IBM 2010 Annual Report Download - page 61

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59
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Liquidity and Capital Resources
Global Financing is a segment of the company and therefore, is
supported 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.
Return on Equity
($ in millions)
At December 31: 2010 2009
Numerator:
Global Financing after-tax income (a)* $1,295 $1,138
Denominator:
Average Global Financing equity
(b)** $3,145 $3,312
Global Financing return on equity (a) /(b) 41.2% 34.4%
* 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.
Looking Forward
Global Financing’s financial position provides flexibility and funding
capacity which enables the business 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
financing assets are IT-related assets which provide a stable base
of business for future growth. 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 participation rates.
IBM continues 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
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 pricing strategy should
mitigate gross margin erosion due to changes in interest rates.
The economy could impact the credit quality of the Global
Financing receivables portfolio and therefore the level of provision
for credit losses. 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 page 57, 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 global economy.