IBM 2003 Annual Report Download - page 73

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ment, software and services to meet IBM clients’ total solu-
tions requirements. Customer financing assets are primarily
sales-type, direct financing and operating leases for equip-
ment as well as loans for software and services with terms
generally for two to five years. Customer financing also
includes internal activity as described on page 69.
Commercial financing originations arise primarily from
inventory and accounts receivable financing for dealers and
remarketers of IBM and non-IBM products. Payment terms
for inventory financing generally range from 30 to 75 days.
Payment terms for accounts receivable financing generally
range from 30 to 90 days. Syndicated loans are also included
in commercial financing assets. See page 69 for discussion on
syndicated loans.
Originations
The following are total external and internal financing
originations.
(dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2003 2002 2001
Customer finance:
External $«13,279 $«12,845 $«15,620
Internal 1,150 1,061 931
Commercial finance 24,291 22,546 25,071
Total $«38,720 $«36,452 $«41,622
New financing originations of customer and commercial
financing assets exceeded cash collections in 2003, which
resulted in a net increase in financing assets at December 31,
2003, as compared to December 31, 2002. The increase in
originations was due to favorable currency movements offset
by a decline in participation rates. The decline in participa-
tion rates is in line with industry trends. Originations
decreased in 2002 from 2001 due to lower demand for the
company’s IT equipment. Cash collections in 2003, 2002 and
2001 included $105 million, $218 million and zero, respec-
tively, generated through sales of portions of Global
Financing’s syndicated loan portfolio. These sales transac-
tions did not have a material impact on the company’s
Consolidated Statement of Earnings. Additionally, funds
were generated through the sale and lease of used equipment
sourced primarily from prior years’ lease originations.
Cash generated by Global Financing was deployed to pay
dividends to IBM and to reduce debt.
Financing Assets by Sector
The following are the percentage of external financing assets
by industry sector.
AT DECEMBER 31: 2003 2002
Financial Services 28% 31%
Business Partners*18 14
Industrial 17 18
Communications 11 12
Distribution 10 11
Public 10 10
Other 64
Total 100% 100%
*Business Partners financing assets represent a portion of commercial financing inventory
and accounts receivable financing for terms generally less than 90 days.
Financing Receivables and Allowances
The following table presents external financing receivables,
excluding residual values, and the allowance for doubtful
accounts.
(dollars in millions)
AT DECEMBER 31: 2003 2002
Financing receivables $«28,451 $«28,007
Specific allowance for
doubtful accounts 666 787
Unallocated allowance for
doubtful accounts 199 184
Total allowance for
doubtful accounts 865 971
Net financing receivables $«27,586 $«27,036
Allowance for doubtful
accounts coverage 3.0% 3.5%
Roll-Forward of Financing Receivables Allowance
for Doubtful Accounts
(dollars in millions)
ADDITIONS:
JAN. 1, RESERVE BAD DEBT DEC. 31,
2003 USED*EXPENSE OTHER** 2003
$«971 $«(417) $«206 $«105 $«865
*Represents reserved receivables, net of recoveries, that were disposed of during the period.
** Primarily represents translation adjustments.
The percentage of financing receivables reserved decreased
from 3.5 percent at December 31, 2002, to 3.0 percent at
December 31, 2003, primarily due to the write-off of receiv-
ables covered by specific reserves. Unallocated reserves
increased 8.2 percent from $184 million at December 31,
2002 to $199 million at December 31, 2003, and the receiv-
ables balance increased 1.6 percent over the same period.
The unallocated reserve coverage increased slightly during
the same period. While the overall credit quality of the portfo-
lio remains stable, the increased unallocated reserve primarily
reflects loss history. Specific reserves decreased 15.4 percent
from $787 million at December 31, 2002 to $666 million at
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
71