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71
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 primarily of IBM systems, software and services, but
also include OEM equipment, software and services to meet IBM
clients’ total solutions requirements. Client financing assets are
primarily sales-type, direct financing and operating leases for sys-
tems products, as well as loans and installment plans for systems,
software and services with terms up to seven years. Global Financ-
ing’s client loans and installment payment plans are primarily for
software and services and are unsecured. These agreements are
subjected to credit analysis to evaluate the associated risk and,
when deemed necessary, actions are taken to mitigate risks, 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, including credit insurance, financial guar-
antees, nonrecourse borrowings, transfer of receivables recorded
as true sale in accordance with accounting guidance or sale of
equipment under operating lease.
At December31, 2015, substantially all financing assets were IT
related assets, and approximately 55percent of the total external
portfolio was with investment grade clients with no direct expo-
sure to consumers. The reduction in investment grade year to year
(5points) was driven primarily by rating changes within the existing
portfolio, not by changing the company’s approach to the market.
Originations
The following are total financing originations:
($ inmillions)
For the year ended December 31: 2015 2014 2013
Client fi nancing $14,444 $15,099 $15,792
Commercial fi nancing 40,571 43,664 41,027
Total $55,015 $58,762 $56,819
In 2015, cash collection of client financing assets exceeded new
financing originations while new financing originations of commer-
cial financing exceeded collections. This resulted in a net decline
in financing assets from December 2014. The decrease in orig-
inations in 2015 versus 2014 was due to declining volumes, and
the increase in 2014 versus 2013 was due to improving volumes.
Internal loan financing with Global Services is executed under a
loan facility and is not considered originations.
Cash generated by Global Financing in 2015 was deployed to
pay intercompany payables and dividends to IBM as well as busi-
ness partners and OEM suppliers.
Global Financing Receivables and Allowances
The following table presents external financing receivables exclud-
ing residual values, and the allowance for credit losses:
($ inmillions)
At December 31: 2015 2014
Gross fi nancing receivables $29,086 $31,007
Specifi c allowance for credit losses 517 484
Unallocated allowance for credit losses 93 96
Total allowance for credit losses 610 580
Net fi nancing receivables $28,475 $30,427
Allowance for credit losses coverage 2.1% 1.9%
Roll Forward of Global Financing Receivables
Allowance for Credit Losses
($ inmillions)
January 1, 2015
Allowance
Used*
Additions/
(Reductions) Other**
December 31,
2015
$580 $(63 ) $144 $(50 ) $610
* 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
2.1percent at December31, 2015, and 1.9percent at December31,
2014. Specific reserves increased 7percent from $484million
at December31, 2014, to $517million at December31, 2015.
Unallocated reserves decreased 3percent from $96million at
December31, 2014, to $93million at December31, 2015, due to
the decrease in gross financing receivables, partially offset by
higher general reserve requirements in Latin America due to lower
credit ratings.
Global Financing’s bad debt expense was $144million for 2015,
compared to $240million for 2014. The year-to-year decrease in
bad debt expense was due to lower specific reserve requirements,
primarily in China and Latin America, 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.