IBM 2011 Annual Report Download - page 66

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64
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Total revenue in 2010 increased $4 million versus 2009 as a result of:
• An increase in internal revenue of 3.8 percent driven by
an increase in used equipment sales revenue (up 7.0 percent
to $1,277 million), partially offset by a decrease in financing
revenue (down 2.6 percent to $565 million); offset by
• A decline in external revenue of 2.8 percent (4 percent
adjusted for currency), due to a decrease in financing revenue
(down 7.9 percent to $1,580 million), partially offset by an
increase in used equipment sales revenue (up 12.1 percent
to $659 million).
The decreases in external and internal financing revenue were due
to lower average asset balances and lower asset yields.
Global Financing gross profit increased 3.4 percent compared to
2009 primarily due to higher used equipment sales gross profit. Gross
margin increased 2.0 points primarily due to a higher financing margin.
Global Financing pre-tax income increased 2.8 percent in 2011
versus 2010, following an increase of 13.5 percent in 2010 versus
2009. The increase in 2011 was driven by the increase in gross profit
of $122 million, partially offset by increases in financing receivables
provisions of $51 million and SG&A expenses of $13 million.
Normalizing for $2 million of workforce rebalancing charges in 2011
and 2010, respectively, pre-tax income increased 2.8 percent versus
2010. The increase in 2010 was primarily driven by a decrease in
financing receivables provisions of $152 million and the increase in
gross profit of $85 million. The increase in financing receivables
provisions in 2011 was primarily due to the current economic
environment in Europe. The overall allowance for credit losses
coverage rate is 1.3 percent, a decrease of 0.2 points versus 2010.
The decrease in return on equity from 2010 to 2011 was driven
by a higher average equity balance, and the increase in return on
equity from 2009 to 2010 was driven by higher after-tax income and
a lower average equity balance.
Financial Condition
Balance Sheet
($ in millions)
At December 31: 2011 2010
Cash and cash equivalents $ 1,308 $ 1,353
Net investment in sales-type
and direct financing leases 9,209 9,370
Equipment under operating leases
External clients (a) 1,567 1,827
Internal clients (b)(c) 219 500
Client loans 11,363 10,630
Total client financing assets 22,358 22,326
Commercial financing receivables 7,130 6,819
Intercompany financing receivables (b)(c) 4,586 4,204
Other receivables 334 321
Other assets 712 790
Total assets $36,427 $35,813
Intercompany payables
(b) $ 6,213 $ 6,717
Debt (d) 23,332 22,823
Other liabilities 3,633 3,016
Total liabilities 33,178 32,557
Total equity 3,249 3,256
Total liabilities and equity $36,427 $35,813
(a)
Includes intercompany mark up, priced on an arm’s-length basis, on products purchased
from the company’s product divisions, which is eliminated in IBM’s consolidated
results.
(b)
Entire amount eliminated for purposes of IBM’s consolidated results and therefore
does not appear on page 72.
(c) These assets, along with all other financing assets in this table, are leveraged at the
value in the table using Global Financing debt.
(d) Global Financing debt is comprised of intercompany loans and external debt.
A portion of Global Financing debt is in support of the company’s internal business,
or related to intercompany mark up embedded in the Global Financing assets. See
table on page 67.
Sources and Uses of Funds
The primary use of funds in Global Financing is to originate client
and commercial financing assets. Client financing assets for end
users consist primarily of IBM systems, software and services, but
also include non-IBM equipment, software and services to meet
IBM clients’ total solutions requirements. Client financing assets are
primarily sales-type, direct financing and operating leases for systems
products as well as loans for systems, software and services with
terms generally from one to seven years. Global Financing’s client
loans are primarily for software and services and are unsecured.
These loans are subjected to additional credit analysis to evaluate
the associated risk and, when deemed necessary, actions are
taken to mitigate risks in the loan agreements which include
covenants to protect against credit deterioration during the life of
the obligation. Client financing also includes internal activity as
described on page 24.