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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_45
SOURCES AND USES OF FUNDS
The primary use of funds in Global Financing is to originate
client andcommercialfinancingassets.Client financingassets
for end users consist primarily of IBM hardware, software and
services, but also include non-IBM equipment, software and
servicestomeetIBMclients’ totalsolutionsrequirements.Client
financingassetsareprimarilysales type,directfinancing, and
operatingleasesforequipment,aswellasloansforhardware,
software and services with terms generally for two to seven
years. GlobalFinancing’s client loansareprimarilyforsoftware
andservicesandareunsecured. Theseloansaresubjectedto
additionalcreditanalysisinordertomitigatetheassociatedrisk.
Unsecuredloanagreementsincludecreditprotectivelanguage,
securitydeposit advances,anddollarlimitson howmuchcan
befinancedinordertominimizecreditrisk. Client financingalso
includesinternalactivityasdescribedonpage 43.
Commercial financing receivables arise primarily from
inventory and accounts receivable financing for dealers and
remarketers of IBM and non-IBM products. Payment terms for
inventoryfinancinggenerallyrangefrom30to75days.Payment
termsforaccountsreceivablefinancinggenerallyrangefrom30
to 90 days. These short-term receivables are primarily unse-
cured andarealsosubjecttoadditionalcreditactionsinorder
tomitigatetheassociatedrisk.
ORIGINATIONS
Thefollowingaretotalexternalandinternalfinancingoriginations.
(Dollarsinmillions)
FORTHEYEARENDEDDECEMBER31: 2005 2004 2003
Client finance:
External $«12,249 $«12,433 $«13,279
Internal 1,167 1,185 1,150
Commercialfinance 27,032 25,566 24,291
Total $«40,448 $«39,184 $«38,720
Cashcollectionsofboth client andcommercialfinancingassets
exceedednewfinancingoriginationsin2005,whichresultedin
anetdeclineinfinancingassetsfromDecember31,2004.The
increases inoriginationsin2005and2004from2004and2003
respectively, were due to improving volumes in commercial
financing,aswellasfavorablecurrencymovementsoffsetbya
declineinparticipationrates.Thedeclineinparticipationrates
wasinlinewithindustrytrends.
CashgeneratedbyGlobalFinancingin2005wasdeployed
topaytheintercompanypayables anddividendstoIBM,aswell
astoreducedebt.
FINANCING ASSETS BY SECTOR
Thefollowingarethepercentageofexternalfinancingassetsby
industrysector.
(Dollarsinmillions)
ATDECEMBER31: 2005 2004
FinancialServices 33% 30%
Industrial 20 20
BusinessPartners* 19 19
Public 10 9
Distribution 89
Communications 69
Other 44
Total 100% 100%
* BusinessPartners’ financingassetsrepresentaportionofcommercialfinancing
inventoryandaccountsreceivablefinancingfortermsgenerallylessthan90days.
GLOBAL FINANCING RECEIVABLES AND ALLOWANCES
Thefollowingtablepresentsexternalfinancingreceivables,exclud-
ingresidualvalues,andtheallowancefordoubtfulaccounts.
(Dollarsinmillions)
ATDECEMBER31: 2005 2004
Grossfinancingreceivables $«23,197 $«26,836
Specificallowancefor doubtfulaccounts 421 654
Unallocatedallowancefordoubtfulaccounts 84 127
Totalallowancefordoubtfulaccounts 505 781
Netfinancingreceivables $«22,692 $«26,055
Allowancefordoubtful
accountcoverage 2.2% 2.9%
ROLL-FORWARD OF FINANCING RECEIVABLES ALLOWANCE
FOR DOUBTFUL ACCOUNTS
(Dollarsinmillions)
REDUCTIONS:
RESERVE BADDEBT DEC. 31,
JAN. 1,2005 USED* EXPENSE OTHER** 2005
$«781 $«(183) $«(35) $«(58) $«505
* Representsreservedreceivables,netofrecoveries,thatweredisposedofduring
theperiod.
** Primarilyrepresentstranslationadjustments.
The percentage of financing receivables reserved decreased
from 2.9 percent at December 31, 2004, to 2.2 percent at
December31,2005primarilyduetothedecreaseinthespecific
allowance for doubtful accounts. Specific reserves decreased
35.6 percent from $654 million at December 31, 2004 to $421
millionatDecember31,2005duetothedispositionofreserved
receivables during the period combined with lower require-
mentsforadditionalspecificreserves.Thislowerrequirementis
generally due to a decline in assets and improving economic
conditions, as well as portfolio management to reduce credit
risk. Unallocated reserves decreased 33.9 percent from $127
million at December 31, 2004 to $84 million at December 31,
2005 due to the decline in gross financing receivables com-
binedwithimprovedeconomicconditionsandimprovedcredit
quality of the portfolio. Global Financing’s bad debt expense
wasareductionof $35millionfortheyearendedDecember31,