IBM 2003 Annual Report Download - page 75

The company’s Global Financing business provides funding
predominantly for the company’s external customers but also
provides intercompany financing for the company (internal), as
described in the “Description of Business” on page 69. As pre-
viously stated, IBM manages and measures Global Financing as
if it were a standalone entity and accordingly, interest expense
relating to debt supporting Global Financing’s external customer
and internal business is included in the “Global Financing
Results of Operations” on page 70 and in note X, “Segment
Information,” on pages 117 to 120.
In the company’s Consolidated Statement of Earnings on
page 74, however, the interest expense supporting Global
Financing’s internal financing to the company is reclassified
from Cost of financing to Interest expense.
Liquidity and Capital Resources
Global Financing is a segment of IBM and as such, is supported
by IBM’s liquidity position and access to capital markets. Cash
generated from operations in 2003 was deployed to reduce
debt and pay dividends in order to maintain an appropriate
debt to equity ratio.
CRITICAL ACCOUNTING ESTIMATES
As discussed in note A, “Significant Accounting Policies,” on
page 80, the application of GAAP involves the exercise of
varying degrees of judgment. The following areas require
more judgment relative to the others and relate to Global
Financing. Also see Critical Accounting Estimates on page 66.
Financing Receivables Reserves
Global Financing reviews its financing receivables portfolio
at least quarterly in order to assess collectibility. Adescription
of the methods used by management to estimate the amount
of uncollectible receivables is included on page 85. Factors
that could result in actual receivable losses that are materially
different from the estimated reserve include sharp changes
in the economy, or a large change in the health of a particular
industry segment that represents a concentration in Global
Financing’s receivables portfolio.
To the extent that actual collectibility differs from
management’s estimates by 5 percent, Global Financing’s net
income would be higher or lower by an estimated $28 million
(using 2003 data), depending upon whether the actual col-
lectibility was better or worse, respectively, than the estimates.
Residual Value
Residual value represents the estimated fair value of equip-
ment under lease as of the end of the lease. Global Financing
estimates the future fair value of residual values by using his-
torical models, the current market for used equipment and
forward-looking product information such as marketing
plans and technological innovations. In addition, Global
Financing also estimates the fair value by analyzing current
market conditions for leasing and sales of both new and used
equipment. These estimates are periodically reviewed and
any other-than-temporary declines in estimated future resid-
ual values are recognized upon identification. Anticipated
increases in future residual value are not recognized until the
equipment is remarketed. Factors that could cause actual
results to differ materially from the estimates include severe
changes in the used equipment market brought on by unfore-
seen changes in technology innovations and any resulting
changes in the useful lives of used equipment.
To the extent that actual residual value recovery is lower
than management’s estimates by 5 percent, Global Financing’s
net income will be lower by an estimated $18 million (using
2003 data). If the actual residual value recovery is higher than
management’s estimates, the increase in net income will be
realized at the end of lease when the equipment is remarketed.
MARKET RISK
See pages 68 and 69 for discussion of the company’s overall
market risk.
LOOKING FORWARD
Given Global Financing’s mission of supporting IBM’s hard-
ware, software and services businesses, originations for both
customer and commercial finance businesses will be depend-
ent upon the overall demand for IT hardware, software and
services, as well as the customer participation rates.
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 funding strategy
(see page 72), should mitigate gross margin erosion due to
changes in interest rates. The company’s policy of matching
asset and liability positions in foreign currencies will limit
the impacts of currency fluctuations.
The economy could impact the credit quality of the
Global Financing receivables portfolio and therefore the level
of provision for bad debt. Global Financing will continue to
apply rigorous credit policies in both the origination of new
business and the evaluation of the existing portfolio.
As seen above, Global Financing has historically been able
to manage residual value risk through both insight into the
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 customer knowledge, should allow for the
prudent management of the business going forward, even
during periods of uncertainty with respect to the economy.
forward-looking and cautionary statements
Certain statements contained in this Annual Report may
constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.
These statements involve a number of risks, uncertainties
and other factors that could cause actual results to be mate-
rially different, as discussed more fully elsewhere in this
Annual Report and in the company’s filings with the SEC,
including the company’s 2003 Form 10-Kfiled on or about
March 8, 2004.
Management Discussion
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