IBM 2015 Annual Report Download - page 74

Download and view the complete annual report

Please find page 74 of the 2015 IBM annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 156

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156

72 Management Discussion
International Business Machines Corporation and Subsidiary Companies
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 cli-
ents. Sales of equipment include equipment returned at the end of
a lease, surplus internal equipment, or used equipment purchased
externally. These sales represented 61.6percent and 56.9percent
of Global Financing’s revenue in 2015 and 2014, respectively. The
increase was due to a higher volume of used equipment sales
for internal transactions. The gross profit margins on these sales
were 66.0percent and 64.9percent in 2015 and 2014, respectively.
The increase in the gross profit margin was driven by a shift in mix
toward higher margin internal equipment sales, partially offset by
decreases in internal and external equipment sales margins.
The table below presents the recorded amount of unguaran-
teed residual value for sales-type, direct financing and operating
leases at December31, 2015 and 2014. In addition, the table
presents the residual value as a percentage of the related orig-
inal amount financed and a run out of when the unguaranteed
residual value assigned to equipment on leases at December31,
2015 is expected to be returned to the company. In addition to the
unguaranteed residual value, on a limited basis, Global Financing
will obtain guarantees of the future value of the equipment to be
returned at end of lease. While primarily focused on IBM products,
guarantees are also obtained for certain OEM products. These
third-party guarantees are included in minimum lease payments as
provided for by accounting standards in the determination of lease
classifications for the covered equipment and provide protection
against risk of loss arising from declines in equipment values for
these assets.
The residual value guarantee increases the minimum lease
payments that are utilized in determining the classification of a
lease as a sales-type lease, direct financing lease or operating
lease. The aggregate asset values associated with the guarantees
of sales-type leases were $811million and $503million for the
financing transactions originated during the years ended Decem-
ber31, 2015 and December31, 2014, respectively. In 2015, the
residual value guarantee program resulted in the company rec-
ognizing $608million of revenue that would otherwise have been
recognized in future periods as operating lease revenue. If the
company had chosen to not participate in a residual value guar-
antee program in 2015 and prior years, the 2015 impact would be
substantially mitigated by the effect of prior year asset values being
recognized as operating lease revenue in the current year. The
aggregate asset values associated with the guarantees of direct
financing leases were $185million and $204million for the financ-
ing transactions originated during the years ended December31,
2015 and 2014, respectively. The associated aggregate guaranteed
future values at the scheduled end of lease were $54million and
$25million for the financing transactions originated during the
years ended December31, 2015 and 2014, respectively. The cost
of guarantees was $5million and $2million for the years ended
December31, 2015 and 2014, respectively.
Unguaranteed Residual Value
($ inmillions)
Total Estimated Run Out of 2015 Balance
At December 31: 2014 2015 2016 2017 2018
2019 and
Beyond
Sales-type and direct fi nancing leases $ 671 $ 645 $144 $172 $202 $128
Operating leases 166 144 61 46 26 11
Total unguaranteed residual value $ 837 $ 789 $205 $218 $228 $139
Related original amount fi nanced $15,636 $14,223
Percentage 5.4% 5.6%
Debt
At December 31: 2015 2014
Debt-to-equity ratio 7.3x 7.2x
The debt used to fund Global Financing assets is composed of
intercompany loans and external debt. Total debt changes gen-
erally correspond with the level of client and commercial financing
receivables, the level of cash and cash equivalents, the change
in intercompany and external payables and the change in inter-
company investment from IBM. The terms of the intercompany
loans are set by the company to substantially match the term and
currency underlying the financing receivable and are based on
arm’s-length pricing.
Global Financing provides financing predominantly for the com-
pany’s external client assets, as well as for assets under contract
by other IBM units. As previously stated, the company measures
Global Financing as a stand-alone entity, and accordingly, interest
expense relating to debt supporting Global Financing’s external
client and internal business is included in the “Global Financing
Results of Operations” on page69 and in noteT, “Segment Infor-
mation,” on pages 141 to 146.
In the company’s Consolidated Statement of Earnings, the
external debt-related interest expense supporting Global Financ-
ing’s internal financing to the company is reclassified from cost of
financing to interest expense.