IBM 2007 Annual Report Download - page 56

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Management Discussion
International Business Machines Corporation and Subsidiary Companies
54
UNGUARANTEED RESIDUAL VALUE
($ in millions)
TOTAL ESTIMATED RUN OUT OF 2007 BALANCE
2011 AND
2006 2007 2008 2009 2010 BEYOND
Sales-type leases $ 854 $ 915 $211 $286 $294 $124
Operating leases 342 421 148 123 117 33
Total unguaranteed residual value $ 1,196 $ 1,336 $359 $409 $411 $157
Related original amount financed $23,225 $24,517
Percentage 5.2% 5.4%
DEBT
AT DECEMBER 31: 2007 2006
Debt-to-equity ratio 7.1x 6.9x
Global Financing funds its operations primarily through borrowings
using a debt-to-equity ratio of approximately 7 to 1. The debt is used
to fund Global Financing assets and is composed of intercompany loans
and external debt. The terms of the intercompany loans are set by the
company to substantially match the term and currency underlying the
receivable and are based on arm’s-length pricing. Both assets and debt
are presented in the Global Financing Balance Sheet on page 52.
The Global Financing business provides funding predominantly for
the company’s external clients but also provides intercompany financ-
ing for the company, as described in the “Description of Business” on
pages 50 and 51. As previously stated, the company measures Global
Financing as if it were a standalone entity and accordingly, interest
expense relating to debt supporting Global Financing’s external cli-
ent and internal business is included in the “Global Financing Results
of Operations” on page 51 and in note V, “Segment Information,” on
pages 116 to 119.
In the company’s Consolidated Statement of Earnings on page
58, however, the interest expense supporting Global Financing’s
internal financing to the company is reclassified from Cost of
Financing to Interest expense.
The following table provides additional information on debt. In
this table, Intercompany activity is comprised of internal loans and
leases at arm’s length pricing in support of Global Services’ long-
term contracts and other internal activity. The company believes
these assets should be appropriately levered in line with the overall
Global Financing business model.
($ in millions)
DECEMBER 31, 2007 DECEMBER 31, 2006
Global Financing Segment $24,532 $22,287
Debt to support external clients $21,072 $18,990
Debt to support internal clients 3,460 3,297
Non-Global Financing Segments 10,743 395
Debt supporting operations 14,203 3,692
Intercompany activity (3,460) (3,297)
Total company debt $35,274 $22,682
Management Discussion ............................ 14
Road Map .........................................................14
Forward-Looking and
Cautionary Statements .....................................15
Management Discussion Snapshot ..................16
Description of Business ....................................17
Year in Review ..................................................23
Prior Year in Review ........................................37
Discontinued Operations .................................42
Other Information ............................................42
Global Financing ........................................ 50
Report of Management ....................................56
Report of Independent Registered
Public Accounting Firm ...................................57
Consolidated Statements ..................................58
Notes .................................................................64