IBM 2008 Annual Report Download - page 59

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Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
($  ) December 31, 2008 December 31, 2007
Global Financing Segment: $24,360 $24,532
Debt to support external clients $20,892 $21,072
Debt to support internal clients 3,468 3,460
Non-Global Financing Segments: 9,566 10,743
Debt supporting operations 13,034 14,203
Intercompany activity (3,468) (3,460)
TOTAL COMPANY DEBT $33,926 $35,274
Liquidity and Capital Resources
Global Financing is a segment of the company and as such, is sup-
ported by the company’s overall liquidity position and access to capital
markets. Cash generated by Global Financing was primarily deployed
to pay intercompany payables and dividends to the company in order
to maintain an appropriate debt-to-equity ratio.
  
($  )
At December : 2008 2007
Numerator:
Global Financing after-tax income
(a)* $1,049 $ 877
Denominator:
Average Global Financing equity
(b)** $3,572 $3,365
Global Financing return on equity
(a) /(b) 29.4% 26.1%
* Calculated based upon an estimated tax rate principally based on Global Financing’s
geographic mix of earnings as IBM’s provision for income taxes is determined on a
consolidated basis.
** Average of the ending equity for Global Financing for the last five quarters.
 
Global Financing’s financial position provides flexibility and funding
capacity which enables the company to be well positioned in the
current environment. Global Financing’s assets and new financing
volumes are primarily IBM products and services financed to the
company’s clients and business partners, and substantially all financ-
ing assets are IT related assets which provide a stable base of business
for future growth.
The company’s System z and high-end converged System p serv-
ers announced in  are a significant financing opportunity. Global
Financing’s offerings are competitive and available to clients as a
result of the company’s borrowing cost and access to the capital
markets. Overall, Global Financing’s originations will be dependent
upon the demand for IT products and services as well as client par-
ticipation rates.
Although funding costs have risen, IBM has continued to access both
the short-term commercial paper market and the medium and long-
term debt markets. A protracted period where IBM could not access
the capital markets would likely lead to a slowdown in originations.
Interest rates and the overall economy (including currency fluc-
tuations) will have an effect on both revenue and gross profit. The
company’s interest rate risk management policy, however, combined
with the Global Financing pricing strategy, should mitigate gross
margin erosion due to changes in interest rates.
The economy could impact the credit quality of the Global Finan-
cing receivables portfolio and therefore the level of provision for bad
debts. Global Financing will continue to apply rigorous credit policies
in both the origination of new business and the evaluation of the
existing portfolio.
As discussed on pages  and , Global Financing has historically
been able to manage residual value risk both through insight into the
company’s 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 client knowledge, should allow for the prudent management of
the business going forward, even during periods of uncertainty with
respect to the economy.