IBM 2014 Annual Report Download - page 76

75
Management Discussion
International Business Machines Corporation and Subsidiary Companies
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 of IBM systems, software and services, and OEM
equipment, software and services to meet IBM clients’ total solu-
tions 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 up to seven
years. Global Financing’s client loans are primarily for software and
services, and are unsecured. These loans are subjected to credit
analysis to evaluate the associated risk and, when deemed nec-
essary, actions are taken to mitigate risks in the loan agreements
which include covenants to protect against credit deterioration
during the life of the obligation.
Commercial financing receivables arise primarily from inventory
and accounts receivable financing for dealers and remarketers of
IBM and OEM 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.
In addition to the actions previously described, in certain cir-
cumstances, the company may take mitigation actions to transfer
credit risk to third parties.
At December31, 2014, substantially all financing assets were IT
related assets, and approximately 59percent of the total external
portfolio was with investment grade clients with no direct exposure
to consumers.
Originations
The following are total financing originations:
($ in millions)
For the year ended December 31: 2014 2013 2012
Client financing $15,099 $15,792 $16,277
Commercial financing 43,664 41,027 36,944
Total $58,762 $56,819 $53,222
In 2014, cash collection of commercial financing and client financ-
ing assets exceeded new financing originations. This resulted in
a net decline in total financing assets from December2013. The
increase in originations in 2014 versus 2013, and in 2013 versus
2012, was due to improving volumes in commercial financing. Inter-
nal loan financing with Global Services is executed under a loan
facility and is not considered originations.
Cash generated by Global Financing in 2014 was deployed
to pay intercompany payables and dividends to IBM as well as
business partners and OEM suppliers. Intercompany payables
declined in 2014 due to lower IBM volumes and shorter settle-
ment terms, which are in line with external suppliers.
Global Financing Receivables and Allowances
The following table presents external financing receivables exclud-
ing residual values, and the allowance for credit losses:
($ in millions)
At December 31: 2014 2013
Gross financing receivables $31,007 $32,319
Specific allowance for credit losses 484 279
Unallocated allowance for credit losses 96 113
Total allowance for credit losses 580 392
Net financing receivables $30,427 $31,928
Allowance for credit losses coverage 1.9% 1.2%
Roll Forward of Global Financing Receivables
Allowance for Credit Losses
($ in millions)
January 1, 2014
Allowance
Used*
Additions/
(Reductions) Other**
December 31,
2014
$392 $(26 ) $240 $(25 ) $580
* Represents reserved receivables, net of recoveries, that were written off during
the period.
** Primarily represents translation adjustments.
The percentage of Global Financing receivables reserved was
1.9percent at December31, 2014, and 1.2percent at Decem-
ber31, 2013. Specific reserves increased 74percent from $279
million at December31, 2013, to $484 million at December31,
2014. Unallocated reserves decreased 15percent from $113 mil-
lion at December31, 2013, to $96 million at December31, 2014,
primarily due to the decrease in gross financing receivables and
a shift in gross financing receivables reserves from general to
specific coverage.
Global Financing’s bad debt expense was an increase of $240
million for 2014, compared to an increase of $85 million for 2013.
The year-to-year increase in bad debt expense was due to higher
specific reserve requirements, primarily in China and Latin Amer-
ica, in the current year.
Residual Value
Residual value is a risk unique to the financing business and
management of this risk is dependent upon the ability to accu-
rately 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.