IBM 2011 Annual Report Download - page 69

67
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: 2011 2010*
Numerator
Global Financing after-tax income
(a)** $1,338 $1,292
Denominator
Average Global Financing equity
(b)+$3,286 $3,145
Global Financing return on equity
(a) /(b) 40.7% 41.1%
* Reclassified to conform with 2011 presentation.
** 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 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 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 pages 65 and 66, 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.
The following table provides additional information on total company debt. In this table, intercompany activity includes 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 leveraged in line with the overall Global Financing business model.
($ in millions)
December 31, 2011 December 31, 2010
Global Financing Segment $23,332 $22,823
Debt to support external clients $20,051 $19,583
Debt to support internal clients 3,281 3,240
Non-Global Financing Segments 7,987 5,801
Debt supporting operations 11,269 9,041
Intercompany activity (3,281) (3,240)
Total company debt $31,320 $28,624