IBM 2015 Annual Report Download - page 75

73
Management Discussion
International Business Machines Corporation and Subsidiary Companies
The following table provides additional information on total
company debt. In this table, intercompany activity includes inter-
nal loans and leases at arm’s-length pricing in support of Global
Services’ long-term contracts and other internal activity. The com-
pany believes these assets should be appropriately leveraged in
line with the overall Global Financing business model.
($ inmillions)
December 31, 2015 December 31, 2014
Global Financing Segment $27,205 $29,103
Debt to support external clients $23,934 $25,531
Debt to support internal clients 3,271 3,572
Non-Global Financing Segments 12,684 11,619*
Debt supporting operations 15,955 15,191*
Intercompany activity (3,271) (3,572)
Total company debt $39,890 $40,722 *
* Reclassified to reflect adoption of the FASB guidance on debt issuance costs in consolidated financial statements. Refer to noteB, “Accounting Changes,” for additional information.
Liquidity and Capital Resources
Global Financing is a segment of the company, and therefore, is
supported by the company’s overall liquidity position and access
to capital markets. Cash generated by Global Financing was
deployed to pay dividends to the company in order to maintain an
appropriate debt-to-equity ratio.
Return on Equity
($ inmillions)
At December 31: 2015 2014
Numerator
Global Financing after-tax income
(1) *$1,572 $1,462
Denominator
Average Global Financing equity
(2) ** $3,785 $3,973
Global Financing return on equity
(1) /(2) 41.5% 36.8%
* 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 fund-
ing capacity which enables the company to be well positioned
in the current environment. Global Financing’s assets and new
financing volumes are IBM and OEM products and services
financed to the company’s clients and business partners, and
substantially all financing assets are IT related assets which pro-
vide 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 partic-
ipation 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 fluc-
tuations) will have an effect on both revenue and gross profit. The
company’s interest rate risk management policy, however, com-
bined 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 pro-
vision 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. 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 man-
agement of the business going forward, even during periods of
uncertainty with respect to the global economy.