Global Financing return on equity(A)/(B)	42.4		%	43.1		%	42.0		%	42.6		%

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

**Average of the ending equity for Global Financing for the last 2 quarters and 3 quarters, for the three months ended June 30, and for the six months ended June 30, respectively.

Looking Forward

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

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

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

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

As discussed on page 77, 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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GAAP Reconciliation

The tables below provide a reconciliation of the company’s income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company’s calculation of operating earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Snapshot” section beginning on page 41 for the company’s rationale for presenting operating earnings information.

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the three months ended June 30, 2013	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	12,132		$	91		$	156		$	12,379
Gross profit margin	48.7		%	0.4		pts.	0.6		pts.	49.7		%
S,G&A	$	6,680		$	(91	)	$	(93	)	$	6,496
R,D&E	1,548			0			(13		)	1,535
Other (income) and expense	(91		)	(0		)	0			(91		)
Total expense and other (income)	7,988			(91		)	(106		)	7,791
Pre-tax income	4,144			182			262			4,588
Pre-tax income margin	16.6		%	0.7		pts.	1.1		pts.	18.4		%
Provision for income taxes*	$	918		$	9		$	82		$	1,009
Effective tax rate	22.1		%	(0.7		)pts.	0.6		pts.	22.0		%
Net income	$	3,226		$	173		$	180		$	3,579
Net income margin	12.9		%	0.7		pts.	0.7		pts.	14.4		%
Diluted earnings per share	$	2.91		$	0.15		$	0.16		$	3.22

*  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.

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the three months ended June 30, 2012	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	12,281		$	93		$	66		$	12,440
Gross profit margin	47.6		%	0.4		pts.	0.3		pts.	48.2		%
S,G&A	$	5,837		$	(87	)	$	(33	)	$	5,717
R,D&E	1,587			0			5			1,592
Other (income) and expense	(132		)	(1		)	0			(133		)
Total expense and other (income)	7,120			(88		)	(28		)	7,004
Pre-tax income	5,161			181			94			5,436
Pre-tax income margin	20.0		%	0.7		pts.	0.4		pts.	21.1		%
Provision for income taxes*	$	1,280		$	49		$	30		$	1,359
Effective tax rate	24.8		%	0.1		pts.	0.1		pts.	25.0		%
Net income	$	3,881		$	132		$	64		$	4,077
Net income margin	15.1		%	0.5		pts.	0.2		pts.	15.8		%
Diluted earnings per share	$	3.34		$	0.11		$	0.06		$	3.51

*  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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(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the six months ended June 30, 2013	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	22,810		$	186		$	320		$	23,316
Gross profit margin	47.2		%	0.4		pts.	0.7		pts.	48.2		%
S,G&A	$	12,257		$	(183	)	$	(197	)	$	11,878
R,D&E	3,193			0			(29		)	3,163
Other (income) and expense	(151		)	(7		)	0			(158		)
Total expense and other (income)	15,060			(190		)	(226		)	14,644
Pre-tax income	7,750			376			546			8,672
Pre-tax income margin	16.0		%	0.8		pts.	1.1		pts.	17.9		%
Provision for income taxes*	$	1,492		$	63		$	162		$	1,717
Effective tax rate	19.2		%	(0.1		)pts.	0.7		pts.	19.8		%
Net income	$	6,258		$	313		$	384		$	6,955
Net income margin	12.9		%	0.6		pts.	0.8		pts.	14.4		%
Diluted earnings per share	$	5.60		$	0.28		$	0.35		$	6.23

*  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.

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the six months ended June 30, 2012	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	23,400		$	181		$	137		$	23,718
Gross profit margin	46.4		%	0.4		pts.	0.3		pts.	47.0		%
S,G&A	$	11,723		$	(171	)	$	(69	)	$	11,483
R,D&E	3,188			0			10			3,197
Other (income) and expense	(190		)	(2		)	0			(192		)
Total expense and other (income)	14,403			(172		)	(60		)	14,171
Pre-tax income	8,997			354			197			9,547
Pre-tax income margin	17.8		%	0.7		pts.	0.4		pts.	18.9		%
Provision for income taxes*	$	2,049		$	96		$	60		$	2,205
Effective tax rate	22.8		%	0.2		pts.	0.2		pts.	23.1		%
Net income	$	6,948		$	258		$	137		$	7,342
Net income margin	13.8		%	0.5		pts.	0.3		pts.	14.6		%
Diluted earnings per share	$	5.95		$	0.22		$	0.12		$	6.29

*  The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

Forward-Looking and Cautionary Statements

Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and corporate IT spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results and purchases; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.

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Item 4. Controls and Procedures

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

Part II — Other Information

Item 1.  Legal Proceedings

Refer to Note 12, “Contingencies,” on pages 37 to 39 of this Form 10-Q.

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

The following table provides information relating to the company’s repurchase of common stock for the second quarter of 2013.

					Approximate
					Dollar Value
				Total Number	of Shares that
	Total Number	Average		of Shares Purchased	May Yet Be
	of Shares	Price Paid		as Part of Publicly	Purchased Under
Period	Purchased	per Share		Announced Program	The Program*
April 1, 2013 - April 30, 2013	4,071,164	$	204.16	4,071,164	$	10,327,862,931
May 1, 2013 - May 31, 2013	12,999,747	$	205.40	12,999,747	$	7,657,668,201
June 1, 2013 - June 30, 2013	—	$	—	—	$	7,657,668,201
Total	17,070,911	$	205.11	17,070,911

* On April 24, 2012, the Board of Directors authorized $7.0 billion in funds for use in the company’s common stock repurchase program. On October 30, 2012 and April 30, 2013, the Board of Directors authorized an additional $5.0 billion and $5.0 billion, respectively, in funds for use in such program. The April 24, 2012 authorization was fully utilized in April 2013. In each case, the company stated that it would repurchase shares on the open market or in private transactions depending on market conditions and that it expects to use cash from operations for the repurchases. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

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Item 6. Exhibits

Exhibit Number

10.1	Forms of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit awards. Terms and conditions document, effective June 7, 2013, in connection with foregoing award agreements.
11	Statement re: computation of per share earnings.
12	Statement re: computation of ratios.
31.1	Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statement of Earnings for the three and six months ended June 30, 2013 and 2012, (ii) the Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Statement of Financial Position at June 30, 2013 and December 31, 2012, (iii) the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012, (iv) the Consolidated Statement of Changes in Equity for the six months ended June 30, 2013 and 2012 and (v) the notes to the Consolidated Financial Statements.

SIGNATURE

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

		International Business Machines Corporation
		(Registrant)
Date:	July 30, 2013
		By:	/s/ James J. Kavanaugh
			James J. Kavanaugh
			Vice President and Controller

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EX-10.1

EXHIBIT 10.1

	International Business Machines Corporation (“IBM”) Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	[Stock Options, Restricted Stock, Restricted Stock Units, Cash-Settled Restricted Stock Units, SARs]
Purpose	The purpose of this Award is to retain selected employees and executives. You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 7, 2013” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant: [Month Date, Year] [Exercise Price: $XX] Number of [Options/Units/Shares/SARs] Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document.
	Options/Units/Shares/SARs	Date
	[number of shares]	[month date year]
	[number of shares]	[month date year]
	[             “             ]	[             “             ]
	Options expire, subject to the Terms and Conditions document, on: [month date year]

1

Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·      Cancellation and rescission of awards (also see below) ·      Jurisdiction, governing law, expenses and taxes ·      Non-solicitation of Company employees and clients, if applicable ·      Treatment of your Award in the event of death or disability or leave of absence ·      Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances. It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award if you render services for a competitor prior to, or during the Rescission Period. You understand that the Rescission Period that has been established is 12 months. Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM’s long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.
Extraordinary Compensation	Your participation in the Plan is voluntary. The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments. The Plan is discretionary in nature. This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future. Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions. This Equity Award Agreement is not part of your employment agreement, if any.
Accept Your Award	This Award is considered valid when you accept it. This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time by two business days prior to the first vesting date in the “Vesting” section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law, and (iii) that by your acceptance of this Award, all awards previously granted to you under the Plan or other IBM Long-Term Performance Plans are subject to the “Cancellation and Rescission” section of this Agreement (unless your previous award agreement(s) specified a longer Rescission Period, in which case such longer period will apply) and the “Cancellation and Rescission” section of the Terms and Conditions document.

2

	International Business Machines Corporation (“IBM”) Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	Performance Share Units (PSUs)
Purpose	The purpose of this Award is to retain selected executives. You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country Global ID	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 7, 2013” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant	# PSUs Awarded				Performance Period			Date of Payout
	[month day year]	[amount]				[dates]			[date]
	[month day year]	[amount]				[dates]			[date]
	[            “            ]	[      “     ]				[    “   ]			[   “  ]
Vesting	You can earn the PSUs awarded above based on IBM’s performance in achieving cumulative business targets of earnings-per-share and cash flow, weighted 80/20 respectively, over the 3-year Performance Period applicable to the award. Performance against each of the targets will be subject to separate payout calculations according to the following table (which will be applied separately for each award of PSUs listed above):
	% of Target		<70%	70%	80%		90%	100%		110%	>120%
	% of PSUs earned		0%	25%	50%		75%	100%		125%	150%
Payout of Awards	Following the Date of Payout, the Company shall either (a) deliver to you a number of shares of Capital Stock equal to the number of your earned PSUs, or (b) make a cash payment to you equal to the Fair Market Value on the Date of Payout of the number of your earned PSUs at the end of the Performance Period, in either case, net of any applicable tax withholding, and the respective PSUs shall thereafter be canceled. All payouts under this Award are subject to the provisions of the Plan, this Agreement and the Terms and Conditions document, including those relating to the cancellation and rescission of awards.
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·   Cancellation and rescission of awards (also see below) ·   Jurisdiction, governing law, expenses and taxes ·   Non-solicitation of Company employees and clients, if applicable ·   Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause, (i) if you are on the performance team, or any successor team thereto, and (ii) under all other circumstances. It is strongly recommended that you print the Terms and Conditions document for later reference.

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

2

	International Business Machines Corporation (“IBM”) Equity Award Agreement
Plan	[IBM 1999 Long-Term Performance Plan (the “Plan”)]
Award Type	Retention Restricted Stock Units (RRSUs)
Purpose	The purpose of this Award is to retain selected executives. You recognize that this Award represents a potentially significant benefit to you and is awarded for the purpose stated here.
Awarded to Home Country [Global ID]	Sample United States (USA) [Employee ID] [Global ID]
Award Agreement	This Equity Award Agreement, together with the “Terms and Conditions of Your Equity Award: Effective June 7, 2013” (“Terms and Conditions”) document and the Plan http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml, both of which are incorporated herein by reference, together constitute the entire agreement between you and IBM with respect to your Award. This Equity Award Agreement shall be governed by the laws of the State of New York, without regard to conflicts or choice of law rules or principles.
Grant	Date of Grant: [Month Date, Year] Number of Units Awarded: [XX]
Vesting	This Award vests as set forth below, subject to your continued employment with the Company as described in the Terms and Conditions document.
	Units	Date
	[amount]	[month date, year]
	[amount]	[month date, year]
Terms and Conditions of Your Equity Award	Refer to the Terms and Conditions document http://w3.ibm.com/hr/exec/comp/eq_prospectus.shtml for an explanation of the terms and conditions applicable to your Award, including those relating to: ·Cancellation and rescission of awards (also see below) ·Jurisdiction, governing law, expenses and taxes ·Non-solicitation of Company employees and clients, if applicable ·Treatment of your Award in the event of death or disability or leave of absence ·Treatment of your Award upon termination of employment, including retirement or for cause It is strongly recommended that you print the Terms and Conditions document for later reference.
Cancellation and Rescission	You understand that IBM may cancel, modify, rescind, suspend, withhold or otherwise limit or restrict this Award in accordance with the terms of the Plan, including, without limitation, canceling or rescinding this Award if you render services for a competitor prior to, or during the Rescission Period. You understand that the Rescission Period that has been established is three years. Refer to the Terms and Conditions document and the Plan for further details.
Data Privacy, Electronic Delivery	By accepting this Award, you agree that data, including your personal data, necessary to administer this Award may be exchanged among IBM and its subsidiaries and affiliates as necessary, and with any vendor engaged by IBM to administer this Award, subject to the Terms and Conditions document; you also consent to receiving information and materials in connection with this Award or any subsequent awards under IBM’s long-term performance plans, including without limitation any prospectuses and plan documents, by any means of electronic delivery available now and/or in the future (including without limitation by e-mail, by Web site access and/or by facsimile), such consent to remain in effect unless and until revoked in writing by you.

1

Extraordinary Compensation

Your participation in the Plan is voluntary. The value of this Award is an extraordinary item of income, is not part of your normal or expected compensation and shall not be considered in calculating any severance, redundancy, end of service payments, bonus, long-service awards, pension, retirement or other benefits or similar payments. The Plan is discretionary in nature. This Award is a one-time benefit that does not create any contractual or other right to receive additional awards or other benefits in the future. Future grants, if any, are at the sole grace and discretion of IBM, including but not limited to, the timing of the grant, the number of units and vesting provisions. This Equity Award Agreement is not part of your employment agreement, if any.

Accept Your Award

This Award is considered valid when you accept it. This Award will be cancelled unless you accept it by 11:59 p.m. Eastern time two business days prior to the first vesting date in the “Vesting” section of this Agreement. By pressing the Accept button below to accept your Award, you acknowledge having received and read this Equity Award Agreement, the Terms and Conditions document and the Plan under which this Award was granted and you agree (i) not to hedge the economic risk of this Award or any previously-granted outstanding awards, which includes entering into any derivative transaction on IBM securities (e.g., any short sale, put, swap, forward, option, collar, etc.), and (ii) to comply with the terms of the Plan, this Equity Award Agreement and the Terms and Conditions document, including those provisions relating to cancellation and rescission of awards and jurisdiction and governing law.

2

IBM

TERMS AND CONDITIONS OF YOUR EQUITY AWARD: EFFECTIVE JUNE 7, 2013

Table of Contents

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

1

Introduction

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

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

How to Use This Document

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

2

Definition of Terms

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

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

“Board” — The Board of Directors of International Business Machines Corporation (“IBM”).

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

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

“Company” — IBM and its affiliates and subsidiaries including subsidiaries of subsidiaries and partnerships and other business ventures in which IBM has an equity interest.

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

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

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

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

3

Provisions that apply to all Award types but not all countries

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

Cancellation and Rescission

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

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

Jurisdiction, Governing Law, Expenses and Taxes

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

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

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

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

4

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

Non-Solicitation

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

5

Provisions that apply to specific Award types for all countries

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

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

i.All RSUs

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

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

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

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

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

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

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

Death or Disability

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

Leave of Absence

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

6

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

Dividend Equivalents

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

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

Settlement of Award

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

iii.Cash-Settled RSUs including Cash-Settled RRSUs

Settlement of Award

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

b.Restricted Stock

Settlement of Award

Subject to Sections 12 and 13 of the Plan and the paragraph entitled “Termination of Employment including Death, Disability or Leave of Absence” below, upon the Vesting Date(s), or as soon thereafter as may be practicable but in no event later than March 15 of the following calendar year, the shares of Restricted Stock awarded under your Equity Award Agreement will be deliverable to you, subject to any applicable tax withholding requirements as described in Section 9 of the Plan.

7

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

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

Death or Disability

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

Leave of Absence

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

Dividends and Other Rights

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

Transferability

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

8

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

i.All Option and SAR Awards

Termination of Employment including Death, Disability and Leave of Absence

Termination of Employment

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

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

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

Death or Disability

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

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

9

Leave of Absence

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

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

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

Termination of Employment for Cause

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

ii.All SAR Awards

Settlement of Award

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

10

d.Performance Share Units ("PSUs")

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

Termination of Employment and Leave of Absence

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

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

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

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

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

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

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

Death or Disability

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

11

Provisions that apply to specific countries

a.Denmark

i.All Awards

Non-Solicitation

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

12

EX-11

EXHIBIT 11

COMPUTATION OF BASIC AND DILUTED

EARNINGS PER SHARE

(UNAUDITED)

	For the Three Months Ended
	June 30, 2013		June 30, 2012
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	1,100,895,416		1,149,039,441
Add — Incremental shares under stock-based compensation plans	6,812,301		10,888,916
Add — Incremental shares associated with contingently issuable shares	1,721,200		1,946,385
Number of shares on which diluted earnings per share is calculated	1,109,428,918		1,161,874,743
Net income on which basic earnings per share is calculated (millions)	$	3,226	$	3,881
Less — net income applicable to contingently issuable shares (millions)	1		1
Net income on which diluted earnings per share is calculated (millions)	$	3,225	$	3,881
Earnings per share of common stock:
Assuming dilution	$	2.91	$	3.34
Basic	$	2.93	$	3.38

There were no stock options outstanding as of June 30, 2013 and 2012 that were considered antidilutive and not included

in the earnings per share assuming dilution calculation.

84

COMPUTATION OF BASIC AND DILUTED

EARNINGS PER SHARE

(UNAUDITED)

	For the Six Months Ended
	June 30, 2013		June 30, 2012
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	1,107,284,900		1,154,065,962
Add — Incremental shares under stock compensation plans	7,842,407		12,211,361
Add — Incremental shares associated with contingently issuable shares	1,584,738		1,782,030
Number of shares on which diluted earnings per share is calculated	1,116,712,046		1,168,059,353
Net income on which basic earnings per share is calculated (millions)	$	6,258	$	6,948
Less — net income applicable to contingently issuable shares (millions)	1		1
Net income on which diluted earnings per share is calculated (millions)	$	6,257	$	6,947
Earnings per share of common stock:
Assuming dilution	$	5.60	$	5.95
Basic	$	5.65	$	6.02

There were no stock options outstanding as of June 30, 2013 and 2012 that were considered antidilutive and not

included in the earnings per share assuming dilution calculation.

85

EX-12

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

FOR SIX MONTHS ENDED JUNE 30,

(UNAUDITED)

(Dollars in millions)	2013		2012
Income before income taxes (1)	$	7,759	$	9,017
Add: fixed charges, excluding capitalized interest	735		761
Income as adjusted before income taxes	$	8,494	$	9,778
Fixed charges:
Interest expense	$	491	$	501
Capitalized interest	17		14
Portion of rental expense representative of interest	244		260
Total fixed charges	$	752	$	775
Ratio of earnings to fixed charges	11.30		12.62

(1) Income before income taxes excludes (a) amortization of capitalized interest, and (b) the company’s share in the income and losses of less-than-fifty percent-owned affiliates.

86

EX-31.1

Exhibit 31.1

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

I, Virginia M. Rometty, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2013

/s/ Virginia M. Rometty

Virginia M. Rometty

Chairman, President and Chief Executive Officer

87

EX-31.2

Exhibit 31.2

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

I, Mark Loughridge, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2013

/s/ Mark Loughridge

Mark Loughridge

Senior Vice President and Chief Financial Officer,
Finance and Enterprise Transformation

88

EX-32.1

Exhibit 32.1

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2013, 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

July 30, 2013

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.

89

EX-32.2

Exhibit 32.2

INTERNATIONAL BUSINESS MACHINES CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Loughridge, Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Mark Loughridge

Mark Loughridge

Senior Vice President and Chief Financial Officer,
Finance and Enterprise Transformation

July 30, 2013

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.

90

XML

Acquisitions/Divestitures:

6 Months Ended

Jun. 30, 2013

Acquisitions/Divestitures:

Acquisitions/Divestitures:

9. Acquisitions/Divestitures:

Acquisitions: During the six months ended June 30, 2013, the company completed three acquisitions at an aggregate cost of $101 million.

The Software segment completed acquisitions of three privately held companies: in the first quarter, StoredIQ Inc. (StoredIQ) and Star Analytics, Inc. (Star Analytics); and in the second quarter, UrbanCode Inc. (UrbanCode).

The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2013:

	Amortization	Total
(Dollars in millions)	Life (in yrs.)	Acquisitions
Current assets		$	7
Fixed assets/noncurrent assets		14
Intangible assets:
Goodwill	N/A	75
Completed technology	5-7	11
Patents/trademarks	3-7	4
Total assets acquired		111
Current liabilities		(3		)
Noncurrent liabilities		(7		)
Total liabilities assumed		(10		)
Total purchase price		$	101

N/A - not applicable

Each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. The acquisition of StoredIQ advances the company’s efforts to help clients derive value from big data. The combination of the company’s and Star Analytics’ software will advance the company’s business analytics initiatives. UrbanCode automates the delivery of software, helping businesses quickly release and update mobile, social, big data and cloud applications. Purchase price consideration for these acquisitions as reflected in the table above, is paid in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled work-force, neither of which qualify as an amortizable intangible asset. The overall weighted-average life of the identified amortizable intangible assets acquired is 6.6 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $75 million has been assigned to the Software segment. It is expected that approximately 8 percent of the goodwill will be deductible for tax purposes.

On July 8, 2013, the company announced that it had completed the acquisition of SoftLayer Technologies, Inc. (SoftLayer), based in Dallas, Texas, the world’s largest privately held cloud computing infrastructure company. Softlayer will enable the company to deliver the security, privacy and reliability attributes of private clouds with the economy and speed of public clouds. At the date of issuance of the financial statements, the initial business combination accounting (purchase price of approximately $2.0 billion) was not complete for this acquisition.

On July 9, 2013, the company announced that it had entered into a definitive agreement to acquire CSL International (CSL), a privately held company based in Herzliya Pituach, Israel. CSL is a leading provider of virtualization management technology for the company’s zEnterprise system. The acquisition is expected to close in the third quarter of 2013.

Divestitures: During the first quarter of 2013, the company completed the divestiture of its Showcase Reporting product set to Help/Systems. Showcase Reporting, which was acquired by IBM through the SPSS acquisition in 2009, is an enterprise-class business intelligence platform that enables customers to build and manage analytical reporting environments. This transaction was not material to the Consolidated Financial Statements.

XML

Acquisitions/Divestitures: (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended				6 Months Ended			6 Months Ended
	Jun. 30, 2013 item	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2013 Completed technology	Jun. 30, 2013 Completed technology Minimum	Jun. 30, 2013 Completed technology Maximum	Jun. 30, 2013 Patents/trademarks	Jun. 30, 2013 Patents/trademarks Minimum	Jun. 30, 2013 Patents/trademarks Maximum	Jun. 30, 2013 Software item	Dec. 31, 2012 Software	Dec. 31, 2011 Software	Jun. 30, 2013 Other Acquisitions Software	Jul. 08, 2013 SoftLayer Forecast
Acquisitions:
Businesses acquired, number (in entities)	3									3
Businesses acquired, aggregate cost	$ 101
Acquired intangible asset, weighted average useful life	6 years 7 months 6 days				5 years	7 years		3 years	7 years
Current assets	7
Fixed assets/noncurrent assets	14
Goodwill	28,846	29,247	26,213							20,164	20,405	18,121	75
Intangible assets				11			4
Total assets acquired	111
Current liabilities	(3)
Noncurrent liabilities	(7)
Total liabilities assumed	(10)
Total purchase price	$ 101													$ 2,000
Expected percent of goodwill deductible for tax purposes	8.00%

XML

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (USD $) In Millions, unless otherwise specified	Jun. 30, 2013		Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 9,558		$ 10,412
Marketable securities	799		717
Notes and accounts receivable - trade (net of allowances of $258 in 2013 and $255 in 2012)	10,277		10,667
Short-term financing receivables (net of allowances of $279 in 2013 and $288 in 2012)	16,661		18,038
Other accounts receivable (net of allowances of $25 in 2013 and $17 in 2012)	1,898		1,873
Inventories, at lower of average cost or market:
Finished goods	482		475
Work in process and raw materials	1,906		1,812
Total inventories	2,389	[1]	2,287
Deferred taxes	1,584		1,415
Prepaid expenses and other current assets	4,746		4,024
Total current assets	47,911	[1]	49,433
Property, plant and equipment	39,552		40,501
Less: Accumulated depreciation	26,196		26,505
Property, plant and equipment - net	13,356		13,996
Long-term financing receivables (net of allowances of $64 in 2013 and $66 in 2012)	11,828		12,812
Prepaid pension assets	922		945
Deferred taxes	4,150		3,973
Goodwill	28,846		29,247
Intangible assets - net	3,418		3,787
Investments and sundry assets	4,721		5,021
Total assets	115,153	[1]	119,213	[1]
Current liabilities:
Taxes	4,708		4,948
Short-term debt	7,830		9,181
Accounts payable	6,821		7,952
Compensation and benefits	4,223		4,745
Deferred income	12,241		11,952
Other accrued expenses and liabilities	5,214		4,847
Total current liabilities	41,037		43,625
Long-term debt	26,292		24,088
Retirement and nonpension postretirement benefit obligations	17,962		20,418
Deferred income	4,166		4,491
Other liabilities	7,812		7,607
Total liabilities	97,269		100,229
IBM stockholders' equity:
Common stock, par value $0.20 per share, and additional paid-in capital Shares authorized: 4,687,500,000 Shares issued: (2013 - 2,204,928,599 2012 - 2,197,561,159)	50,886		50,110
Retained earnings	121,883		117,641
Treasury stock - at cost Shares: (2013 - 1,109,502,777 2012 - 1,080,193,483)	(129,239)		(123,131)
Accumulated other comprehensive income/(loss)	(25,774)		(25,759)
Total IBM stockholders' equity	17,756		18,860	[1]
Noncontrolling interests	127		124
Total equity	17,883		18,984
Total liabilities and equity	$ 115,153	[1]	$ 119,213

[1] Amounts may not add due to rounding.

XML

Accounting Changes:

6 Months Ended

Jun. 30, 2013

Accounting Changes:

Accounting Changes:

2. Accounting Changes: In July 2013, the Financial Accounting Standards Board (FASB) issued guidance allowing the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to interest rates on direct Treasury obligations of the United States government and the LIBOR. In addition, the guidance removes the restriction on using different benchmark rates for similar hedges. The guidance became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013, and is not expected to have a material impact in the consolidated financial results.

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

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

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

XML

Financing Receivables: (Tables)

6 Months Ended

Jun. 30, 2013

Financing Receivables:

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

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Current:
Net investment in sales-type and direct financing leases	$	3,947	$	3,862
Commercial financing receivables	6,467		7,750
Client loan receivables	5,101		5,395
Installment payment receivables	1,145		1,031
Total	$	16,661	$	18,038
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,610	$	6,107
Commercial financing receivables	—		5
Client loan receivables	5,591		5,966
Installment payment receivables	627		733
Total	$	11,828	$	12,812

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

(Dollars in millions)	Major			Growth
At June 30, 2013	Markets			Markets			Total
Financing receivables:
Lease receivables	$	6,776		$	2,049		$	8,826
Loan receivables	8,894			3,774			12,668
Ending balance	$	15,670		$	5,824		$	21,494
Collectively evaluated for impairment	$	15,561		$	5,671		$	21,232
Individually evaluated for impairment	$	109		$	153		$	262
Allowance for credit losses:
Beginning balance at January 1, 2013
Lease receivables	$	59		$	55		$	114
Loan receivables	121			84			204
Total	$	180		$	138		$	318
Write-offs	(20		)	(4		)	(23		)
Provision	(14		)	37			23
Other	(3		)	(4		)	(7		)
Ending balance at June 30, 2013	$	144		$	168		$	311
Lease receivables	$	48		$	63		$	111
Loan receivables	$	96		$	104		$	200
Collectively evaluated for impairment	$	50		$	31		$	81
Individually evaluated for impairment	$	94		$	136		$	230

(Dollars in millions)	Major			Growth
At December 31, 2012	Markets			Markets			Total
Financing receivables:
Lease receivables	$	7,036		$	2,138		$	9,174
Loan receivables	9,666			3,670			13,336
Ending balance	$	16,701		$	5,808		$	22,510
Collectively evaluated for impairment	$	16,570		$	5,684		$	22,254
Individually evaluated for impairment	$	131		$	125		$	256
Allowance for credit losses:
Beginning balance at January 1, 2012
Lease receivables	$	79		$	40		$	118
Loan receivables	125			64			189
Total	$	203		$	104		$	307
Write-offs	(14		)	(1		)	(15		)
Provision	(9		)	38			28
Other	0			(2		)	(2		)
Ending balance at December 31, 2012	$	180		$	138		$	318
Lease receivables	$	59		$	55		$	114
Loan receivables	$	121		$	84		$	204
Collectively evaluated for impairment	$	69		$	29		$	98
Individually evaluated for impairment	$	111		$	109		$	220

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

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Major markets	$	24	$	27
Growth markets	31		21
Total lease receivables	$	55	$	47
Major markets	$	41	$	67
Growth markets	62		25
Total loan receivables	$	104	$	92
Total receivables	$	159	$	139

Schedule of impaired client loan receivables

	At June 30, 2013				At December 31, 2012
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	71	$	67	$	88	$	77
Growth markets	95		86		72		65
Total	$	166	$	153	$	160	$	143

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2013:	Investment		Recognized*		Cash Basis
Major markets	$	70	$	0	$	0
Growth markets	90		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2012:	Investment		Recognized*		Cash Basis
Major markets	$	81	$	0	$	0
Growth markets	64		0		0
Total	$	145	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2013:	Investment		Recognized*		Cash Basis
Major markets	$	76	$	0	$	0
Growth markets	84		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2012:	Investment		Recognized*		Cash Basis
Major markets	$	91	$	0	$	0
Growth markets	63		0		0
Total	$	154	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

Schedule of gross recorded investment by credit quality indicator

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At June 30, 2013:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	577	$	90	$	757	$	165
A+ – A-	1,559		205		2,046		378
BBB+ – BBB-	2,398		818		3,147		1,506
BB+ – BB	1,231		309		1,616		568
BB- – B+	542		405		711		746
B – B-	381		163		500		300
CCC+ – D-	89		60		117		110
Total	$	6,776	$	2,049	$	8,894	$	3,774

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At December 31, 2012:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	646	$	86	$	887	$	148
A+ – A-	1,664		223		2,286		382
BBB+ – BBB-	2,285		776		3,139		1,333
BB+ – BB	1,367		450		1,878		773
BB- – B+	552		418		758		718
B – B-	399		127		548		218
CCC+ – D	124		58		170		99
Total	$	7,036	$	2,138	$	9,666	$	3,670

Schedule of past due financing receivables

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At June 30, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	11	$	6,766	$	6,776	$	7
Growth markets	16		2,033		2,049		11
Total lease receivables	$	27	$	8,799	$	8,826	$	17
Major markets	$	18	$	8,875	$	8,894	$	10
Growth markets	43		3,731		3,774		28
Total loan receivables	$	61	$	12,607	$	12,668	$	38
Total	$	88	$	21,406	$	21,494	$	55

* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2012:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	7,028	$	7,036	$	5
Growth markets	11		2,127		2,138		8
Total lease receivables	$	20	$	9,154	$	9,174	$	13
Major markets	$	27	$	9,639	$	9,666	$	8
Growth markets	36		3,634		3,670		31
Total loan receivables	$	63	$	13,273	$	13,336	$	39
Total	$	82	$	22,428	$	22,510	$	52

* Does not include accounts that are fully reserved.

XML

Intangible Assets Including Goodwill: (Details 3) (USD $) In Millions, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Changes in Goodwill Balances
Beginning Balance	$ 29,247	$ 26,213
Goodwill Additions	75	2,894
Purchase Price Adjustments	11	(30)
Divestitures	(2)	(22)
Foreign Currency Translation and Other Adjustments	(486)	192
Ending Balance	28,846	29,247
Goodwill impairment losses	0	0
Goodwill accumulated impairment losses	0	0
Global Business Services
Changes in Goodwill Balances
Beginning Balance	4,357	4,313
Goodwill Additions		5
Purchase Price Adjustments	0	0
Divestitures		(2)
Foreign Currency Translation and Other Adjustments	(121)	42
Ending Balance	4,236	4,357
Global Technology Services
Changes in Goodwill Balances
Beginning Balance	2,916	2,646
Goodwill Additions		264
Purchase Price Adjustments	5
Divestitures		0
Foreign Currency Translation and Other Adjustments	(76)	6
Ending Balance	2,844	2,916
Software
Changes in Goodwill Balances
Beginning Balance	20,405	18,121
Goodwill Additions	75	2,182
Purchase Price Adjustments	(27)	(30)
Divestitures	(2)	(6)
Foreign Currency Translation and Other Adjustments	(289)	137
Ending Balance	20,164	20,405
Systems and Technology
Changes in Goodwill Balances
Beginning Balance	1,568	1,133
Goodwill Additions		443
Purchase Price Adjustments	33	0
Divestitures		(14)
Foreign Currency Translation and Other Adjustments	0	6
Ending Balance	$ 1,602	$ 1,568

XML

Intangible Assets Including Goodwill:

6 Months Ended

Jun. 30, 2013

Intangible Assets Including Goodwill:

Intangible Assets Including Goodwill:

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

	At June 30, 2013
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,522	$	(677	)	$	845
Client relationships	2,059		(1,068		)	991
Completed technology	2,483		(1,050		)	1,433
In-process R&D	15		—			15
Patents/trademarks	280		(149		)	131
Other(a)	8		(5		)	2
Total	$	6,367	$	(2,949	)	$	3,418

	At December 31, 2012
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,527	$	(665	)	$	861
Client relationships	2,103		(961		)	1,142
Completed technology	2,709		(1,112		)	1,597
In-process R&D	28		—			28
Patents/trademarks	281		(127		)	154
Other(a)	31		(27		)	3
Total	$	6,679	$	(2,892	)	$	3,787

(a)   Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased $369 million during the first half of 2013, primarily due to amortization. The aggregate intangible amortization expense was $326 million and $657 million for the second quarter and first six months of 2013, respectively, versus $318 million and $627 million for the second quarter and first six months of 2012, respectively. In addition, in the first half of 2013, the company retired $598 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 June 30, 2013:

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2013 (for Q3-Q4)	$	280	$	369	$	648
2014	388		630		1,018
2015	158		502		660
2016	20		463		483
2017	—		345		345

The change in the goodwill balances by reportable segment, for the six months ended June 30, 2013 and for the year ended December 31, 2012 are as follows:

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/13		Additions		Adjustments			Divestitures			Adjustments			6/30/13
Global Business Services	$	4,357	$	—	$	(0	)	$	—		$	(121	)	$	4,236
Global Technology Services	2,916		—		5			—			(76		)	2,844
Software	20,405		75		(27		)	(2		)	(289		)	20,164
Systems and Technology	1,568		—		33			—			(0		)	1,602
Total	$	29,247	$	75	$	11		$	(2	)	$	(486	)	$	28,846

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/12		Additions		Adjustments			Divestitures			Adjustments		12/31/12
Global Business Services	$	4,313	$	5	$	(0	)	$	(2	)	$	42	$	4,357
Global Technology Services	2,646		264		—			(0		)	6		2,916
Software	18,121		2,182		(30		)	(6		)	137		20,405
Systems and Technology	1,133		443		(0		)	(14		)	6		1,568
Total	$	26,213	$	2,894	$	(30	)	$	(22	)	$	192	$	29,247

Purchase price adjustments recorded in the first six months of 2013 and full year 2012 were related to acquisitions that were completed on or prior to December 31, 2012 or December 31, 2011, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. There were no goodwill impairment losses recorded during the first six months of 2013 or the full year of 2012 and the company has no accumulated impairment losses.

XML

Segments: (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012		Jun. 30, 2013	Jun. 30, 2012
Revenue
Revenue	$ 24,924	$ 25,783	[1]	$ 48,332	$ 50,456
Total reportable segments
Revenue
Revenue	26,737	27,529		51,922	53,991
Internal transactions
Revenue
Revenue	1,928	1,921		3,847	3,872
Other revenue adjustments
Revenue
Revenue	$ 115	$ 175		$ 257	$ 336

[1] Amounts may not add due to rounding.

XML

Restructuring-Related Liabilities: (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Current Liability
Restructuring Reserve
Liability at the beginning of the period	$ 30
Payments	(15)
Other Adjustments	14
Liability at the end of the period	29
Noncurrent Liability
Restructuring Reserve
Liability at the beginning of the period	430
Other Adjustments	(12)
Liability at the end of the period	417
Workforce | Current Liability
Restructuring Reserve
Liability at the beginning of the period	28
Payments	(15)
Other Adjustments	14
Liability at the end of the period	28
Workforce | Noncurrent Liability
Restructuring Reserve
Liability at the beginning of the period	430
Other Adjustments	(12)
Liability at the end of the period	417
Space | Current Liability
Restructuring Reserve
Liability at the beginning of the period	2
Payments	0
Other Adjustments	0
Liability at the end of the period	1
Space | Noncurrent Liability
Restructuring Reserve
Liability at the beginning of the period	0
Other Adjustments	0
Liability at the end of the period	$ 0

XML

Financial Instruments: (Details 5) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	$ (218)	$ (12)	$ (603)	$ (40)
Gain (loss) recognized in earnings attributable to risk being hedged	151	(86)	226	15
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	52	217	632	231
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	47	111	103	134
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	2	2	1	5
Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0	0	0	0
Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	0	0	0	0
Foreign exchange Contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	(10)	68	350	119
Foreign exchange Contracts | Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Recognized in OCI	62	149	282	112
Cost of financing | Interest rate contracts | Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income, recognized on derivative instruments in fair value hedges	(68)	80	(88)	56
Gain (loss) recognized in earnings attributable to risk being hedged	92	(47)	138	8
Interest expense | Interest rate contracts | Derivative instruments in fair value hedging relationships
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income, recognized on derivative instruments in fair value hedges	(44)	65	(56)	45
Gain (loss) recognized in earnings attributable to risk being hedged	59	(39)	88	7
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 Portion Reclassified from AOCI to Earnings		(2)		(4)
Interest expense | Foreign exchange Contracts | Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	3	1	2	3
Other (income) and expense | Foreign exchange Contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	48	86	85	106
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, (Ineffectiveness) and Amounts Excluded from Effectiveness Testing	(1)	1	(1)	2
Other (income) and expense | Foreign exchange Contracts | Derivative instruments not designated as hedging instruments
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	(80)	(122)	(519)	(204)
Cost of sales | Foreign exchange Contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	(7)	11	2	16
SG&A expense | Foreign exchange Contracts | Derivative instruments in cash flow hedging relationships
Derivative Instruments, Gain (Loss)
Gain (Loss) Recognized in Earnings and Other Comprehensive Income, Effective Portion Reclassified from AOCI to Earnings	5	15	15	16
SG&A expense | Equity contracts | Derivative instruments not designated as hedging instruments
Derivative Instruments, Gain (Loss)
Amount of gain (loss) recognized in income on derivatives	$ (26)	$ (35)	$ 60	$ 63

XML

Equity Activity: (Tables)

6 Months Ended

Jun. 30, 2013

Equity Activity:

Schedule of Reclassifications and Taxes Related to items of Other Comprehensive Income

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(936	)	$	(23	)	$	(959	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	0			0			0
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(10	)	$	9		$	(1	)
Reclassification of (gains)/losses to:
Cost of sales	7			(2		)	4
SG&A expense	(5		)	2			(3		)
Other (income) and expense	(48		)	19			(30		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	(57	)	$	28		$	(29	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	0			0			0
Net (losses)/gains arising during the period	210			(71		)	138
Amortization of prior service (credits)/costs	(28		)	10			(18		)
Amortization of net (gains)/losses	864			(304		)	559
Total retirement-related benefit plans	$	1,045		$	(366	)	$	679
Other comprehensive income/(loss)	$	53		$	(361	)	$	(309	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(724	)	$	(58	)	$	(782	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(3	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	(2		)	1			(1		)
Subsequent changes in previously impaired securities arising during the period	9			(3		)	6
Total net changes related to available-for-sale securities	$	4		$	(1	)	$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	68		$	(15	)	$	53
Reclassification of (gains)/losses to:
Cost of sales	(12		)	0			(11		)
SG&A expense	(15		)	4			(11		)
Other (income) and expense	(86		)	33			(53		)
Interest expense	2			(1		)	1
Total unrealized gains/(losses) on cash flow hedges	$	(42	)	$	21		$	(21	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	70			(26		)	45
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(37		)	13			(24		)
Amortization of net (gains)/losses	613			(217		)	397
Total retirement-related benefit plans	$	647		$	(229	)	$	418
Other comprehensive income/(loss)	$	(115	)	$	(268	)	$	(383	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(1,341	)	$	(107	)	$	(1,448	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	1			0			1
Total net changes related to available-for-sale securities	$	(1	)	$	1		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	350		$	(119	)	$	231
Reclassification of (gains)/losses to:
Cost of sales	(3		)	1			(2		)
SG&A expense	(15		)	6			(10		)
Other (income) and expense	(85		)	33			(52		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	247		$	(79	)	$	168
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	33		$	(11	)	$	21
Net (losses)/gains arising during the period	195			(67		)	129
Amortization of prior service (credits)/costs	(58		)	20			(38		)
Amortization of net (gains)/losses	1,750			(597		)	1,153
Total retirement-related benefit plans	$	1,920		$	(655	)	$	1,265
Other comprehensive income/(loss)	$	826		$	(842	)	$	(16	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(337	)	$	(48	)	$	(385	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	3		$	(1	)	$	2
Reclassification of (gains)/losses to other (income) and expense	(16		)	6			(10		)
Subsequent changes in previously impaired securities arising during the period	27			(10		)	17
Total net changes related to available-for-sale securities	$	14		$	(5	)	$	9
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	119		$	(45	)	$	74
Reclassification of (gains)/losses to:
Cost of sales	(16		)	0			(16		)
SG&A expense	(16		)	4			(12		)
Other (income) and expense	(106		)	41			(65		)
Interest expense	4			(2		)	2
Total unrealized gains/(losses) on cash flow hedges	$	(16	)	$	(1	)	$	(17	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	65			(23		)	41
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(74		)	27			(47		)
Amortization of net (gains)/losses	1,232			(446		)	786
Total retirement-related benefit plans	$	1,223		$	(443	)	$	780
Other comprehensive income/(loss)	$	884		$	(497	)	$	387

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2013	$	(90	)	$	1,733		$	(27,406	)	$	4	$	(25,759	)
Other comprehensive income before reclassifications	231			(1,448		)	150			0		(1,067		)
Amount reclassified from accumulated other comprehensive income	(63		)	0			1,115			0		1,050
Total change for the period	168			(1,448		)	1,265			0		(16		)
June 30, 2013	$	78		$	284		$	(26,141	)	$	4	$	(25,774	)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2012	$	71		$	1,767		$	(23,737	)	$	13		$	(21,885	)
Other comprehensive income before reclassifications	74			(385		)	41			18			(252		)
Amount reclassified from accumulated other comprehensive income	(91		)	0			739			(10		)	638
Total change for the period	(17		)	(385		)	780			9			387
June 30, 2012	$	54		$	1,382		$	(22,956	)	$	22		$	(21,498	)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax

XML

Segments: (Tables)

6 Months Ended

Jun. 30, 2013

Segments:

Revenue and Pre-tax Income by Segment

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the three months ended June 30, 2013:
External revenue	$	9,536		$	4,606		$	6,423		$	3,758		$	487		$	24,809
Internal revenue	292			188			738			135			575			1,928
Total revenue	$	9,828		$	4,795		$	7,161		$	3,893		$	1,061		$	26,737
Pre-tax income	$	1,514		$	623		$	2,443		$	(141	)	$	550		$	4,989
Revenue year-to-year change	(4.5		)%	(1.1		)%	3.1		%	(11.9		)%	2.9		%	(2.9		)%
Pre-tax income year-to-year change	(13.8		)%	(22.4		)%	(2.0		)%	nm			4.2		%	(14.2		)%
Pre-tax income margin	15.4		%	13.0		%	34.1		%	(3.6		)%	51.8		%	18.7		%

nm - not meaningful

For the three months ended June 30, 2012:
External revenue	$	9,995		$	4,667		$	6,171		$	4,259		$	517		$	25,608
Internal revenue	291			180			776			159			515			1,921
Total revenue	$	10,286		$	4,847		$	6,946		$	4,418		$	1,032		$	27,529
Pre-tax income	$	1,757		$	803		$	2,493		$	234		$	528		$	5,814
Pre-tax income margin	17.1		%	16.6		%	35.9		%	5.3		%	51.1		%	21.1		%

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the six months ended June 30, 2013:
External revenue	$	19,140		$	9,091		$	11,995		$	6,864		$	985		$	48,075
Internal revenue	540			368			1,569			255			1,116			3,847
Total revenue	$	19,680		$	9,459		$	13,563		$	7,118		$	2,101		$	51,922
Pre-tax income	$	3,099		$	1,326		$	4,457		$	(546	)	$	1,088		$	9,425
Revenue year-to-year change	(4.5		)%	(2.2		)%	1.3		%	(14.4		)%	4.7		%	(3.8		)%
Pre-tax income year-to-year change	(4.3		)%	(5.6		)%	0.4		%	nm			4.6		%	(8.0		)%
Pre-tax income margin	15.7		%	14.0		%	32.9		%	(7.7		)%	51.8		%	18.2		%

nm - not meaningful

For the six months ended June 30, 2012:
External revenue	$	20,031		$	9,304		$	11,770		$	8,008		$	1,006		$	50,120
Internal revenue	584			363			1,615			309			1,000			3,872
Total revenue	$	20,615		$	9,667		$	13,386		$	8,317		$	2,006		$	53,991
Pre-tax income	$	3,237		$	1,404		$	4,438		$	130		$	1,040		$	10,248
Pre-tax income margin	15.7		%	14.5		%	33.2		%	1.6		%	51.8		%	19.0		%

Revenue and pre-tax income reconciliations to IBM as Reported

(Dollars in millions)
For the three months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	26,737		$	27,529
Eliminations of internal transactions	(1,928		)	(1,921		)
Other revenue adjustments	115			175
Total IBM Consolidated	$	24,924		$	25,783
Pre-tax income:
Total reportable segments	$	4,989		$	5,814
Amortization of acquired intangible assets	(178		)	(173		)
Acquisition-related charges	(4		)	(7		)
Non-operating retirement-related (costs)/income	(262		)	(94		)
Eliminations of internal transactions	(379		)	(343		)
Unallocated corporate amounts	(22		)	(36		)
Total IBM Consolidated	$	4,144		$	5,161

(Dollars in millions)
For the six months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	51,922		$	53,991
Eliminations of internal transactions	(3,847		)	(3,872		)
Other revenue adjustments	257			336
Total IBM Consolidated	$	48,332		$	50,456
Pre-tax income:
Total reportable segments	$	9,425		$	10,248
Amortization of acquired intangible assets	(361		)	(339		)
Acquisition-related charges	(15		)	(14		)
Non-operating retirement-related (costs)/income	(546		)	(197		)
Eliminations of internal transactions	(718		)	(627		)
Unallocated corporate amounts	(35		)	(74		)
Total IBM Consolidated	$	7,750		$	8,997

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Stock-Based Compensation: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ 161	$ 160	$ 305	$ 328
Income tax benefits	(56)	(56)	(106)	(116)
Total Stock-based compensation cost	105	104	199	212
Stock-based compensation cost, increase (decrease) due to performance share units	1		(11)
Stock-based compensation cost, increase (decrease) due to restricted stock units	4		(5)
Stock-based compensation cost, increase (decrease) related to the company's assumption of stock-based awards previously issued by acquired entities	(4)		(7)
Stock-based compensation cost, unrecognized, related to non-vested awards	1,287		1,287
Stock-based compensation cost, unrecognized, related to non-vested awards, weighted average period of recognition			2 years 7 months 6 days
Capitalized stock-based compensation cost			0	0
Cost
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	30	30	61	64
Selling, general and administrative expense
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	115	117	214	236
Research, development and engineering
Stock-based compensation cost, allocation of recognized costs
Pre-tax stock-based compensation cost	$ 15	$ 12	$ 30	$ 27

XML

Financial Instruments: (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Financial Instruments:
Impairments of non-financial assets	$ 0	$ 0
Financial assets and financial liabilities measured at fair value on a recurring basis:
Debt securities - noncurrent	9		10
Available-for-sale equity investments	17		34
Derivative assets	648		587
Derivative liabilities	225		242
Potential reduction in net position of total derivative liabilities	256		262
Recurring | Prepaid expenses and other current assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	553		333
Recurring | Investments and sundry assets
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	384		585
Recurring | Other accrued expenses and liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	366		426
Recurring | Other liabilities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative liabilities	115		78
Recurring | Level 1
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	1,170		1,923
Debt securities - noncurrent	2		2
Available-for-sale equity investments	17		34
Total Assets	1,189		1,959
Recurring | Level 1 | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	1,170		1,923
Recurring | Level 2
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	6,199		5,823
Debt securities - current	799		717
Debt securities - noncurrent	7		8
Available-for-sale equity investments	0
Derivative assets	937		918
Total Assets	7,942		7,466
Total Liabilities	481		503
Recurring | Level 2 | Interest rate contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	392		604
Recurring | Level 2 | Foreign exchange contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	544		305
Derivative liabilities	448		496
Recurring | Level 2 | Equity contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	1		9
Derivative liabilities	33		7
Recurring | Level 2 | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	3,532		3,694
Recurring | Level 2 | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	1,230		2,098
Recurring | Level 2 | U.S. government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	950
Recurring | Level 2 | Canada government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	465
Recurring | Level 2 | Other securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	22		30
Recurring | Total fair value
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	7,369		7,746
Debt securities - current	799		717
Debt securities - noncurrent	9		10
Available-for-sale equity investments	17		34
Derivative assets	937		918
Total Assets	9,131		9,424
Total Liabilities	481		503
Potential reduction in net position of total derivative assets	256		262
Potential reduction in net position of total derivative liabilities	256		262
Recurring | Total fair value | Interest rate contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	392		604
Recurring | Total fair value | Foreign exchange contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	544		305
Derivative liabilities	448		496
Recurring | Total fair value | Equity contracts
Financial assets and financial liabilities measured at fair value on a recurring basis:
Derivative assets	1		9
Derivative liabilities	33		7
Recurring | Total fair value | Time deposits and certificates of deposit
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	3,532		3,694
Recurring | Total fair value | Commercial paper
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	1,230		2,098
Recurring | Total fair value | Money market funds
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	1,170		1,923
Recurring | Total fair value | U.S. government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	950
Recurring | Total fair value | Canada government securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	465
Recurring | Total fair value | Other securities
Financial assets and financial liabilities measured at fair value on a recurring basis:
Cash equivalents	$ 22		$ 30

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Financing Receivables: (Details 2) (USD $) In Millions, unless otherwise specified	6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Major Markets	Dec. 31, 2012 Major Markets	Jun. 30, 2013 Growth Markets	Dec. 31, 2012 Growth Markets	Jun. 30, 2013 Lease receivables	Dec. 31, 2012 Lease receivables	Dec. 31, 2011 Lease receivables	Jun. 30, 2013 Lease receivables Major Markets	Dec. 31, 2012 Lease receivables Major Markets	Dec. 31, 2011 Lease receivables Major Markets	Jun. 30, 2013 Lease receivables Growth Markets	Dec. 31, 2012 Lease receivables Growth Markets	Dec. 31, 2011 Lease receivables Growth Markets	Jun. 30, 2013 Loan receivables	Dec. 31, 2012 Loan receivables	Dec. 31, 2011 Loan receivables	Jun. 30, 2013 Loan receivables Major Markets	Dec. 31, 2012 Loan receivables Major Markets	Dec. 31, 2011 Loan receivables Major Markets	Jun. 30, 2013 Loan receivables Growth Markets	Dec. 31, 2012 Loan receivables Growth Markets	Dec. 31, 2011 Loan receivables Growth Markets
Financing Receivables
Ending Balance	$ 21,494	$ 22,510	$ 15,670	$ 16,701	$ 5,824	$ 5,808	$ 8,826	$ 9,174		$ 6,776	$ 7,036		$ 2,049	$ 2,138		$ 12,668	$ 13,336		$ 8,894	$ 9,666		$ 3,774	$ 3,670
Collectively evaluated for impairment	21,232	22,254	15,561	16,570	5,671	5,684
Individually evaluated for impairment	262	256	109	131	153	125
Allowance for Credit Losses
Allowance for credit losses, beginning balance	318	307	180	203	138	104	111	114	118	48	59	79	63	55	40	200	204	189	96	121	125	104	84	64
Write-offs	(23)	(15)	(20)	(14)	(4)	(1)
Provision	23	28	(14)	(9)	37	38
Other	(7)	(2)	(3)	0	(4)	(2)
Allowance for credit losses, ending balance	311	318	144	180	168	138	111	114	118	48	59	79	63	55	40	200	204	189	96	121	125	104	84	64
Collectively evaluated for impairment	81	98	50	69	31	29
Individually evaluated for impairment	$ 230	$ 220	$ 94	$ 111	$ 136	$ 109

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Segments: (Details 3) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Pre-tax Income
Income before income taxes	$ 4,144	$ 5,161	$ 7,750	$ 8,997
Total reportable segments
Pre-tax Income
Income before income taxes	4,989	5,814	9,425	10,248
Pre-tax reconciliations items
Pre-tax Income
Amortization of acquired intangible assets	(178)	(173)	(361)	(339)
Acquisition-related charges	(4)	(7)	(15)	(14)
Non-operating retirement-related (costs)/income	(262)	(94)	(546)	(197)
Internal transactions
Pre-tax Income
Income before income taxes	(379)	(343)	(718)	(627)
Unallocated corporate amounts
Pre-tax Income
Income before income taxes	$ (22)	$ (36)	$ (35)	$ (74)

XML

Restructuring-Related Liabilities: (Tables)

6 Months Ended

Jun. 30, 2013

Restructuring-Related Liabilities:

Schedule of restructuring related liabilities

	Liability								Liability
	as of					Other			as of
(Dollars in millions)	01/01/13		Payments			Adjustments*			6/30/2013
Current:
Workforce	$	28	$	(15	)	$	14		$	28
Space	2		(0		)	(0		)	1
Total current	$	30	$	(15	)	$	14		$	29
Noncurrent:
Workforce	$	430	$	—		$	(12	)	$	417
Space	0		—			(0		)	0
Total noncurrent	$	430	$	—		$	(12	)	$	417

*   Principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion.

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Financing Receivables: (Details 5) (USD $) In Millions, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Gross recorded investment for each class of receivables, by credit quality indicator
Total	$ 21,494	$ 22,510
Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	15,670	16,701
Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	5,824	5,808
Lease receivables
Gross recorded investment for each class of receivables, by credit quality indicator
Total	8,826	9,174
Lease receivables | Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	6,776	7,036
Lease receivables | Major Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	577	646
Lease receivables | Major Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,559	1,664
Lease receivables | Major Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,398	2,285
Lease receivables | Major Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,231	1,367
Lease receivables | Major Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	542	552
Lease receivables | Major Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	381	399
Lease receivables | Major Markets | CCC+ - D-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	89	124
Lease receivables | Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,049	2,138
Lease receivables | Growth Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	90	86
Lease receivables | Growth Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	205	223
Lease receivables | Growth Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	818	776
Lease receivables | Growth Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	309	450
Lease receivables | Growth Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	405	418
Lease receivables | Growth Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	163	127
Lease receivables | Growth Markets | CCC+ - D-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	60	58
Loan receivables
Gross recorded investment for each class of receivables, by credit quality indicator
Total	12,668	13,336
Loan receivables | Major Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	8,894	9,666
Loan receivables | Major Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	757	887
Loan receivables | Major Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	2,046	2,286
Loan receivables | Major Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	3,147	3,139
Loan receivables | Major Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,616	1,878
Loan receivables | Major Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	711	758
Loan receivables | Major Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	500	548
Loan receivables | Major Markets | CCC+ - D-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	117	170
Loan receivables | Growth Markets
Gross recorded investment for each class of receivables, by credit quality indicator
Total	3,774	3,670
Loan receivables | Growth Markets | AAA - AA-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	165	148
Loan receivables | Growth Markets | A+ - A-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	378	382
Loan receivables | Growth Markets | BBB+ - BBB-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	1,506	1,333
Loan receivables | Growth Markets | BB+ - BB
Gross recorded investment for each class of receivables, by credit quality indicator
Total	568	773
Loan receivables | Growth Markets | BB- - B+
Gross recorded investment for each class of receivables, by credit quality indicator
Total	746	718
Loan receivables | Growth Markets | B - B-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	300	218
Loan receivables | Growth Markets | CCC+ - D-
Gross recorded investment for each class of receivables, by credit quality indicator
Total	$ 110	$ 99

XML

Stock-Based Compensation: (Tables)

6 Months Ended

Jun. 30, 2013

Stock-Based Compensation:

Stock-based compensation cost included in Consolidated Statement of Earnings

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013			2012			2013			2012
Cost	$	30		$	30		$	61		$	64
Selling, general and administrative	115			117			214			236
Research, development and engineering	15			12			30			27
Pre-tax stock-based compensation cost	161			160			305			328
Income tax benefits	(56		)	(56		)	(106		)	(116		)
Total stock-based compensation cost	$	105		$	104		$	199		$	212

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CONSOLIDATED STATEMENT OF CASH FLOWS (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012
Cash flows from operating activities:
Net income	$ 6,258		$ 6,948
Adjustments to reconcile net income to cash provided by operating activities
Depreciation	1,632		1,706
Amortization of intangibles	657		627
Stock-based compensation	305		328
Net (gain)/loss on asset sales and other	(10)		(118)
Changes in operating assets and liabilities, net of acquisitions/divestitures	(1,644)		(764)
Net cash provided by operating activities	7,197	[1]	8,726	[1]
Cash flows from investing activities:
Payments for property, plant and equipment	(1,574)		(2,135)
Proceeds from disposition of property, plant and equipment	181		175
Investment in software	(275)		(320)
Acquisition of businesses, net of cash acquired	(179)		(1,925)
Divestitures of businesses, net of cash transferred	12		13
Non-operating finance receivables - net	336		686
Purchases of marketable securities and other investments	(3,135)		(1,655)
Proceeds from disposition of marketable securities and other investments	2,759		1,247
Net cash used in investing activities	(1,876)	[1]	(3,913)	[1]
Cash flows from financing activities:
Proceeds from new debt	6,694		7,559
Payments to settle debt	(4,876)		(4,069)
Short-term borrowings/(repayments) less than 90 days - net	(376)		(2,236)
Common stock repurchases	(6,145)		(6,002)
Common stock transactions - other	657		918
Cash dividends paid	(1,996)		(1,848)
Net cash used in financing activities	(6,043)	[1]	(5,678)
Effect of exchange rate changes on cash and cash equivalents	(133)		(193)
Net change in cash and cash equivalents	(854)	[1]	(1,058)
Cash and cash equivalents at January 1	10,412		11,922
Cash and cash equivalents at June 30	$ 9,558		$ 10,864

[1] Amounts may not add due to rounding.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Parenthetical)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Common stock issued under employee plans (in shares)	7,367,440	10,092,817
Purchases of treasury stock under employee plans (in shares)	1,399,751	1,905,803
Sales of treasury stock under employee plans (in shares)	1,480,251	2,034,612
Other treasury shares purchased, not retired (in shares)	29,389,794	30,629,597

XML

Financial Instruments:

6 Months Ended

Jun. 30, 2013

Financial Instruments:

Financial Instruments:

3. Financial Instruments:

Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. See Note A, “Significant Accounting Policies,” on pages 76 to 86 in the company’s 2012 Annual Report for further information. There were no material impairments of non-financial assets for the six months ended June 30, 2013 and 2012, respectively.

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

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012.

(Dollars in millions) At June 30, 2013	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,532	$	—	$	3,532
Commercial paper	—		1,230		—		1,230
Money market funds	1,170		—		—		1,170
U.S. government securities	—		950		—		950
Canada government securities	—		465		—		465
Other securities	—		22		—		22
Total	1,170		6,199		—		7,369		(6)
Debt securities - current (2)	—		799				799		(6)
Debt securities - noncurrent (3)	2		7		—		9
Available-for-sale equity investments (3)	17		0		—		17
Derivative assets (4)
Interest rate contracts	—		392		—		392
Foreign exchange contracts	—		544		—		544
Equity contracts	—		1		—		1
Total	—		937		—		937		(7)
Total assets	$	1,189	$	7,942	$	—	$	9,131	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	448	$	—	$	448
Equity contracts	—		33		—		33
Total liabilities	$	—	$	481	$	—	$	481	(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 June 30, 2013 were $553 million and $384 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 June 30, 2013 were $366 million and $115 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 $256 million each.

(Dollars in millions)
At December 31, 2012	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,694	$	—	$	3,694
Commercial paper	—		2,098		—		2,098
Money market funds	1,923		—		—		1,923
Other securities	—		30		—		30
Total	1,923		5,823		—		7,746		(6)
Debt securities - current (2)	—		717		—		717		(6)
Debt securities - noncurrent (3)	2		8		—		10
Available-for-sale equity investments (3)	34		—		—		34
Derivative assets (4)
Interest rate contracts	—		604		—		604
Foreign exchange contracts	—		305		—		305
Equity contracts	—		9		—		9
Total	—		918		—		918		(7)
Total assets	$	1,959	$	7,466	$	—	$	9,424	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	496	$	—	$	496
Equity contracts	—		7		—		7
Total liabilities	$	—	$	503	$	—	$	503	(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, 2012 were $333 million and $585 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, 2012 were $426 million and $78 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 $262 million each.

There were no transfers between Levels 1 and 2 for the six months ended June 30, 2013 and the year ended December 31, 2012.

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 June 30, 2013 and December 31, 2012, 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 $26,292 million and $24,088 million and the estimated fair value is $28,243 million and $27,119 million at June 30, 2013 and December 31, 2012, 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.

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At June 30, 2013:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	7	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	13	$	4	$	0	$	17

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

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2012:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	8	$	2	$	—	$	10
Available-for-sale equity investments(1)	$	31	$	4	$	1	$	34

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

Based on an evaluation of available evidence as of June 30, 2013 and December 31, 2012, the company believes that unrealized losses on debt and available-for-sale equity investments were temporary and did not represent a need for an other-than-temporary impairment.

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

(Dollars in millions)
For the three months ended June 30:	2013		2012
Proceeds	$	2	$	6
Gross realized gains (before taxes)	1		2
Gross realized losses (before taxes)	0		0

(Dollars in millions)
For the six months ended June 30:	2013		2012
Proceeds	$	20	$	51
Gross realized gains (before taxes)	4		16
Gross realized losses (before taxes)	4		0

The after-tax net unrealized holding gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) for the period and after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:

(Dollars in millions)
For the three months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	0		$	4
Net unrealized (gains)/losses reclassified to net income*	(0		)	(1		)

*There were no significant writedowns for the three months ended June 30, 2013 and 2012, respectively.

(Dollars in millions)
For the six months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	(0	)	$	18
Net unrealized (gains)/losses reclassified to net income*	0			(10		)

* There were no significant writedowns for the six months ended June 30, 2013 and 2012, respectively.

The contractual maturities of substantially all available-for-sale debt securities are less than one year at June 30, 2013.

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 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 June 30, 2013 and December 31, 2012 was $55 million and $94 million, respectively, for which no collateral was posted at June 30, 2013 and December 31, 2012.  Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of June 30, 2013 and December 31, 2012 was $937 million and $918 million, respectively. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure was reduced by $256 million and $262 million at June 30, 2013 and December 31, 2012, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at June 30, 2013 and December 31, 2012, this exposure was reduced by $33 million and $69 million of cash collateral, respectively, received by the company. At June 30, 2013 and December 31, 2012, the net exposure related to derivative assets recorded in the Statement of Financial Position was $648 million and $587 million respectively.  At June 30, 2013 and December 31, 2012, the net amount related to derivative liabilities recorded in the Statement of Financial Position was $225 million and $242 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 June 30, 2013 or December 31, 2012 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral totaled $33 million and $69 million at June 30, 2013 and December 31, 2012, 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 June 30, 2013 or at December 31, 2012. Additionally, the company’s exposure is further reduced by holding non-cash collateral. At June 30, 2013, no amounts of non-cash collateral were held, and at December 31, 2012, $31 million was held in U.S. Treasury securities.  Per accounting guidance, non-cash collateral is not recorded on the 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, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.

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

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

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolios. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2013 and December 31, 2012, the total notional amount of the company’s interest rate swaps was $3.0 billion and $4.3 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2013 and December 31, 2012 was approximately 6.6 years and 5.1 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 June 30, 2013 and December 31, 2012.

At June 30, 2013 and December 31, 2012, net gains of approximately $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the company’s borrowings. Within these amounts, gains of less than $1 million, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments designated as net investment hedges was $4.6 billion and $3.3 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2013 and December 31, 2012 was approximately 0.3 years and 0.4 years, respectively.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is four years. At June 30, 2013 and December 31, 2012, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.8 billion and $10.7 billion, respectively, with a weighted-average remaining maturity of 0.7 years and 0.7 years, respectively.

At June 30, 2013 and December 31, 2012, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $109 million and net losses of $138 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $205 million of gains and $79 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At June 30, 2013 and December 31, 2012, no instruments relating to this program were outstanding.

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 June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $13.4 billion and $12.9 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At June 30, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion for 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 June 30, 2013 and December 31, 2012.

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company utilizes 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 June 30, 2013 and December 31, 2012.

The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of June 30, 2013 and December 31, 2012, as well as for the three and six months ended June 30, 2013 and 2012, respectively:

Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position

As of June 30, 2013 and December 31, 2012

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	6/30/2013		12/31/2012		Classification	6/30/2013		12/31/2012
Designated as hedging instruments:
Interest rate contracts:	Prepaid expenses and other current assets	$	26	$	47	Other accrued expenses and liabilities	$	—	$	—
	Investments and sundry assets	366		557		Other liabilities	—		—
Foreign exchange contracts:	Prepaid expenses and other current assets	393		135		Other accrued expenses and liabilities	150		267
	Investments and sundry assets	—		5		Other liabilities	115		78
Fair value of derivative Assets		$	785	$	744	Fair value of derivative liabilities	$	265	$	345
Not designated as hedging instruments:
Foreign exchange contracts:	Prepaid expenses and other current assets	$	133	$	142	Other accrued expenses and liabilities	$	183	$	152
	Investments and sundry assets	18		23		Other liabilities	—		—
Equity contracts:	Prepaid expenses and other current assets	1		9		Other accrued expenses and liabilities	33		7
Fair value of derivative Assets		$	152	$	174	Fair value of derivative liabilities	$	216	$	159
Total debt designated as hedging instruments:
	Short-term debt	N/A		N/A			$	1,176	$	578
	Long-term debt	N/A		N/A			2,226		3,035
Total		$	937	$	918		$	3,883	$	4,116

N/A-not applicable

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

For the three months ended June 30, 2013 and 2012

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the three months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(68	)	$	80		$	92	$	(47	)
	Interest expense	(44		)	65			59		(39		)
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(80		)	(122		)	N/A		N/A
Equity contracts	SG&A expense	(26		)	(35		)	N/A		N/A
Total		$	(218	)	$	(12	)	$	151	$	(86	)

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
													(Ineffectiveness) and
	Effective Portion					Consolidated	Effective Portion Reclassified						Amounts Excluded from
For the three months	Recognized in OCI					Statement of	from AOCI						Effectiveness Testing(3)
ended June 30:	2013			2012		Earnings Line Item	2013			2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—		$	—	Interest expense	$	—		$	(2	)	$	—		$	—
Foreign exchange Contracts	(10		)	68		Other (income) and expense	48			86			(1		)	1
						Cost of sales	(7		)	11			—			—
						SG&A expense	5			15			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	62			149		Interest expense	—			—			3			1
Total	$	52		$	217		$	47		$	111		$	2		$	2

N/A-not applicable

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

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

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

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

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

The Effect of Derivative Instruments in the Consolidated Statement of Earnings

For the six months ended June 30, 2013 and 2012

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the six months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(88	)	$	56		$	138	$	8
	Interest expense	(56		)	45			88		7
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(519		)	(204		)	N/A		N/A
Equity contracts	SG&A expense	60			63			N/A		N/A
Total		$	(603	)	$	(40	)	$	226	$	15

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
											(Ineffectiveness) and
	Effective Portion				Consolidated	Effective Portion Reclassified					Amounts Excluded from
For the six months	Recognized in OCI				Statement of	from AOCI					Effectiveness Testing(3)
ended June 30:	2013		2012		Earnings Line Item	2013		2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Interest expense	$	—	$	(4	)	$	—		$	—
Foreign exchange Contracts	350		119		Other (income) and expense	85		106			(1		)	2
					Cost of sales	2		16			—			—
					SG&A expense	15		16			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	282		112		Interest expense	—		—			2			3
Total	$	632	$	231		$	103	$	134		$	1		$	5

N/A-not applicable

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

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

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

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

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

For the three and six months ending June 30, 2013 and 2012, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Refer to the company’s 2012 Annual Report, Note A, “Significant Accounting Policies,” on page 83 for additional information on the company’s use of derivative financial instruments.

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Basis of Presentation:

6 Months Ended

Jun. 30, 2013

Basis of Presentation:

Basis of Presentation:

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See the company’s 2012 Annual Report on pages 59 to 61 for a discussion of the company’s critical accounting estimates.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2012 Annual Report.

Noncontrolling interest amounts in income of $0.9 million and $2.0 million, net of tax, for the three months ended June 30, 2013 and 2012, respectively, and $2.3 million and $5.7 million, net of tax, for the six months ended June 30, 2013 and 2012, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.

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

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Financing Receivables: (Details 3) (USD $) In Millions, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Financing Receivables on Non-accrual Status
Total Receivables	$ 159	$ 139
Lease receivables
Financing Receivables on Non-accrual Status
Total Receivables	55	47
Lease receivables | Major Markets
Financing Receivables on Non-accrual Status
Total Receivables	24	27
Lease receivables | Growth Markets
Financing Receivables on Non-accrual Status
Total Receivables	31	21
Loan receivables
Financing Receivables on Non-accrual Status
Total Receivables	104	92
Loan receivables | Major Markets
Financing Receivables on Non-accrual Status
Total Receivables	41	67
Loan receivables | Growth Markets
Financing Receivables on Non-accrual Status
Total Receivables	$ 62	$ 25

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Retirement-Related Benefits: (Tables)

6 Months Ended

Jun. 30, 2013

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

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

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	636	$	459	38.5	%
Nonpension postretirement plans — cost	71		89		(21.0	)
Total	$	706	$	548	28.8	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	1,310	$	991	32.2	%
Nonpension postretirement plans — cost	151		174		(13.3	)
Total	$	1,460	$	1,164	25.4	%

Defined Benefit Pension Plans

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

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

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	120		$	111
Interest cost	494			548			376			444
Expected return on plan assets	(995		)	(1,011		)	(537		)	(573		)
Amortization of prior service costs/(credits)	2			3			(29		)	(38		)
Recognized actuarial losses	444			330			394			256
Curtailments and settlements	—			—			0			0
Multi-employer plans/other costs	—			—			25			23
Total net periodic pension (income)/cost of defined benefit plans	(55		)	(131		)	349			222
Cost of defined contribution plans	193			212			148			156
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	138		$	81		$	497		$	378

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the six months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	251		$	224
Interest cost	990			1,098			758			894
Expected return on plan assets	(1,991		)	(2,022		)	(1,091		)	(1,153		)
Amortization of prior service costs/(credits)	5			5			(60		)	(77		)
Recognized actuarial losses	895			665			798			515
Curtailments and settlements	—			—			—			1
Multi-employer plan/other costs	—			—			55			46
Total net periodic pension (income)/cost of defined benefit plans	(101		)	(254		)	711			449
Cost of defined contribution plans	399			477			300			319
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	298		$	223		$	1,011		$	768

Nonpension Postretirement Plans

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block

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

(Dollars in millions)	U.S. Plan					Non-U.S. Plans
For the three months ended June 30:	2013			2012		2013			2012
Service cost	$	9		$	9	$	2		$	2
Interest cost	40			51		15			16
Expected return on plan assets	(0		)	—		(2		)	(2		)
Amortization of prior service costs/(credits)	—			—		(1		)	(1		)
Recognized actuarial losses	2			10		6			4
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	51		$	70	$	20		$	19

	U.S. Plans					Non-U.S. Plans
For the six months ended June 30:	2013			2012		2013			2012
Service cost	$	17		$	18	$	5		$	5
Interest cost	82			100		31			33
Expected return on plan assets	(1		)	—		(5		)	(5		)
Amortization of prior service credits	—			—		(2		)	(2		)
Recognized actuarial losses	11			16		12			9
Curtailments and settlements	—			—		0			—
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	109		$	134	$	41		$	39

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Commitments: (Tables)

6 Months Ended

Jun. 30, 2013

Commitments:

Changes in warranty liabilities

Standard Warranty Liability

(Dollars in millions)	2013			2012
Balance at January 1	$	394		$	407
Current period accruals	163			181
Accrual adjustments to reflect actual experience	11			(9		)
Charges incurred	(192		)	(199		)
Balance at June 30	$	376		$	380

Extended Warranty Liability

(Dollars in millions)	2013			2012
Aggregate deferred revenue at January 1	$	606		$	636
Revenue deferred for new extended warranty contracts	119			127
Amortization of deferred revenue	(148		)	(155		)
Other*	(11		)	(6		)
Aggregate deferred revenue at June 30	$	567		$	602
Current portion	$	271		$	288
Noncurrent portion	296			314
Aggregate deferred revenue at June 30	$	567		$	602

* Other primarily consists of foreign currency translation adjustments.

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Financial Instruments: (Details 4) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Foreign exchange forward contracts | Net Unrealized Gains/(Losses) on Cash Flow Hedges
Derivative Instruments, Gain (Loss)
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges of borrowings	$ 109,000,000	$ (138,000,000)
Interest rate swaps | Net Unrealized Gains/(Losses) on Cash Flow Hedges
Derivative Instruments, Gain (Loss)
Net gains (losses) before taxes in other comprehensive income/(loss), cash flow hedges of borrowings	1,000,000	1,000,000
Derivative instruments in fair value hedging relationships | Interest rate swaps
Derivative Instruments, Gain (Loss)
Notional amount	3,000,000,000	4,300,000,000
Average remaining maturity	6 years 7 months 6 days	5 years 1 month 6 days
Derivative instruments in cash flow hedging relationships | Foreign exchange forward contracts
Derivative Instruments, Gain (Loss)
Notional amount	10,800,000,000	10,700,000,000
Average remaining maturity	8 months 12 days	8 months 12 days
Gains (losses) expected to be reclassified to net income within the next 12 months	205,000,000	(79,000,000)
Maximum length of time hedged	4 years
Derivative instruments in cash flow hedging relationships | Interest rate swaps
Derivative Instruments, Gain (Loss)
Gains (losses) expected to be reclassified to net income within the next 12 months	1,000,000	1,000,000
Derivative instruments in net investment hedging relationships
Derivative Instruments, Gain (Loss)
Notional amount	4,600,000,000	3,300,000,000
Average remaining maturity	3 months 18 days	4 months 24 days
Derivative instruments not designated as hedging instruments | Foreign exchange forward and swap contracts
Derivative Instruments, Gain (Loss)
Notional amount	13,400,000,000	12,900,000,000
Maximum length of time hedged	1 year
Derivative instruments not designated as hedging instruments | Equity contracts
Derivative Instruments, Gain (Loss)
Notional amount	$ 1,200,000,000	$ 1,200,000,000

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Intangible Assets Including Goodwill: (Details 2) (USD $) In Millions, unless otherwise specified	Jun. 30, 2013
Future amortization expense, by year
2013 (for Q3-Q4)	$ 648
2014	1,018
2015	660
2016	483
2017	345
Capitalized Software
Future amortization expense, by year
2013 (for Q3-Q4)	280
2014	388
2015	158
2016	20
Acquired Intangibles
Future amortization expense, by year
2013 (for Q3-Q4)	369
2014	630
2015	502
2016	463
2017	$ 345

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Equity Activity: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 2012
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments, before tax	$ (936)		$ (724)		$ (1,341)		$ (337)
Net changes related to available-for-sale securities, before tax
Unrealized gains/(losses) arising during the period, before tax	0		(3)		(2)		3
Reclassification of (gains)/losses to net income, before tax	0		(2)		0		(16)
Subsequent changes in previously impaired securities arising during the period, before tax	0		9		1		27
Total net changes related to available-for-sale securities	0		4		(1)		14
Unrealized gains/(losses) on cash flow hedges, before tax
Unrealized gains/(losses) arising during the period, before tax	(10)		68		350		119
Reclassification of (gains)/losses to net income, before tax	(47)		(111)		(103)		(135)
Total unrealized gains/(losses) on cash flow hedges	(57)		(42)	[1]	247		(16)
Retirement-related benefit plans, before tax
Prior service costs/(credits), before tax	0		0		33		0
Net (losses)/gains arising during the period, before tax	210		70		195		65
Curtailments and settlements, before tax	0		0		0		0
Amortization of prior service (credits)/costs, before tax	(28)		(37)		(58)		(74)
Amortization of net (gains)/losses, before tax	864		613		1,750		1,232
Total retirement-related benefit plans	1,045	[1]	647	[1]	1,920		1,223
Other comprehensive income/(loss), before tax	53	[1]	(115)		826	[1]	884
Other comprehensive income/(loss), tax
Foreign currency translation adjustments, tax	(23)		(58)		(107)		(48)
Net changes related to available-for-sale securities, tax
Unrealized gains/(losses) arising during the period, tax	0		1		1		(1)
Subsequent changes in previously impaired securities arising during the period, tax	0		(3)		0		(10)
Total net changes related to available-for-sale securities, tax	0		(1)		1		(5)
Unrealized gains/(losses) on cash flow hedges, tax
Unrealized gains/(losses) arising during the period, tax	9		(15)		(119)		(45)
Total unrealized gains/(losses) on cash flow hedges, tax	28		21		(79)		(1)
Retirement-related benefit plans, tax
Prior service costs/(credits), tax	0		0		(11)		0
Net (losses)/gains arising during the period, tax	(71)		(26)		(67)		(23)
Curtailments and settlements, tax			0				0
Amortization of prior service (credits)/costs, tax	10		13		20		27
Amortization of net (gains)/losses, tax	(304)		(217)		(597)		(446)
Total retirement-related benefit plans, tax	(366)		(229)		(655)		(443)
Other comprehensive income/(loss), tax	(361)		(268)		(842)		(497)
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments, net of tax	(959)		(782)		(1,448)		(385)
Net changes related to available-for-sale securities, net of tax
Unrealized gains/(losses) arising during the period, net of tax	0		(2)		(2)		2
Reclassification of (gains)/losses to net income, net of tax	0		(1)		0		(10)
Subsequent changes in previously impaired securities arising during the period, net of tax	0		6		1		17
Total net changes related to available-for-sale securities, net of tax	0		2		0		9
Unrealized gains/(losses) on cash flow hedges, net of tax
Unrealized gains/(losses) arising during the period, net of tax	(1)		53		231		74
Total unrealized gains/(losses) on cash flow hedges, net of tax	(29)		(21)		168		(17)
Retirement-related benefit plans, net of tax
Prior service costs/(credits), net of tax	0		0		21		0
Net (losses)/gains arising during the period, net of tax	138		45		129		41
Curtailments and settlements, net of tax			0				0
Amortization of prior service (credits)/costs, net of tax	(18)		(24)		(38)		(47)
Amortization of net (gains)/losses, net of tax	559		397		1,153		786
Total retirement-related benefit plans, net of tax	679		418		1,265		780
Other comprehensive income/(loss)	(309)	[1]	(383)		(16)		387
Cost of sales
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	7		(12)		(3)		(16)
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to net income, tax	(2)		0		1		0
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	4		(11)		(2)		(16)
SG&A expense
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	(5)		(15)		(15)		(16)
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to net income, tax	2		4		6		4
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	(3)		(11)		(10)		(12)
Other (income) and expense
Net changes related to available-for-sale securities, before tax
Reclassification of (gains)/losses to net income, before tax	0		(2)		0		(16)
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	(48)		(86)		(85)		(106)
Net changes related to available-for-sale securities, tax
Reclassification of (gains)/losses to net income, tax	0		1		0		6
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to net income, tax	19		33		33		41
Net changes related to available-for-sale securities, net of tax
Reclassification of (gains)/losses to net income, net of tax	0		(1)		0		(10)
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	(30)		(53)		(52)		(65)
Interest expense
Unrealized gains/(losses) on cash flow hedges, before tax
Reclassification of (gains)/losses to net income, before tax	0		2		0		4
Unrealized gains/(losses) on cash flow hedges, tax
Reclassification of (gains)/losses to net income, tax	0		(1)		0		(2)
Unrealized gains/(losses) on cash flow hedges, net of tax
Reclassification of (gains)/losses to net income, net of tax	$ 0		$ 1		$ 0		$ 2

[1] Amounts may not add due to rounding.

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Financing Receivables: (Details 7) (USD $) In Millions, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Past Due Financing Receivable
Total Past Due (> 90 days)	$ 88	$ 82
Current	21,406	22,428
Total Financing Receivables	21,494	22,510
Recorded Investment > 90 Days and Accruing	55	52
Troubled debt restructurings of financing receivables	0	0
Major Markets
Past Due Financing Receivable
Total Financing Receivables	15,670	16,701
Growth Markets
Past Due Financing Receivable
Total Financing Receivables	5,824	5,808
Lease receivables
Past Due Financing Receivable
Total Past Due (> 90 days)	27	20
Current	8,799	9,154
Total Financing Receivables	8,826	9,174
Recorded Investment > 90 Days and Accruing	17	13
Lease receivables | Major Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	11	8
Current	6,766	7,028
Total Financing Receivables	6,776	7,036
Recorded Investment > 90 Days and Accruing	7	5
Lease receivables | Growth Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	16	11
Current	2,033	2,127
Total Financing Receivables	2,049	2,138
Recorded Investment > 90 Days and Accruing	11	8
Loan receivables
Past Due Financing Receivable
Total Past Due (> 90 days)	61	63
Current	12,607	13,273
Total Financing Receivables	12,668	13,336
Recorded Investment > 90 Days and Accruing	38	39
Loan receivables | Major Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	18	27
Current	8,875	9,639
Total Financing Receivables	8,894	9,666
Recorded Investment > 90 Days and Accruing	10	8
Loan receivables | Growth Markets
Past Due Financing Receivable
Total Past Due (> 90 days)	43	36
Current	3,731	3,634
Total Financing Receivables	3,774	3,670
Recorded Investment > 90 Days and Accruing	$ 28	$ 31

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 2012
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income	$ 3,226		$ 3,881		$ 6,258		$ 6,948
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments	(936)		(724)		(1,341)		(337)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0		(3)		(2)		3
Reclassification of (gains)/losses to net income	0		(2)		0		(16)
Subsequent changes in previously impaired securities arising during the period	0		9		1		27
Total net changes related to available-for-sale securities	0		4		(1)		14
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	(10)		68		350		119
Reclassification of (gains)/losses to net income	(47)		(111)		(103)		(135)
Total unrealized gains/(losses) on cash flow hedges	(57)		(42)	[1]	247		(16)
Retirement-related benefit plans:
Prior service costs/(credits)	0		0		33		0
Net (losses)/gains arising during the period	210		70		195		65
Curtailments and settlements	0		0		0		0
Amortization of prior service (credits)/costs	(28)		(37)		(58)		(74)
Amortization of net (gains)/losses	864		613		1,750		1,232
Total retirement-related benefit plans	1,045	[1]	647	[1]	1,920		1,223
Other comprehensive income/(loss), before tax	53	[1]	(115)		826	[1]	884
Income tax (expense)/benefit related to items of other comprehensive income	(361)		(268)		(842)		(497)
Other comprehensive income/(loss)	(309)	[1]	(383)		(16)		387
Total comprehensive income/(loss)	$ 2,917		$ 3,498		$ 6,242		$ 7,335

[1] Amounts may not add due to rounding.

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Segments:

6 Months Ended

Jun. 30, 2013

Segments:

Segments:

6. Segments:  The tables on pages 26 and 27 reflect the results of operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income. These results are used, in part, by senior management, both in evaluating the performance of, and in allocating resources to, each of the segments.

SEGMENT INFORMATION

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the three months ended June 30, 2013:
External revenue	$	9,536		$	4,606		$	6,423		$	3,758		$	487		$	24,809
Internal revenue	292			188			738			135			575			1,928
Total revenue	$	9,828		$	4,795		$	7,161		$	3,893		$	1,061		$	26,737
Pre-tax income	$	1,514		$	623		$	2,443		$	(141	)	$	550		$	4,989
Revenue year-to-year change	(4.5		)%	(1.1		)%	3.1		%	(11.9		)%	2.9		%	(2.9		)%
Pre-tax income year-to-year change	(13.8		)%	(22.4		)%	(2.0		)%	nm			4.2		%	(14.2		)%
Pre-tax income margin	15.4		%	13.0		%	34.1		%	(3.6		)%	51.8		%	18.7		%

nm - not meaningful

For the three months ended June 30, 2012:
External revenue	$	9,995		$	4,667		$	6,171		$	4,259		$	517		$	25,608
Internal revenue	291			180			776			159			515			1,921
Total revenue	$	10,286		$	4,847		$	6,946		$	4,418		$	1,032		$	27,529
Pre-tax income	$	1,757		$	803		$	2,493		$	234		$	528		$	5,814
Pre-tax income margin	17.1		%	16.6		%	35.9		%	5.3		%	51.1		%	21.1		%

Reconciliations to IBM as Reported:

(Dollars in millions)
For the three months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	26,737		$	27,529
Eliminations of internal transactions	(1,928		)	(1,921		)
Other revenue adjustments	115			175
Total IBM Consolidated	$	24,924		$	25,783
Pre-tax income:
Total reportable segments	$	4,989		$	5,814
Amortization of acquired intangible assets	(178		)	(173		)
Acquisition-related charges	(4		)	(7		)
Non-operating retirement-related (costs)/income	(262		)	(94		)
Eliminations of internal transactions	(379		)	(343		)
Unallocated corporate amounts	(22		)	(36		)
Total IBM Consolidated	$	4,144		$	5,161

SEGMENT INFORMATION

	Global Services
	Global			Global
	Technology			Business						Systems and			Global			Total
(Dollars in millions)	Services			Services			Software			Technology			Financing			Segments
For the six months ended June 30, 2013:
External revenue	$	19,140		$	9,091		$	11,995		$	6,864		$	985		$	48,075
Internal revenue	540			368			1,569			255			1,116			3,847
Total revenue	$	19,680		$	9,459		$	13,563		$	7,118		$	2,101		$	51,922
Pre-tax income	$	3,099		$	1,326		$	4,457		$	(546	)	$	1,088		$	9,425
Revenue year-to-year change	(4.5		)%	(2.2		)%	1.3		%	(14.4		)%	4.7		%	(3.8		)%
Pre-tax income year-to-year change	(4.3		)%	(5.6		)%	0.4		%	nm			4.6		%	(8.0		)%
Pre-tax income margin	15.7		%	14.0		%	32.9		%	(7.7		)%	51.8		%	18.2		%

nm - not meaningful

For the six months ended June 30, 2012:
External revenue	$	20,031		$	9,304		$	11,770		$	8,008		$	1,006		$	50,120
Internal revenue	584			363			1,615			309			1,000			3,872
Total revenue	$	20,615		$	9,667		$	13,386		$	8,317		$	2,006		$	53,991
Pre-tax income	$	3,237		$	1,404		$	4,438		$	130		$	1,040		$	10,248
Pre-tax income margin	15.7		%	14.5		%	33.2		%	1.6		%	51.8		%	19.0		%

Reconciliations to IBM as Reported:

(Dollars in millions)
For the six months ended June 30:	2013			2012
Revenue:
Total reportable segments	$	51,922		$	53,991
Eliminations of internal transactions	(3,847		)	(3,872		)
Other revenue adjustments	257			336
Total IBM Consolidated	$	48,332		$	50,456
Pre-tax income:
Total reportable segments	$	9,425		$	10,248
Amortization of acquired intangible assets	(361		)	(339		)
Acquisition-related charges	(15		)	(14		)
Non-operating retirement-related (costs)/income	(546		)	(197		)
Eliminations of internal transactions	(718		)	(627		)
Unallocated corporate amounts	(35		)	(74		)
Total IBM Consolidated	$	7,750		$	8,997

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Notes and accounts receivable - trade, allowances	$ 258	$ 255
Short-term financing receivables, allowances	279	288
Other accounts receivable, allowances	25	17
Long-term financing receivables, allowances	$ 64	$ 66
Common stock, par value (in dollars per share)	$ 0.20	$ 0.20
Common stock, Shares authorized (in shares)	4,687,500,000	4,687,500,000
Common stock, Shares issued (in shares)	2,204,928,599	2,197,561,159
Treasury stock, Shares (in shares)	1,109,502,777	1,080,193,483

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Contingencies: (Details) (USD $) In Millions, unless otherwise specified		1 Months Ended	3 Months Ended	0 Months Ended		0 Months Ended	1 Months Ended
	Jun. 30, 2013 item	Oct. 31, 2012 Litigation in United Kingdom regarding defined benefit plans (C Plan) Y	Sep. 30, 2012 Litigation in United Kingdom regarding defined benefit plans (C Plan)	Jul. 10, 2013 SCO Group item	Jun. 30, 2013 Former IBM UK Defined Benefit Plan Participants IBM United Kingdom Limited item	Jul. 25, 2013 Civil enforcement action with the SEC IBM Korea, LG IBM, IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd.	Mar. 31, 2011 Civil enforcement action with the SEC IBM Korea, LG IBM, IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd.	Jul. 31, 2012 State of Indiana
Contingencies:
Clients presence in number of countries	170
Loss Contingencies
Number of breaches of contract and copyright claims dismissed				7
Number of breaches of contract and copyright claims filed				10
Number of tortious interference claims dismissed				1
Amount of settlement to be paid/(received)							$ 10	$ (52)
Claims pending					290
Additional pre-tax retirement-related obligation recorded			162
Retirement age of employee under the C Plan		60
Retirement age of employee under the C Plan before modifications		63
Profits gained as a result of the conduct alleged in the SEC's complaint							5.3
Prejudgment interest							2.7
Civil penalty							2
Period for which reports are to be submitted to SEC and court on certain matters, including those relating to compliance with the FCPA						2 years
Income tax examination - Brazil, total potential liability	$ 650

XML

CONSOLIDATED STATEMENT OF EARNINGS (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 2012
Revenue:
Services	$ 14,312	$ 14,833		$ 28,586		$ 29,653
Sales	10,119	10,426		18,748		19,782
Financing	493	523		998		1,021
Total revenue	24,924	25,783	[1]	48,332		50,456
Cost:
Services	9,326	9,785		18,852		19,770
Sales	3,202	3,435		6,133		6,761
Financing	264	282		537		526
Total cost	12,792	13,502		25,522		27,056	[1]
Gross profit	12,132	12,281		22,810		23,400
Expense and other income:
Selling, general and administrative	6,680	5,837		12,257		11,723
Research, development and engineering	1,548	1,587		3,193		3,188
Intellectual property and custom development income	(247)	(289)		(430)		(545)
Other (income) and expense	(91)	(132)		(151)		(190)
Interest expense	98	117		192		226
Total expense and other income	7,988	7,120		15,060	[1]	14,403	[1]
Income before income taxes	4,144	5,161		7,750		8,997
Provision for income taxes	918	1,280		1,492		2,049
Net income	$ 3,226	$ 3,881		$ 6,258		$ 6,948
Earnings per share of common stock:
Assuming dilution (in dollars per share)	$ 2.91	$ 3.34		$ 5.60		$ 5.95
Basic (in dollars per share)	$ 2.93	$ 3.38		$ 5.65		$ 6.02
Weighted-average number of common shares outstanding: (millions)
Assuming dilution (in shares)	1,109.4	1,161.9		1,116.7		1,168.1
Basic (in shares)	1,100.9	1,149.0		1,107.3		1,154.1
Cash dividend per common share (in dollars per share)	$ 0.95	$ 0.85		$ 1.80		$ 1.60

[1] Amounts may not add due to rounding.

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Equity Activity: (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period				$ (25,759)	$ (21,885)
Other comprehensive income before reclassifications				(1,067)	(252)
Amount reclassified from accumulated other comprehensive income				1,050	638
Total change for the period	(309)	[1]	(383)	(16)	387
Balance at the End of the Period	(25,774)		(21,498)	(25,774)	(21,498)
Net Unrealized Gains/(Losses) on Cash Flow Hedges
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period				(90)	71
Other comprehensive income before reclassifications				231	74
Amount reclassified from accumulated other comprehensive income				(63)	(91)
Total change for the period				168	(17)
Balance at the End of the Period	78		54	78	54
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period				1,733	1,767
Other comprehensive income before reclassifications				(1,448)	(385)
Amount reclassified from accumulated other comprehensive income				0	0
Total change for the period				(1,448)	(385)
Balance at the End of the Period	284		1,382	284	1,382
Net Change Retirement-Related Benefit Plans
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period				(27,406)	(23,737)
Other comprehensive income before reclassifications				150	41
Amount reclassified from accumulated other comprehensive income				1,115	739
Total change for the period				1,265	780
Balance at the End of the Period	(26,141)		(22,956)	(26,141)	(22,956)
Net Unrealized Gains/(Losses) on Available-For-Sale Securities
Accumulated Other Comprehensive Income (Loss) Net of Tax
Balance at the Beginning of the Period				4	13
Other comprehensive income before reclassifications				0	18
Amount reclassified from accumulated other comprehensive income				0	(10)
Total change for the period				0	9
Balance at the End of the Period	$ 4		$ 22	$ 4	$ 22

[1] Amounts may not add due to rounding.

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Acquisitions/Divestitures: (Tables)

6 Months Ended

Jun. 30, 2013

Acquisitions/Divestitures:

Business acquisition, purchase price allocation

	Amortization	Total
(Dollars in millions)	Life (in yrs.)	Acquisitions
Current assets		$	7
Fixed assets/noncurrent assets		14
Intangible assets:
Goodwill	N/A	75
Completed technology	5-7	11
Patents/trademarks	3-7	4
Total assets acquired		111
Current liabilities		(3		)
Noncurrent liabilities		(7		)
Total liabilities assumed		(10		)
Total purchase price		$	101

N/A - not applicable

XML

Financial Instruments: (Tables)

6 Months Ended

Jun. 30, 2013

Financial Instruments:

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

(Dollars in millions) At June 30, 2013	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,532	$	—	$	3,532
Commercial paper	—		1,230		—		1,230
Money market funds	1,170		—		—		1,170
U.S. government securities	—		950		—		950
Canada government securities	—		465		—		465
Other securities	—		22		—		22
Total	1,170		6,199		—		7,369		(6)
Debt securities - current (2)	—		799				799		(6)
Debt securities - noncurrent (3)	2		7		—		9
Available-for-sale equity investments (3)	17		0		—		17
Derivative assets (4)
Interest rate contracts	—		392		—		392
Foreign exchange contracts	—		544		—		544
Equity contracts	—		1		—		1
Total	—		937		—		937		(7)
Total assets	$	1,189	$	7,942	$	—	$	9,131	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	448	$	—	$	448
Equity contracts	—		33		—		33
Total liabilities	$	—	$	481	$	—	$	481	(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 June 30, 2013 were $553 million and $384 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 June 30, 2013 were $366 million and $115 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 $256 million each.

(Dollars in millions)
At December 31, 2012	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents(1)
Time deposits and certificates of deposit	$	—	$	3,694	$	—	$	3,694
Commercial paper	—		2,098		—		2,098
Money market funds	1,923		—		—		1,923
Other securities	—		30		—		30
Total	1,923		5,823		—		7,746		(6)
Debt securities - current (2)	—		717		—		717		(6)
Debt securities - noncurrent (3)	2		8		—		10
Available-for-sale equity investments (3)	34		—		—		34
Derivative assets (4)
Interest rate contracts	—		604		—		604
Foreign exchange contracts	—		305		—		305
Equity contracts	—		9		—		9
Total	—		918		—		918		(7)
Total assets	$	1,959	$	7,466	$	—	$	9,424	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	496	$	—	$	496
Equity contracts	—		7		—		7
Total liabilities	$	—	$	503	$	—	$	503	(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, 2012 were $333 million and $585 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, 2012 were $426 million and $78 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 $262 million each.

Noncurrent debt and marketable equity securities available-for-sale and recorded at fair value

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At June 30, 2013:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	7	$	2	$	—	$	9
Available-for-sale equity investments(1)	$	13	$	4	$	0	$	17

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

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At December 31, 2012:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	8	$	2	$	—	$	10
Available-for-sale equity investments(1)	$	31	$	4	$	1	$	34

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

Sales of debt and available-for-sale equity investments

(Dollars in millions)
For the three months ended June 30:	2013		2012
Proceeds	$	2	$	6
Gross realized gains (before taxes)	1		2
Gross realized losses (before taxes)	0		0

(Dollars in millions)
For the six months ended June 30:	2013		2012
Proceeds	$	20	$	51
Gross realized gains (before taxes)	4		16
Gross realized losses (before taxes)	4		0

Unrealized gains/(losses) on available-for-sale debt and equity securities

(Dollars in millions)
For the three months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	0		$	4
Net unrealized (gains)/losses reclassified to net income*	(0		)	(1		)

*There were no significant writedowns for the three months ended June 30, 2013 and 2012, respectively.

(Dollars in millions)
For the six months ended June 30:	2013			2012
Net unrealized gains/(losses) arising during the period	$	(0	)	$	18
Net unrealized (gains)/losses reclassified to net income*	0			(10		)

* There were no significant writedowns for the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Derivative Instruments in the Consolidated Statement of Financial Position

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	6/30/2013		12/31/2012		Classification	6/30/2013		12/31/2012
Designated as hedging instruments:
Interest rate contracts:	Prepaid expenses and other current assets	$	26	$	47	Other accrued expenses and liabilities	$	—	$	—
	Investments and sundry assets	366		557		Other liabilities	—		—
Foreign exchange contracts:	Prepaid expenses and other current assets	393		135		Other accrued expenses and liabilities	150		267
	Investments and sundry assets	—		5		Other liabilities	115		78
Fair value of derivative Assets		$	785	$	744	Fair value of derivative liabilities	$	265	$	345
Not designated as hedging instruments:
Foreign exchange contracts:	Prepaid expenses and other current assets	$	133	$	142	Other accrued expenses and liabilities	$	183	$	152
	Investments and sundry assets	18		23		Other liabilities	—		—
Equity contracts:	Prepaid expenses and other current assets	1		9		Other accrued expenses and liabilities	33		7
Fair value of derivative Assets		$	152	$	174	Fair value of derivative liabilities	$	216	$	159
Total debt designated as hedging instruments:
	Short-term debt	N/A		N/A			$	1,176	$	578
	Long-term debt	N/A		N/A			2,226		3,035
Total		$	937	$	918		$	3,883	$	4,116

N/A-not applicable

Effect of Derivative Instruments in the Consolidated Statement of Earnings

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the three months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(68	)	$	80		$	92	$	(47	)
	Interest expense	(44		)	65			59		(39		)
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(80		)	(122		)	N/A		N/A
Equity contracts	SG&A expense	(26		)	(35		)	N/A		N/A
Total		$	(218	)	$	(12	)	$	151	$	(86	)

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
													(Ineffectiveness) and
	Effective Portion					Consolidated	Effective Portion Reclassified						Amounts Excluded from
For the three months	Recognized in OCI					Statement of	from AOCI						Effectiveness Testing(3)
ended June 30:	2013			2012		Earnings Line Item	2013			2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—		$	—	Interest expense	$	—		$	(2	)	$	—		$	—
Foreign exchange Contracts	(10		)	68		Other (income) and expense	48			86			(1		)	1
						Cost of sales	(7		)	11			—			—
						SG&A expense	5			15			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	62			149		Interest expense	—			—			3			1
Total	$	52		$	217		$	47		$	111		$	2		$	2

N/A-not applicable

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

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

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

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

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

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives(1)						Being Hedged(2)
For the six months ended June 30:	Earnings Line Item	2013			2012			2013		2012
Derivative instruments in fair value hedges:
Interest rate contracts	Cost of financing	$	(88	)	$	56		$	138	$	8
	Interest expense	(56		)	45			88		7
Derivative instruments not designated as hedging instruments(1):
Foreign exchange contracts	Other (income) and expense	(519		)	(204		)	N/A		N/A
Equity contracts	SG&A expense	60			63			N/A		N/A
Total		$	(603	)	$	(40	)	$	226	$	15

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
											(Ineffectiveness) and
	Effective Portion				Consolidated	Effective Portion Reclassified					Amounts Excluded from
For the six months	Recognized in OCI				Statement of	from AOCI					Effectiveness Testing(3)
ended June 30:	2013		2012		Earnings Line Item	2013		2012			2013			2012
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Interest expense	$	—	$	(4	)	$	—		$	—
Foreign exchange Contracts	350		119		Other (income) and expense	85		106			(1		)	2
					Cost of sales	2		16			—			—
					SG&A expense	15		16			—			—
Instruments in net investment hedges(4):
Foreign exchange Contracts	282		112		Interest expense	—		—			2			3
Total	$	632	$	231		$	103	$	134		$	1		$	5

N/A-not applicable

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

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

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

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

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

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Financing Receivables: (Details 6) (Global Financing, Financing Receivable Portfolio)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Financial Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	38.00%	38.00%
Government Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	16.00%	16.00%
Manufacturing Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	13.00%	14.00%
Retail Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	8.00%	9.00%
Services Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	9.00%	7.00%
Healthcare Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	6.00%	6.00%
Communications Industry
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	6.00%	6.00%
Other industries
Financing Receivables by Portfolio Segment
Financing receivables (as a percent)	4.00%	4.00%

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Intangible Assets Including Goodwill: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Intangible asset balances by major asset class:
Gross Carrying Amount	$ 6,367		$ 6,367		$ 6,679
Accumulated Amortization	(2,949)		(2,949)		(2,892)
Net Carrying Amount	3,418		3,418		3,787
Net carrying amount increase/(decrease)			(369)
Intangible asset amortization expense	326	318	657	627
Intangible assets retired and fully amortized			598
Capitalized software
Intangible asset balances by major asset class:
Gross Carrying Amount	1,522		1,522		1,527
Accumulated Amortization	(677)		(677)		(665)
Net Carrying Amount	845		845		861
Client relationships
Intangible asset balances by major asset class:
Gross Carrying Amount	2,059		2,059		2,103
Accumulated Amortization	(1,068)		(1,068)		(961)
Net Carrying Amount	991		991		1,142
Completed technology
Intangible asset balances by major asset class:
Gross Carrying Amount	2,483		2,483		2,709
Accumulated Amortization	(1,050)		(1,050)		(1,112)
Net Carrying Amount	1,433		1,433		1,597
In-process R&D
Intangible asset balances by major asset class:
Gross Carrying Amount	15		15		28
Net Carrying Amount	15		15		28
Patents/trademarks
Intangible asset balances by major asset class:
Gross Carrying Amount	280		280		281
Accumulated Amortization	(149)		(149)		(127)
Net Carrying Amount	131		131		154
Other intangible assets
Intangible asset balances by major asset class:
Gross Carrying Amount	8		8		31
Accumulated Amortization	(5)		(5)		(27)
Net Carrying Amount	$ 2		$ 2		$ 3

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Financing Receivables: (Details) (USD $) In Millions, unless otherwise specified						6 Months Ended				6 Months Ended				6 Months Ended				6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2013 Net investment in sales-type and direct financing leases	Dec. 31, 2012 Net investment in sales-type and direct financing leases	Jun. 30, 2013 Net investment in sales-type and direct financing leases Financing receivable, lower range of payment terms	Jun. 30, 2013 Net investment in sales-type and direct financing leases Financing receivable, upper range of payment terms	Jun. 30, 2013 Commercial financing receivables	Dec. 31, 2012 Commercial financing receivables	Jun. 30, 2013 Commercial financing receivables Financing receivable, lower range of payment terms	Jun. 30, 2013 Commercial financing receivables Financing receivable, upper range of payment terms	Jun. 30, 2013 Client loan receivables	Dec. 31, 2012 Client loan receivables	Jun. 30, 2013 Client loan receivables Financing receivable, lower range of payment terms	Jun. 30, 2013 Client loan receivables Financing receivable, upper range of payment terms	Jun. 30, 2013 Installment payment receivables	Dec. 31, 2012 Installment payment receivables	Jun. 30, 2013 Installment payment receivables Financing receivable, lower range of payment terms	Jun. 30, 2013 Installment payment receivables Financing receivable, upper range of payment terms
Financing receivables:
Financing receivables used as collateral for non-recourse borrowings	$ 731	$ 650
Financing receivables held for sale	0	0
Financing receivables, current
Financing receivables, net, current	16,661	18,038		3,947	3,862			6,467	7,750			5,101	5,395			1,145	1,031
Financing receivables, noncurrent
Financing receivables, net, noncurrent	11,828	12,812		5,610	6,107				5			5,591	5,966			627	733
Financing receivables
Financing receivable, payment terms						2 years	6 years			30 days	90 days			1 year	7 years			1 year	3 years
Sales-type and direct financing leases, unguaranteed residual value				745	794
Sales-type and direct financing leases, unearned income				698	728
Allowance for credit losses	$ 311	$ 318	$ 307	$ 111	$ 114			$ 31	$ 46			$ 165	$ 155			$ 35	$ 39

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Financial Instruments: (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Fair value of financial instruments, details:
Carrying amount of long-term debt	$ 26,292		$ 26,292		$ 24,088
Fair value of long-term debt	28,243		28,243		27,119
Debt and Marketable Equity Securities.
Debt securities - noncurrent, Adjusted Cost	7		7		8
Debt securities - noncurrent, gross unrealized gains	2		2		2
Available-for-sale equity investments, Adjusted Cost	13		13		31
Available-for-sale equity investments, gross unrealized gains	4		4		4
Available-for-sale equity investments, gross unrealized losses	0		0		1
Debt securities - noncurrent	9		9		10
Available-for-sale equity investments	17		17		34
Sales of debt and available-for-sale equity investments
Proceeds	2	6	20	51
Gross realized gains (before taxes)	1	2	4	16
Gross realized losses (before taxes)	0	0	4	0
Unrealized holding gains/(losses) on available-for-sale debt and equity securities
Net unrealized gains/(losses) arising during the period	0	4	0	18
Net unrealized (gains)/losses reclassified to net income	0	(1)	0	(10)
Writedowns included in net income for the period	$ 0	$ 0	$ 0	$ 0
Maximum contractual maturities of substantially all available-for-sale debt securities			1 year

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Financial Instruments: (Details 3) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013 basispoint	Dec. 31, 2012
Financial Instruments:
Derivative instruments with credit-risk related contingent features	$ 55	$ 94
Collateral posted on derivative instruments	0	0
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	937	918
Fair value of total derivative liabilities and debt	3,883	4,116
Maximum spread on credit default swap agreements before full overnight collateralization is required (in basis points)	250
Liabilities included in master netting arrangements	256	262
Cash collateral received, derivatives	33	69
Net exposure related to derivative assets recorded in the Statement of Financial Position	648	587
Net amount related to derivative liabilities recorded in the Statement of Financial Position	225	242
Non-cash collateral received and not recorded on the Statement of Financial Position	0	31
Cash collateral rehypothecated	0	0
Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	785	744
Fair value of total derivative instruments, Liabilities	265	345
Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	152	174
Fair value of total derivative instruments, Liabilities	216	159
Other receivables
Fair Values of Derivative Instruments
Cash collateral issued, derivatives	0	0
Accounts payable
Fair Values of Derivative Instruments
Cash collateral received, derivatives	33	69
Prepaid expenses and other current assets | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	26	47
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	393	135
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	133	142
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	1	9
Investments and sundry assets | Interest rate contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	366	557
Investments and sundry assets | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets		5
Investments and sundry assets | Foreign exchange contracts | Derivative instruments not designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Assets	18	23
Other accrued expenses and liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	150	267
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	183	152
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	33	7
Other liabilities | Foreign exchange contracts | Designated as hedging instruments
Fair Values of Derivative Instruments
Fair value of total derivative instruments, Liabilities	115	78
Long term debt | Designated as hedging instruments | Net investment hedge
Fair Values of Derivative Instruments
Debt designated as hedging instrument	2,226	3,035
Short term debt | Designated as hedging instruments | Net investment hedge
Fair Values of Derivative Instruments
Debt designated as hedging instrument	$ 1,176	$ 578

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Stock-Based Compensation:

6 Months Ended

Jun. 30, 2013

Stock-Based Compensation:

Stock-Based Compensation:

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013			2012			2013			2012
Cost	$	30		$	30		$	61		$	64
Selling, general and administrative	115			117			214			236
Research, development and engineering	15			12			30			27
Pre-tax stock-based compensation cost	161			160			305			328
Income tax benefits	(56		)	(56		)	(106		)	(116		)
Total stock-based compensation cost	$	105		$	104		$	199		$	212

The increase in pre-tax stock-based compensation cost for the three months ended June 30, 2013, as compared to the corresponding period in the prior year, was due to increases related to restricted stock units ($4 million) and performance share units ($1 million), partially offset by a decrease in the company’s assumption of stock-based awards previously issued by acquired entities ($4 million). The decrease in pre-tax stock-based compensation cost for the six months ended June 30, 2013, as compared to the corresponding period in the prior year, was due to decreases related to performance share units ($11 million), the company’s assumption of stock-based awards previously issued by acquired entities ($7 million) and restricted stock units ($5 million).

As of June 30, 2013, the total unrecognized compensation cost of $1,287 million related to non-vested awards 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 June 30, 2013 and 2012.

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Intangible Assets Including Goodwill: (Tables)

6 Months Ended

Jun. 30, 2013

Intangible Assets Including Goodwill:

Intangible asset balances by major asset class

	At June 30, 2013
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,522	$	(677	)	$	845
Client relationships	2,059		(1,068		)	991
Completed technology	2,483		(1,050		)	1,433
In-process R&D	15		—			15
Patents/trademarks	280		(149		)	131
Other(a)	8		(5		)	2
Total	$	6,367	$	(2,949	)	$	3,418

	At December 31, 2012
(Dollars in millions)	Gross Carrying		Accumulated			Net Carrying
Intangible asset class	Amount		Amortization			Amount
Capitalized software	$	1,527	$	(665	)	$	861
Client relationships	2,103		(961		)	1,142
Completed technology	2,709		(1,112		)	1,597
In-process R&D	28		—			28
Patents/trademarks	281		(127		)	154
Other(a)	31		(27		)	3
Total	$	6,679	$	(2,892	)	$	3,787

(a)   Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

Intangible assets, future amortization expense

	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
2013 (for Q3-Q4)	$	280	$	369	$	648
2014	388		630		1,018
2015	158		502		660
2016	20		463		483
2017	—		345		345

Changes in goodwill balances by reportable segment

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other			Balance
Segment	01/01/13		Additions		Adjustments			Divestitures			Adjustments			6/30/13
Global Business Services	$	4,357	$	—	$	(0	)	$	—		$	(121	)	$	4,236
Global Technology Services	2,916		—		5			—			(76		)	2,844
Software	20,405		75		(27		)	(2		)	(289		)	20,164
Systems and Technology	1,568		—		33			—			(0		)	1,602
Total	$	29,247	$	75	$	11		$	(2	)	$	(486	)	$	28,846

											Foreign
											Currency
					Purchase						Translation
(Dollars in millions)	Balance		Goodwill		Price						And Other		Balance
Segment	01/01/12		Additions		Adjustments			Divestitures			Adjustments		12/31/12
Global Business Services	$	4,313	$	5	$	(0	)	$	(2	)	$	42	$	4,357
Global Technology Services	2,646		264		—			(0		)	6		2,916
Software	18,121		2,182		(30		)	(6		)	137		20,405
Systems and Technology	1,133		443		(0		)	(14		)	6		1,568
Total	$	26,213	$	2,894	$	(30	)	$	(22	)	$	192	$	29,247

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Financing Receivables: (Details 4) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Impaired client loan receivables
Recorded Investment	$ 166		$ 166		$ 160
Related Allowance	153		153		143
Average Recorded Investment	161	145	161	154
Interest Income Recognized	0	0	0	0
Interest Income Recognized on Cash Basis	0	0	0	0
Major Markets
Impaired client loan receivables
Recorded Investment	71		71		88
Related Allowance	67		67		77
Average Recorded Investment	70	81	76	91
Interest Income Recognized	0	0	0	0
Interest Income Recognized on Cash Basis	0	0	0	0
Growth Markets
Impaired client loan receivables
Recorded Investment	95		95		72
Related Allowance	86		86		65
Average Recorded Investment	90	64	84	63
Interest Income Recognized	0	0	0	0
Interest Income Recognized on Cash Basis	$ 0	$ 0	$ 0	$ 0

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Retirement-Related Benefits:

6 Months Ended

Jun. 30, 2013

Retirement-Related Benefits:

Retirement-Related Benefits:

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

					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	636	$	459	38.5	%
Nonpension postretirement plans — cost	71		89		(21.0	)
Total	$	706	$	548	28.8	%

					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2013		2012		Change
Retirement-related plans — cost
Defined benefit and contribution pension plans — cost	$	1,310	$	991	32.2	%
Nonpension postretirement plans — cost	151		174		(13.3	)
Total	$	1,460	$	1,164	25.4	%

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

Cost/(Income) of Pension Plans

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the three months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	120		$	111
Interest cost	494			548			376			444
Expected return on plan assets	(995		)	(1,011		)	(537		)	(573		)
Amortization of prior service costs/(credits)	2			3			(29		)	(38		)
Recognized actuarial losses	444			330			394			256
Curtailments and settlements	—			—			0			0
Multi-employer plans/other costs	—			—			25			23
Total net periodic pension (income)/cost of defined benefit plans	(55		)	(131		)	349			222
Cost of defined contribution plans	193			212			148			156
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	138		$	81		$	497		$	378

(Dollars in millions)	U.S. Plans						Non-U.S. Plans
For the six months ended June 30:	2013			2012			2013			2012
Service cost	$	—		$	—		$	251		$	224
Interest cost	990			1,098			758			894
Expected return on plan assets	(1,991		)	(2,022		)	(1,091		)	(1,153		)
Amortization of prior service costs/(credits)	5			5			(60		)	(77		)
Recognized actuarial losses	895			665			798			515
Curtailments and settlements	—			—			—			1
Multi-employer plan/other costs	—			—			55			46
Total net periodic pension (income)/cost of defined benefit plans	(101		)	(254		)	711			449
Cost of defined contribution plans	399			477			300			319
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings	$	298		$	223		$	1,011		$	768

In 2013, the company expects to contribute to its non-U.S. defined benefit and multi-employer plans approximately $600 million, which will be mainly contributed to the defined benefit pension plans in Japan, the UK and Switzerland. This amount represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first six months of 2013 were $290 million.

The following table provides the components of the cost/(income) for the company’s nonpension postretirement plans:

Cost of Nonpension Postretirement Plans

(Dollars in millions)	U.S. Plan					Non-U.S. Plans
For the three months ended June 30:	2013			2012		2013			2012
Service cost	$	9		$	9	$	2		$	2
Interest cost	40			51		15			16
Expected return on plan assets	(0		)	—		(2		)	(2		)
Amortization of prior service costs/(credits)	—			—		(1		)	(1		)
Recognized actuarial losses	2			10		6			4
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	51		$	70	$	20		$	19

	U.S. Plans					Non-U.S. Plans
For the six months ended June 30:	2013			2012		2013			2012
Service cost	$	17		$	18	$	5		$	5
Interest cost	82			100		31			33
Expected return on plan assets	(1		)	—		(5		)	(5		)
Amortization of prior service credits	—			—		(2		)	(2		)
Recognized actuarial losses	11			16		12			9
Curtailments and settlements	—			—		0			—
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings	$	109		$	134	$	41		$	39

The company received a $10.0 million subsidy in the second quarter of 2013 and a $16.2 million subsidy for the first half of 2013 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this subsidy is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants. For further information related to the Medicare Prescription Drug Act, see page 133 in the company’s 2012 Annual Report.

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Financing Receivables:

6 Months Ended

Jun. 30, 2013

Financing Receivables:

Financing Receivables:

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

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Current:
Net investment in sales-type and direct financing leases	$	3,947	$	3,862
Commercial financing receivables	6,467		7,750
Client loan receivables	5,101		5,395
Installment payment receivables	1,145		1,031
Total	$	16,661	$	18,038
Noncurrent:
Net investment in sales-type and direct financing leases	$	5,610	$	6,107
Commercial financing receivables	—		5
Client loan receivables	5,591		5,966
Installment payment receivables	627		733
Total	$	11,828	$	12,812

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 $745 million and $794 million at June 30, 2013 and December 31, 2012, respectively, and is reflected net of unearned income of $698 million and $728 million, and net of the allowance for credit losses of $111 million and $114 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $31 million and $46 million at June 30, 2013 and December 31, 2012, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan receivables, net of allowance for credit losses of $165 million and $155 million at June 30, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.

Installment payment receivables, net of allowance for credit losses of $35 million and $39 million at June 30, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.

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

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $731 million and $650 million at June 30, 2013 and December 31, 2012, respectively.

The company did not have any financing receivables held for sale as of June 30, 2013 and December 31, 2012.

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 June 30, 2013 and December 31, 2012. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. For additional information on the company’s accounting policies for the allowance for credit losses, see the company’s 2012 Annual Report beginning on page 85.

(Dollars in millions)	Major			Growth
At June 30, 2013	Markets			Markets			Total
Financing receivables:
Lease receivables	$	6,776		$	2,049		$	8,826
Loan receivables	8,894			3,774			12,668
Ending balance	$	15,670		$	5,824		$	21,494
Collectively evaluated for impairment	$	15,561		$	5,671		$	21,232
Individually evaluated for impairment	$	109		$	153		$	262
Allowance for credit losses:
Beginning balance at January 1, 2013
Lease receivables	$	59		$	55		$	114
Loan receivables	121			84			204
Total	$	180		$	138		$	318
Write-offs	(20		)	(4		)	(23		)
Provision	(14		)	37			23
Other	(3		)	(4		)	(7		)
Ending balance at June 30, 2013	$	144		$	168		$	311
Lease receivables	$	48		$	63		$	111
Loan receivables	$	96		$	104		$	200
Collectively evaluated for impairment	$	50		$	31		$	81
Individually evaluated for impairment	$	94		$	136		$	230

(Dollars in millions)	Major			Growth
At December 31, 2012	Markets			Markets			Total
Financing receivables:
Lease receivables	$	7,036		$	2,138		$	9,174
Loan receivables	9,666			3,670			13,336
Ending balance	$	16,701		$	5,808		$	22,510
Collectively evaluated for impairment	$	16,570		$	5,684		$	22,254
Individually evaluated for impairment	$	131		$	125		$	256
Allowance for credit losses:
Beginning balance at January 1, 2012
Lease receivables	$	79		$	40		$	118
Loan receivables	125			64			189
Total	$	203		$	104		$	307
Write-offs	(14		)	(1		)	(15		)
Provision	(9		)	38			28
Other	0			(2		)	(2		)
Ending balance at December 31, 2012	$	180		$	138		$	318
Lease receivables	$	59		$	55		$	114
Loan receivables	$	121		$	84		$	204
Collectively evaluated for impairment	$	69		$	29		$	98
Individually evaluated for impairment	$	111		$	109		$	220

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

Financing Receivables on Non-Accrual Status

Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts 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.

The following table presents the recorded investment in financing receivables which are on non-accrual status at June 30, 2013 and December 31, 2012.

	At June 30,		At December 31,
(Dollars in millions)	2013		2012
Major markets	$	24	$	27
Growth markets	31		21
Total lease receivables	$	55	$	47
Major markets	$	41	$	67
Growth markets	62		25
Total loan receivables	$	104	$	92
Total receivables	$	159	$	139

Impaired Loans

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

The following tables present impaired client loan receivables.

	At June 30, 2013				At December 31, 2012
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Major markets	$	71	$	67	$	88	$	77
Growth markets	95		86		72		65
Total	$	166	$	153	$	160	$	143

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2013:	Investment		Recognized*		Cash Basis
Major markets	$	70	$	0	$	0
Growth markets	90		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended June 30, 2012:	Investment		Recognized*		Cash Basis
Major markets	$	81	$	0	$	0
Growth markets	64		0		0
Total	$	145	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2013:	Investment		Recognized*		Cash Basis
Major markets	$	76	$	0	$	0
Growth markets	84		0		0
Total	$	161	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the six months ended June 30 2012:	Investment		Recognized*		Cash Basis
Major markets	$	91	$	0	$	0
Growth markets	63		0		0
Total	$	154	$	0	$	0

* Impaired loans are placed on non-accrual status, depending on the level of impairment.

Credit Quality Indicators

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

The following tables present the gross recorded investment for each class of receivables, by credit quality indicator, at June 30, 2013 and December 31, 2012. Receivables with a credit quality indicator ranging from AAA to BBB- are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company may take to transfer credit risk to third parties.

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At June 30, 2013:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	577	$	90	$	757	$	165
A+ – A-	1,559		205		2,046		378
BBB+ – BBB-	2,398		818		3,147		1,506
BB+ – BB	1,231		309		1,616		568
BB- – B+	542		405		711		746
B – B-	381		163		500		300
CCC+ – D-	89		60		117		110
Total	$	6,776	$	2,049	$	8,894	$	3,774

At June 30, 2013, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (38 percent), Government (16 percent), Manufacturing (13 percent), Services (9 percent), Retail (8 percent), Communications (6 percent), Healthcare (6 percent) and Other (4 percent).

	Lease Receivables				Loan Receivables
(Dollars in millions)	Major		Growth		Major		Growth
At December 31, 2012:	Markets		Markets		Markets		Markets
Credit Rating:
AAA – AA-	$	646	$	86	$	887	$	148
A+ – A-	1,664		223		2,286		382
BBB+ – BBB-	2,285		776		3,139		1,333
BB+ – BB	1,367		450		1,878		773
BB- – B+	552		418		758		718
B – B-	399		127		548		218
CCC+ – D	124		58		170		99
Total	$	7,036	$	2,138	$	9,666	$	3,670

At December 31, 2012, the industries which made up Global Financing’s receivables portfolio consisted of:  Financial (38 percent), Government (16 percent), Manufacturing (14 percent), Retail (9 percent), Services (7 percent), Healthcare (6 percent), Communications (6 percent) and Other (4 percent).

Past Due Financing Receivables

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

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At June 30, 2013:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	11	$	6,766	$	6,776	$	7
Growth markets	16		2,033		2,049		11
Total lease receivables	$	27	$	8,799	$	8,826	$	17
Major markets	$	18	$	8,875	$	8,894	$	10
Growth markets	43		3,731		3,774		28
Total loan receivables	$	61	$	12,607	$	12,668	$	38
Total	$	88	$	21,406	$	21,494	$	55

* Does not include accounts that are fully reserved.

							Recorded
	Total				Total		Investment
(Dollars in millions)	Past Due				Financing		> 90 Days
At December 31, 2012:	> 90 days*		Current		Receivables		and Accruing
Major markets	$	8	$	7,028	$	7,036	$	5
Growth markets	11		2,127		2,138		8
Total lease receivables	$	20	$	9,154	$	9,174	$	13
Major markets	$	27	$	9,639	$	9,666	$	8
Growth markets	36		3,634		3,670		31
Total loan receivables	$	63	$	13,273	$	13,336	$	39
Total	$	82	$	22,428	$	22,510	$	52

* Does not include accounts that are fully reserved.

Troubled Debt Restructurings

The company did not have any troubled debt restructurings during the six months ended June 30, 2013 and for the year ended December 31, 2012.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $) In Millions, unless otherwise specified	Total	Total IBM Stockholders' Equity	Common Stock and Additional Paid-in Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income/(Loss)	Non-Controlling Interests	Comprehensive Income/(Loss)
Equity - at Dec. 31, 2011	$ 20,236	$ 20,138	$ 48,129	$ 104,857	$ (110,963)	$ (21,885)	$ 97
Net income plus other comprehensive income/(loss)
Net income	6,948	6,948		6,948				6,948
Other comprehensive income/(loss)	387	387				387		387
Total comprehensive income/(loss)	7,335	7,335						7,335
Cash dividends declared - common stock	(1,848)	(1,848)		(1,848)
Common stock issued under employee plans (shares - 7,367,440 and 10,092,817 for the six months ended June 30, 2013 and 2012, respectively)	780	780	780
Purchases (shares - 1,399,751 and 1,905,803) and sales (shares - 1,480,251 and 2,034,612) of treasury stock under employee plans - net, for the six months ended June 30, 2013 and 2012, respectively	(174)	(174)		(29)	(146)
Other treasury shares purchased, not retired (shares - 29,389,794 and 30,629,597 for the six months ended June 30, 2013 and 2012, respectively)	(6,007)	(6,007)			(6,007)
Changes in other equity	248	248	248
Changes in noncontrolling interests	(6)						(6)
Equity - at Jun. 30, 2012	20,563	20,472	49,157	109,928	(117,116)	(21,498)	92
Equity - at Dec. 31, 2012	18,984	18,860	50,110	117,641	(123,131)	(25,759)	124
Net income plus other comprehensive income/(loss)
Net income	6,258	6,258		6,258				6,258
Other comprehensive income/(loss)	(16)	(16)				(16)		(16)
Total comprehensive income/(loss)	6,242	6,242						6,242
Cash dividends declared - common stock	(1,996)	(1,996)		(1,996)
Common stock issued under employee plans (shares - 7,367,440 and 10,092,817 for the six months ended June 30, 2013 and 2012, respectively)	668	668	668
Purchases (shares - 1,399,751 and 1,905,803) and sales (shares - 1,480,251 and 2,034,612) of treasury stock under employee plans - net, for the six months ended June 30, 2013 and 2012, respectively	(132)	(132)		(19)	(113)
Other treasury shares purchased, not retired (shares - 29,389,794 and 30,629,597 for the six months ended June 30, 2013 and 2012, respectively)	(5,994)	(5,994)			(5,994)
Changes in other equity	108	108	108
Changes in noncontrolling interests	4						4
Equity - at Jun. 30, 2013	$ 17,883	$ 17,756	$ 50,886	$ 121,883	$ (129,239)	$ (25,774)	$ 127

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Retirement-Related Benefits: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Retirement-related plans cost
Defined benefit and contribution pension plan - cost	$ 636	$ 459	$ 1,310	$ 991
Nonpension postretirement plans - cost	71	89	151	174
Total	706	548	1,460	1,164
Year-to-year percent change, defined benefit and contribution pension plans cost	38.50%		32.20%
Year-to-year percent change, Nonpension postretirement plans cost	(21.00%)		(13.30%)
Year-to-year percent change, total	28.80%		25.40%
Defined benefit and contribution pension plan - cost U.S. Plans	138	81	298	223
Defined benefit and contribution pension plan - cost Non-U.S. Plans	497	378	1,011	768
Proceeds from Medicare Prescription Drug Improvement and Modernization Act of 2003	10.0		16.2
Defined Contribution U.S. Plans
Retirement-related plans cost
Cost of defined contribution plans	193	212	399	477
Defined Contribution Non-U.S. Plans
Retirement-related plans cost
Cost of defined contribution plans	148	156	300	319
Multi-employer Plans - Non-U.S. Plans
Retirement-related plans cost
Multi-employer plan/other costs	25	23	55	46
U.S. Defined Benefit Pension Plans
Retirement-related plans cost
Interest cost	494	548	990	1,098
Expected return on plan assets	(995)	(1,011)	(1,991)	(2,022)
Amortization of prior service costs/(credits)	2	3	5	5
Recognized actuarial losses	444	330	895	665
Total net periodic pension (income)/cost of defined benefit plans	(55)	(131)	(101)	(254)
Non-US Defined Benefit Pension Plans
Retirement-related plans cost
Service cost	120	111	251	224
Interest cost	376	444	758	894
Expected return on plan assets	(537)	(573)	(1,091)	(1,153)
Amortization of prior service costs/(credits)	(29)	(38)	(60)	(77)
Recognized actuarial losses	394	256	798	515
Curtailments and settlements	0	0		1
Total net periodic pension (income)/cost of defined benefit plans	349	222	711	449
Non-U.S. Defined Benefit and Multi-employer Plan
Retirement-related plans cost
Expected current year contributions to non-U.S. defined benefit plans			600
Year-to-date contributions to non-U.S. defined benefit plans			290
U.S. Defined Benefit Non Pension Postretirement Plans
Retirement-related plans cost
Service cost	9	9	17	18
Interest cost	40	51	82	100
Expected return on plan assets	0		(1)
Recognized actuarial losses	2	10	11	16
Total net periodic pension (income)/cost of defined benefit plans	51	70	109	134
Non-U.S. Defined Benefit Non Pension Postretirement Plans
Retirement-related plans cost
Service cost	2	2	5	5
Interest cost	15	16	31	33
Expected return on plan assets	(2)	(2)	(5)	(5)
Amortization of prior service costs/(credits)	(1)	(1)	(2)	(2)
Recognized actuarial losses	6	4	12	9
Curtailments and settlements			0
Total net periodic pension (income)/cost of defined benefit plans	$ 20	$ 19	$ 41	$ 39

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Segments: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended			6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012		Jun. 30, 2013	Jun. 30, 2012
Segment Information
Revenue	$ 24,924	$ 25,783	[1]	$ 48,332	$ 50,456
Pre-tax income	4,144	5,161		7,750	8,997
Global Technology Services
Segment Information
Revenue	9,536	9,995		19,140	20,031
Global Business Services
Segment Information
Revenue	4,606	4,667		9,091	9,304
Software
Segment Information
Revenue	6,423	6,171		11,995	11,770
Systems and Technology
Segment Information
Revenue	3,758	4,259		6,864	8,008
Global Financing
Segment Information
Revenue	487	517		985	1,006
Total Segments
Segment Information
Revenue	24,809	25,608		48,075	50,120
Business Segments
Segment Information
Revenue	26,737	27,529		51,922	53,991
Pre-tax income	4,989	5,814		9,425	10,248
Revenue year-to-year change (as a percent)	(2.90%)			(3.80%)
Pre-tax income year-to-year change (as a percent)	(14.20%)			(8.00%)
Pre-tax income margin (as a percent)	18.70%	21.10%		18.20%	19.00%
Business Segments | Global Technology Services
Segment Information
Revenue	9,828	10,286		19,680	20,615
Pre-tax income	1,514	1,757		3,099	3,237
Revenue year-to-year change (as a percent)	(4.50%)			(4.50%)
Pre-tax income year-to-year change (as a percent)	(13.80%)			(4.30%)
Pre-tax income margin (as a percent)	15.40%	17.10%		15.70%	15.70%
Business Segments | Global Business Services
Segment Information
Revenue	4,795	4,847		9,459	9,667
Pre-tax income	623	803		1,326	1,404
Revenue year-to-year change (as a percent)	(1.10%)			(2.20%)
Pre-tax income year-to-year change (as a percent)	(22.40%)			(5.60%)
Pre-tax income margin (as a percent)	13.00%	16.60%		14.00%	14.50%
Business Segments | Software
Segment Information
Revenue	7,161	6,946		13,563	13,386
Pre-tax income	2,443	2,493		4,457	4,438
Revenue year-to-year change (as a percent)	3.10%			1.30%
Pre-tax income year-to-year change (as a percent)	(2.00%)			0.40%
Pre-tax income margin (as a percent)	34.10%	35.90%		32.90%	33.20%
Business Segments | Systems and Technology
Segment Information
Revenue	3,893	4,418		7,118	8,317
Pre-tax income	(141)	234		(546)	130
Revenue year-to-year change (as a percent)	(11.90%)			(14.40%)
Pre-tax income margin (as a percent)	(3.60%)	5.30%		(7.70%)	1.60%
Business Segments | Global Financing
Segment Information
Revenue	1,061	1,032		2,101	2,006
Pre-tax income	550	528		1,088	1,040
Revenue year-to-year change (as a percent)	2.90%			4.70%
Pre-tax income year-to-year change (as a percent)	4.20%			4.60%
Pre-tax income margin (as a percent)	51.80%	51.10%		51.80%	51.80%
Internal transactions
Segment Information
Revenue	1,928	1,921		3,847	3,872
Pre-tax income	(379)	(343)		(718)	(627)
Internal transactions | Global Technology Services
Segment Information
Revenue	292	291		540	584
Internal transactions | Global Business Services
Segment Information
Revenue	188	180		368	363
Internal transactions | Software
Segment Information
Revenue	738	776		1,569	1,615
Internal transactions | Systems and Technology
Segment Information
Revenue	135	159		255	309
Internal transactions | Global Financing
Segment Information
Revenue	$ 575	$ 515		$ 1,116	$ 1,000

[1] Amounts may not add due to rounding.

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Basis of Presentation: (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Basis of Presentation:
Noncontrolling interest amounts in income, net of tax	$ 0.9	$ 2.0	$ 2.3	$ 5.7

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Commitments: (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 Extended lines of credit	Dec. 31, 2012 Extended lines of credit	Jun. 30, 2013 Financing for client purchase agreements	Dec. 31, 2012 Financing for client purchase agreements	Jun. 30, 2013 Financial guarantees	Dec. 31, 2012 Financial guarantees
Commitments, guarantees:
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients			$ 4,889	$ 4,719	$ 1,566	$ 1,513
Guarantor obligations, maximum exposure							58	65
Movement in standard warranty liability
Beginning Balance	394	407
Current period accruals	163	181
Accrual adjustments to reflect actual experience	11	(9)
Charges incurred	(192)	(199)
Ending Balance	$ 376	$ 380

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Restructuring-Related Liabilities:

6 Months Ended

Jun. 30, 2013

Restructuring-Related Liabilities:

Restructuring-Related Liabilities:

11. Restructuring-Related Liabilities: The following table provides a roll forward of the current and noncurrent liability balances for special actions taken in the following periods: (1) the second quarter of 2005 associated with Global Services, primarily in Europe, (2) the fourth quarter of 2002 associated with the acquisition of the PricewaterhouseCoopers consulting business, (3) the second quarter of 2002 associated with the Microelectronics Division and the rebalancing of the company’s workforce and leased space resources, (4) the 2002 actions associated with the hard disk drive business for reductions in workforce, manufacturing capacity and space, (5) the actions taken in 1999, and (6) the actions that were executed prior to 1994.

	Liability								Liability
	as of					Other			as of
(Dollars in millions)	01/01/13		Payments			Adjustments*			6/30/2013
Current:
Workforce	$	28	$	(15	)	$	14		$	28
Space	2		(0		)	(0		)	1
Total current	$	30	$	(15	)	$	14		$	29
Noncurrent:
Workforce	$	430	$	—		$	(12	)	$	417
Space	0		—			(0		)	0
Total noncurrent	$	430	$	—		$	(12	)	$	417

*   Principally includes the reclassification of noncurrent to current, foreign currency translation adjustments and interest accretion.

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Equity Activity:

6 Months Ended

Jun. 30, 2013

Equity Activity:

Equity Activity:

7. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(936	)	$	(23	)	$	(959	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0		$	0		$	0
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	0			0			0
Total net changes related to available-for-sale securities	$	0		$	0		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(10	)	$	9		$	(1	)
Reclassification of (gains)/losses to:
Cost of sales	7			(2		)	4
SG&A expense	(5		)	2			(3		)
Other (income) and expense	(48		)	19			(30		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	(57	)	$	28		$	(29	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	0			0			0
Net (losses)/gains arising during the period	210			(71		)	138
Amortization of prior service (credits)/costs	(28		)	10			(18		)
Amortization of net (gains)/losses	864			(304		)	559
Total retirement-related benefit plans	$	1,045		$	(366	)	$	679
Other comprehensive income/(loss)	$	53		$	(361	)	$	(309	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the three months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(724	)	$	(58	)	$	(782	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(3	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	(2		)	1			(1		)
Subsequent changes in previously impaired securities arising during the period	9			(3		)	6
Total net changes related to available-for-sale securities	$	4		$	(1	)	$	2
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	68		$	(15	)	$	53
Reclassification of (gains)/losses to:
Cost of sales	(12		)	0			(11		)
SG&A expense	(15		)	4			(11		)
Other (income) and expense	(86		)	33			(53		)
Interest expense	2			(1		)	1
Total unrealized gains/(losses) on cash flow hedges	$	(42	)	$	21		$	(21	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	70			(26		)	45
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(37		)	13			(24		)
Amortization of net (gains)/losses	613			(217		)	397
Total retirement-related benefit plans	$	647		$	(229	)	$	418
Other comprehensive income/(loss)	$	(115	)	$	(268	)	$	(383	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2013:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(1,341	)	$	(107	)	$	(1,448	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(2	)	$	1		$	(2	)
Reclassification of (gains)/losses to other (income) and expense	0			0			0
Subsequent changes in previously impaired securities arising during the period	1			0			1
Total net changes related to available-for-sale securities	$	(1	)	$	1		$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	350		$	(119	)	$	231
Reclassification of (gains)/losses to:
Cost of sales	(3		)	1			(2		)
SG&A expense	(15		)	6			(10		)
Other (income) and expense	(85		)	33			(52		)
Interest expense	0			0			0
Total unrealized gains/(losses) on cash flow hedges	$	247		$	(79	)	$	168
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	33		$	(11	)	$	21
Net (losses)/gains arising during the period	195			(67		)	129
Amortization of prior service (credits)/costs	(58		)	20			(38		)
Amortization of net (gains)/losses	1,750			(597		)	1,153
Total retirement-related benefit plans	$	1,920		$	(655	)	$	1,265
Other comprehensive income/(loss)	$	826		$	(842	)	$	(16	)

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)	Before Tax			Tax (Expense)/			Net of Tax
For the six months ended June 30, 2012:	Amount			Benefit			Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(337	)	$	(48	)	$	(385	)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	3		$	(1	)	$	2
Reclassification of (gains)/losses to other (income) and expense	(16		)	6			(10		)
Subsequent changes in previously impaired securities arising during the period	27			(10		)	17
Total net changes related to available-for-sale securities	$	14		$	(5	)	$	9
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	119		$	(45	)	$	74
Reclassification of (gains)/losses to:
Cost of sales	(16		)	0			(16		)
SG&A expense	(16		)	4			(12		)
Other (income) and expense	(106		)	41			(65		)
Interest expense	4			(2		)	2
Total unrealized gains/(losses) on cash flow hedges	$	(16	)	$	(1	)	$	(17	)
Retirement-related benefit plans(1):
Prior service costs/(credits)	$	0		$	0		$	0
Net (losses)/gains arising during the period	65			(23		)	41
Curtailments and settlements	0			0			0
Amortization of prior service (credits)/costs	(74		)	27			(47		)
Amortization of net (gains)/losses	1,232			(446		)	786
Total retirement-related benefit plans	$	1,223		$	(443	)	$	780
Other comprehensive income/(loss)	$	884		$	(497	)	$	387

(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8,”Retirement-Related Benefits,” on pages 32 to 34 for additional information.)

Accumulated Other Comprehensive Income/(Loss) (net of Tax)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)			Currency			Related			on Available-		Other
	on Cash Flow			Translation			Benefit			For-Sale		Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities		Income/(Loss)
January 1, 2013	$	(90	)	$	1,733		$	(27,406	)	$	4	$	(25,759	)
Other comprehensive income before reclassifications	231			(1,448		)	150			0		(1,067		)
Amount reclassified from accumulated other comprehensive income	(63		)	0			1,115			0		1,050
Total change for the period	168			(1,448		)	1,265			0		(16		)
June 30, 2013	$	78		$	284		$	(26,141	)	$	4	$	(25,774	)

							Net Change			Net Unrealized
	Net Unrealized			Foreign			Retirement-			Gains/(Losses)			Accumulated
	Gains/(Losses)			Currency			Related			on Available-			Other
	on Cash Flow			Translation			Benefit			For-Sale			Comprehensive
(Dollars in Millions)	Hedges			Adjustments*			Plans			Securities			Income/(Loss)
January 1, 2012	$	71		$	1,767		$	(23,737	)	$	13		$	(21,885	)
Other comprehensive income before reclassifications	74			(385		)	41			18			(252		)
Amount reclassified from accumulated other comprehensive income	(91		)	0			739			(10		)	638
Total change for the period	(17		)	(385		)	780			9			387
June 30, 2012	$	54		$	1,382		$	(22,956	)	$	22		$	(21,498	)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax

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Subsequent Events:

6 Months Ended

Jun. 30, 2013

Subsequent Events:

Subsequent Events:

14. Subsequent Events: On July 30, 2013, the company announced that the Board of Directors approved a quarterly dividend of $0.95 per common share. The dividend is payable September 10, 2013 to shareholders of record on August 9, 2013.

On July 29, 2013, the company offered and priced $1.5 billion of ten-year fixed-rate bonds with a 3.375 percent coupon, and $650 million of 2-year floating-rate bonds priced at three month London Interbanks Offered Rate (LIBOR) plus three basis points. Both series of bonds will be issued on August 1, 2013.

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Contingencies:

6 Months Ended

Jun. 30, 2013

Contingencies:

Contingencies:

12. Contingencies: As a company with a substantial employee population and with clients in more than 170 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended June 30, 2013, were not material to the Consolidated Financial Statements.

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

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

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

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

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

On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. The State terminated the contract, claiming that IBM was in breach, and the State is seeking damages. IBM believes the State’s claims against it are without merit and is seeking payment of termination amounts specified in the contract. Trial began in late February 2012 in Marion County, Indiana Superior Court and concluded in early April. On July 18, 2012, the court rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. The parties have each appealed portions of the court’s ruling.

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. The trial in the High Court concluded in April 2013 and the company is awaiting a ruling from the Court. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK and are currently stayed pending resolution of the above-referenced High Court proceedings.

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

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 activities by employees of IBM Korea, LG IBM, IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd., during the period from 1998 through 2009, allegedly in violation of the Foreign Corrupt Practices Act of 1977. As part of that settlement, IBM consented to the entry of a judgment relating to the books and records and internal control provisions of the securities laws, and also agreed to pay a total of $10 million, categorized by the SEC as follows: (i) $5.3 million, representing profits gained as a result of the conduct alleged in the SEC’s complaint, (ii) prejudgment interest on that amount of $2.7 million, and (iii) a civil penalty of $2 million. On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.

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

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

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters include claims for taxes on the importation of computer software. In November 2008, the company won a significant case in the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this decision. The total potential amount related to the remaining matters for all applicable years is approximately $650 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013
Document and Entity Information
Entity Registrant Name	INTERNATIONAL BUSINESS MACHINES CORP
Entity Central Index Key	0000051143
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding	1,095,425,823
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

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Commitments:

6 Months Ended

Jun. 30, 2013

Commitments:

Commitments:

13. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $4,889 million and $4,719 million at June 30, 2013 and December 31, 2012, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $1,566 million and $1,513 million at June 30, 2013 and December 31, 2012, respectively.

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

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of non-financial 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, which procedures 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 $58 million and $65 million at June 30, 2013 and December 31, 2012, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

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

Standard Warranty Liability

(Dollars in millions)	2013			2012
Balance at January 1	$	394		$	407
Current period accruals	163			181
Accrual adjustments to reflect actual experience	11			(9		)
Charges incurred	(192		)	(199		)
Balance at June 30	$	376		$	380

Extended Warranty Liability

(Dollars in millions)	2013			2012
Aggregate deferred revenue at January 1	$	606		$	636
Revenue deferred for new extended warranty contracts	119			127
Amortization of deferred revenue	(148		)	(155		)
Other*	(11		)	(6		)
Aggregate deferred revenue at June 30	$	567		$	602
Current portion	$	271		$	288
Noncurrent portion	296			314
Aggregate deferred revenue at June 30	$	567		$	602

* Other primarily consists of foreign currency translation adjustments.

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Subsequent Events: (Details) (Subsequent event, USD $) In Millions, except Per Share data, unless otherwise specified	1 Months Ended
	Jul. 30, 2013	Jul. 29, 2013 Ten-year fixed rate bonds with 3.375 percent coupon rate	Jul. 29, 2013 Two-year floating rate bonds
Subsequent events:
Dividend declared (in dollars per share)	$ 0.95
Dividend declared, date	Jul. 30, 2013
Dividend payable, date	Sep. 10, 2013
Shareholders of record, date	Aug. 09, 2013
Bond offering date		Jul. 29, 2013	Jul. 29, 2013
Bond offered and priced		$ 1,500	$ 650
Maturity term		10 years	2 years
Debt instrument, interest rate (as a percent)		3.75%
Reference rate			three-month LIBOR
Interest rate margin (as a percent)			0.03%
Bond issuance date		Aug. 01, 2013	Aug. 01, 2013

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Commitments: (Details 2) (USD $) In Millions, unless otherwise specified			6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Extended warranty	Jun. 30, 2012 Extended warranty
Movement in extended warranty liability
Beginning balance, aggregate deferred revenue			$ 606	$ 636
Revenue deferred for new extended warranty contracts			119	127
Amortization of deferred revenue			(148)	(155)
Other			(11)	(6)
Ending balance, aggregate deferred revenue			567	602
Deferred revenue:
Deferred income, current portion	12,241	11,952	271	288
Deferred income, noncurrent portion	4,166	4,491	296	314
Aggregate deferred revenue			$ 567	$ 602