IBM 2003 Annual Report Download - page 71

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69
Foreign Currency Exchange Rate Risk
At December 31, 2003, a 10 percent weaker U.S. dollar
against foreign currencies with all other variables held con-
stant would result in a decrease in the fair value of the com-
pany’s financial instruments of $283 million as compared
with a decrease of $640 million at December 31, 2002.
Conversely, a 10 percent stronger U.S. dollar against foreign
currencies with all other variables held constant would result
in an increase in the fair value of the company’s financial
instruments of $296 million compared to $660 million at
December 31, 2002. In 2003 versus 2002, the reported
decrease in foreign currency exchange rate sensitivity was
primarily due to a reduction in foreign currency debt.
FINANCING RISKS
See the Global Financing Description of Business (next col-
umn) for a discussion of the financing risks associated with
the company’s Global Financing business and management’s
goals to mitigate such risks while striving for superior return
on Global Financing’s equity.
employees and related workforce
global financing
DESCRIPTION OF BUSINESS
Global Financing is a business segment within IBM, but is
managed (on an arm’s-length basis) and measured as if it
were a standalone entity. Accordingly, the information pre-
sented in this section is consistent with this separate com-
pany view.
The mission of Global Financing is to generate a return
on equity. It also facilitates the acquisition of IBM hardware,
software and services.
Global Financing invests in financing assets, manages the
associated risks and leverages with debt, all with the objec-
tive of generating consistently strong returns on equity. The
focus on IBM products and IBM clients mitigates the risks
normally associated with a financing company. Global
Financing has the benefit of both a deep knowledge of its
customer base and a clear insight into the products that are
being leased. This pairing allows Global Financing to manage
two of the major risks (credit and residual value) that are nor-
mally associated with financing.
Global Financing comprises three lines of business:
•Customer financing provides lease and loan financing to
end users and internal customers for terms generally
between two and five years. Internal financing is predom-
inantly in support of Global Services’ long-term customer
service contracts. Global Financing also factors a selected
portion of the company’s accounts receivable, primarily
for cash management purposes. All of these internal
financing arrangements are at arm’s-length rates and are
based upon market conditions.
•Commercial financing provides primarily short-term
inventory and accounts receivable financing to dealers and
remarketers of IT products. Global Financing also partic-
ipates as a lender in selected syndicated loan facilities that
originated from 1999 through 2001. Syndicated loans are
loans in which Global Financing purchased a fixed per-
centage of a loan facility from a bank or other lending
institution. Global Financing no longer participates in
new syndicated loan programs. There are, however,
remaining amounts committed and outstanding.
Outstandings represent less than 1 percent of total Global
Financing assets at December 31, 2003, as compared to 2
percent at December 31, 2002.
•Remarketing includes the sale and lease of used equip-
ment to new or existing customers. This equipment is pri-
marily sourced from the conclusion of lease transactions.
In addition to the strength of the economy and its impact on
corporate IT budgets, key drivers of Global Financing’s results
are interest rates and originations. Originations, which
determine the asset base of Global Financing’s annuity-like
business, are impacted by IBM’s non-Global Financing sales
volumes and Global Financing’s participation rates.
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
PERCENTAGE
CHANGES
2003-2002 -
AT DECEMBER 31,: 2003 2002 2001 2002 2001
IBM/wholly owned
subsidiaries 319,273 315,889 319,876 1.1 (1.2)
Less-than-wholly
owned subsidiaries 18,189 22,282 25,403 (18.4) (12.3)
Complementary 17,695 17,250 21,300 2.6 (19.0)
Employees at IBM and its wholly owned subsidiaries in 2003
increased 3,384 from last year. The company continues to
invest in Global Services and Software, growth areas of the
business, through a combination of hiring and acquisitions
(e.g., Rational). The company also continues to rebalance its
workforce to improve IBM’s competitiveness in the market-
place as well as to withdraw from certain businesses, thereby
offsetting some of the growth.
In less-than-wholly owned subsidiaries, the number of
employees decreased from last year, primarily as a result of
the company’s services subsidiary in Australia being converted
to a wholly owned status.
The company’s complementary workforce is an approx-
imation of equivalent full-time employees hired under
temporary, part-time and limited-term employment arrange-
mentsto meet specific business needs in a flexible and cost-
effective manner.