IBM 2006 Annual Report Download - page 54

Global Financing optimizes the recovery of residual values by sell-
ing 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
end of lease, represented 39.8 percent of Global Financing’s revenue in
2006 and 42.1 percent in 2005. The decrease was due to declines in both
internal and external used equipment sales. The gross margin on these
sales was 38.1 percent and 38.7 percent in 2006 and 2005, respectively.
The following table presents the recorded amount of unguaranteed
residual value for sales-type and operating leases at December 31, 2005
and 2006. In addition, the table below 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 December 31, 2006 is expected to be returned to the company. In
addition to the unguaranteed residual value below, on a limited basis,
Global Financing will obtain guarantees of the future value of the
equipment to be returned at end of lease. 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 guar-
antee increases the minimum lease payments that are utilized in
determining the classification of a lease as a sales-type lease or an
operating lease. The aggregate asset values associated with the guar-
antees were $794 million and $651 million for financing transactions
originated during the years ended December 31, 2006 and 2005,
respectively. In 2006, the residual value guarantee program resulted in
the company recognizing approximately $564 million of revenue that
would otherwise have been recognized in future periods as operating
lease revenue. If the company had chosen not to participate in a
residual value program in 2006 and prior years, overall revenue would
not have been materially affected due to the relatively constant year-to-
year aggregate asset value associated with the residual value guarantees.
The associated aggregate guaranteed future values at the scheduled
end of lease were $38 million and $27 million for financing transac-
tions originated during the same time periods, respectively. The cost
of guarantees was $5 million for year ended December 31, 2006, and
$4.3 million for year ended December 31, 2005.
Unguaranteed Residual Value
(Dollars in millions)
TOTAL RUN OUT OF 2006 BALANCE
2010 AND
2005* 2006 2007 2008 2009 BEYOND
Sales-type leases $  $  $ $ $ $
Operating leases      
Total unguaranteed residual value $ , $ , $ $ $ $
Related original amount financed $, $,
Percentage .% .%
* Restated to conform with 2006 presentation.
Debt
AT DECEMBER 31: 2006 2005
Debt-to-equity ratio .x .x
Global Financing funds its operations primarily through borrowings
using a debt-to-equity ratio objective of approximately 7 to 1. The
debt is used to fund Global Financing assets and is composed of inter-
company loans and external debt. The terms of the intercompany
loans are set by the company to substantially match the term and cur-
rency underlying the financing receivable. The intercompany loans are
based on arm’s-length pricing. Both assets and debt are presented in
the Global Financing Balance Sheet on page 50.
The company’s Global Financing business provides funding
predominantly for the company’s external clients but also provides
intercompany financing for the company (internal), as described in
the “Description of Business” on page 49. As previously stated, the
company measures Global Financing as if it were a standalone 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 49 and in note W,
“Segment Information,” on pages 111 to 115.
In the company’s Consolidated Statement of Earnings on page 56,
however, the interest expense supporting Global Financing’s internal
financing to the company is reclassified from Cost of financing to
Interest expense.
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
52 2006 Annual Report
Management Discussion ........................................................
Road Map ............................................................................. 
Forward-Looking and Cautionary Statements ..................... 
Management Discussion Snapshot ...................................... 
Description of Business ....................................................... 
Year in Review...................................................................... 
Prior Year in Review ............................................................. 
Discontinued Operations ..................................................... 
Other Information ................................................................ 
Global Financing .................................................................. 
Report of Management .........................................................
Report of Independent Registered Public Accounting Firm ....
Consolidated Statements .......................................................
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