IBM 2011 Annual Report Download - page 67

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65
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Commercial financing receivables arise primarily from inventory
and accounts receivable financing for dealers and remarketers of
IBM and non-IBM products. Payment terms for inventory financing
and accounts receivable financing generally range from 30 to 90 days.
These short-term receivables are primarily unsecured and are also
subjected to additional credit analysis in order to evaluate the
associated risk.
At December 31, 2011, substantially all financing assets are IT
related assets, and approximately 63 percent of the external portfolio
is with investment grade clients with no direct exposure to consumers
or mortgage assets.
Originations
The following are total external financing and internal lease financing
originations.
($ in millions)
For the year ended December 31: 2011 2010 2009
Client financing
External $14,390 $12,632 $11,760
Internal —116 755
Commercial financing 35,282 32,366 27,126
To t a l $49,673 $45,113 $39,641
In 2011, new financing originations exceeded cash collections for
both client and commercial financing. This resulted in a net increase
in total financing assets from December 31, 2010. The increase in
originations in both 2011 versus 2010 and 2010 versus 2009 was due
to improving external volumes in both client and commercial financing.
Internal loan financing with Global Services is executed under a loan
facility and is not considered originations.
Cash generated by Global Financing in 2011 was primarily deployed
to pay the intercompany payables and dividends to IBM.
Global Financing Receivables and Allowances
The following table presents external financing receivables excluding
residual values, and the allowance for credit losses.
($ in millions)
At December 31: 2011 2010
Gross financing receivables $27,366 $26,565
Specific allowance for credit losses 226 305
Unallocated allowance for credit losses 124 96
Total allowance for credit losses 350 401
Net financing receivables $27,016 $26,164
Allowance for credit losses coverage 1.3% 1.5%
Roll Forward of Global Financing Receivables
Allowance for Credit Losses
($ in millions)
January 1, 2011
Allowance
Used*
Additions/
(Reductions) Other**
December 31,
2011
$401 $(87 ) $42 $(7 ) $350
* Represents reserved receivables, net of recoveries, that were disposed of during the
period.
** Primarily represents translation adjustments.
The percentage of Global Financing receivables reserved
decreased from 1.5 percent at December 31, 2010 to 1.3 percent at
December 31, 2011 primarily due to the disposition of receivables
previously reserved, and the increase in gross financing receivables.
Specific reserves decreased 25.9 percent from $305 million at
December 31, 2010 to $226 million at December 31, 2011. Unallocated
reserves increased 29.2 percent from $96 million at December 31, 2010,
to $124 million at December 31, 2011. Global Financing’s bad debt
expense was an increase of $42 million for 2011, compared to
a decrease of $9 million for 2010. The year-to-year increase was
primarily attributed to the current economic environment in Europe.
Residual Value
Residual value is a risk unique to the financing business and
management of this risk is dependent upon the ability to accurately
project future equipment values at lease inception. Global Financing
has insight into product plans and cycles for the IBM products under
lease. Based upon this product information, Global Financing
continually monitors projections of future equipment values and
compares them with the residual values reflected in the portfolio.
See note A, “Significant Accounting Policies,” on page 86 for the
company’s accounting policy for residual values.
Global Financing optimizes the recovery of residual values by
selling 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 the end of a lease, represented 48.1 percent of Global
Financing’s revenue in 2011 and 47.4 percent in 2010. The gross
margins on these sales were 54.8 percent and 52.8 percent in 2011
and 2010, respectively. The increase was primarily driven by an
increase in the internal sales margin.