-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjkrSvP8+QRK/nNbLElYFjrHgyO/I2ddugcbixeuxu0ML0ydloc+RAugUu9AqsuV jf60L3WBioqpCrjwsOz26g== /in/edgar/work/0000353524-00-500009/0000353524-00-500009.txt : 20001114 0000353524-00-500009.hdr.sgml : 20001114 ACCESSION NUMBER: 0000353524-00-500009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBM CREDIT CORP CENTRAL INDEX KEY: 0000353524 STANDARD INDUSTRIAL CLASSIFICATION: [6172 ] IRS NUMBER: 222351962 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08175 FILM NUMBER: 762276 BUSINESS ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: ROOM 3C2108 CITY: ARMONK STATE: NY ZIP: 10504-1785 BUSINESS PHONE: 9147651900 MAIL ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: PO BOX 10399 CITY: ARMONK STATE: NY ZIP: 10504-1785 10-Q 1 form10qsep00.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission file number 1-8175 ________________________________________ IBM CREDIT CORPORATION ___________________________________________________________ (Exact name of registrant as specified in its charter) DELAWARE 22-2351962 ____________________________ _____________________________ (State of incorporation) (IRS employer identification number) North Castle Drive, MS NCA-306 Armonk, New York 10504-1785 _______________________________________________________ _______________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 914-765-1900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 31, 2000, 936 shares of capital stock, par value $1.00 per share, were held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at October 31, 2000: NONE. The registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. 2 INDEX Part I - Financial Information: Page _____ Item 1. Financial Statements: Consolidated Statement of Financial Position at September 30, 2000 and December 31, 1999 . . . . . . . . . . . 1 Consolidated Statement of Earnings for the three and nine months ended September 30, 2000 and 1999. . . . . . . . . . . . . 2 Consolidated Statement of Cash Flows for the nine months ended September 30, 2000 and 1999. . . . . . . . . . . . . . . . 3 Notes to Consolidated Financial Statements . . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .10 Part II - Other Information. . . . . . . . . . . . . . . . . . . . . . 19 3 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (unaudited) (Dollars in thousands)
At At September 30, December 31, 2000 1999 _____________ ____________ ASSETS: Cash and cash equivalents. . . . . $ 839,412 $ 600,111 Net investment in capital leases . 5,408,612 5,337,200 Equipment on operating leases, net 2,677,589 3,386,686 Loans receivable . . . . . . . . . 3,817,952 3,535,498 Working capital financing receivables. . . . . . . . . . . 2,617,973 2,963,583 Investments and other assets . . . 512,904 521,627 __________ ___________ Total Assets $15,874,442 $16,344,705 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . $ 4,942,922 $ 5,491,441 Short-term debt-IBM. . . . . . . . 3,123,862 1,641,447 Due to IBM and affiliates. . . . . 1,203,296 1,976,167 Interest and other accruals. . . . 468,756 454,261 Deferred income taxes. . . . . . . 913,196 877,916 Long-term debt . . . . . . . . . . 1,644,316 2,279,437 Long-term debt-IBM . . . . . . . . 1,587,904 1,391,702 ___________ ___________ Total liabilities . . . . . . . 13,884,252 14,112,371 ___________ ___________ Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 2000 and 1999 . . . . 457,411 457,411 Retained earnings. . . . . . . . . 1,532,779 1,774,923 ___________ ___________ Total stockholder's equity. . . 1,990,190 2,232,334 ___________ ___________ Total Liabilities and Stockholder's Equity . . . . . . . . . . . . . . $15,874,442 $16,344,705 =========== =========== The accompanying notes are an integral part of this statement.
-1- 4 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ________ ________ _________ ________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . .$102,834 $ 99,887 $299,986 $285,419 Operating leases, net of depreciation. . . . . . 132,478 114,796 374,264 335,671 ________ ________ _________ ________ 235,312 214,683 674,250 621,090 Income from working capital financing. . . . . . . . . 70,309 63,755 198,010 171,179 Income from loans . . . . . 76,476 63,009 218,786 183,495 Equipment sales . . . . . . 152,831 75,303 423,253 356,012 Other income. . . . . . . . 14,577 21,821 50,343 71,716 ________ ________ _________ _________ Total finance and other income. . . . . . . . . 549,505 438,571 1,564,642 1,403,492 ________ ________ _________ _________ COST AND EXPENSES: Interest. . . . . . . . . . 162,218 141,255 452,854 419,945 Cost of equipment sales . . 137,973 68,462 384,215 314,444 Selling, general and administrative . . . . . . 75,927 52,087 210,603 157,705 Provision for receivable losses . . . . . . . . . . 94 8,003 8,952 23,008 _______ ________ _________ _________ Total cost and expenses. 376,212 269,807 1,056,624 915,102 _______ ________ _________ _________ EARNINGS BEFORE INCOME TAXES. 173,293 168,764 508,018 488,390 Provision for income taxes. . 68,279 66,493 200,162 192,426 ________ ________ _________ _________ NET EARNINGS. . . . . . . . .$105,014 $102,271 $307,856 $295,964 ========= ======= ========= ======== The accompanying notes are an integral part of this statement.
-2- 5 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands)
Nine Months Ended September 30, 2000 1999 ___________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . $ 307,856 $ 295,964 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . . . . . 1,429,794 1,549,007 Provision for receivable losses. . . . . 8,952 23,008 Increase in deferred income taxes. . . . 35,280 48,912 Increase (decrease) in interest and other accruals . . . . . . . . . . . . 14,495 (147,228) Cost of equipment sold. . . . . . . . . 349,260 281,638 Decrease in amounts due IBM and affiliates . . . . . . . . . . . . . . (772,871) (1,070,525) Other, net . . . . . . . . . . . . . . . 3,616 45,066 ___________ ___________ Cash provided by operating activities . . . 1,376,382 1,025,842 ___________ ___________ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in capital leases . . . . . . (1,959,101) (1,477,121) Collections on capital leases, net of income earned . . . . . . . . . . . . . 1,788,285 1,383,860 Investment in equipment on operating leases. . . . . . . . . . . . . . . . . (946,150) (1,317,050) Investment in loans receivable . . . . . (1,446,609) (1,457,151) Collections on loans receivable, net of interest earned. . . . . . . . . . . 1,163,805 1,234,121 Collections on working capital financing receivables, net. . . 327,408 22,203 Purchases of marketable securities . . . - (24,390) Proceeds from redemption of marketable securities. . . . . . . . . . . . . . . - 93,203 Cash payment for lease portfolio acquired . . . . . . . . . . . . . . . - (176,613) Proceeds from the sale of the net assets of IBM Credit International Factoring Corporation. . . . . . . . . . . . . . - 273,759 Other, net . . . . . . . . . . . . . . . (11,748) (49,954) ___________ ___________ Cash used in investing activities . . . . . (1,084,110) (1,495,133) ___________ ___________ The accompanying notes are an integral part of this statement.
-3- -4- 6 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Continued) Nine Months Ended September 30, 2000 1999 ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . 1,442,000 1,674,288 Repayment of debt with original maturities of one year or more . . . . . (632,080) (700,543) Repayment of debt with original maturities within one year, net. . . . . (312,891) (497,865) Cash dividends paid to IBM. . . . . . . . (550,000) (75,000) ___________ ___________ Cash (used in) provided by financing activities. . . . . . . . . . . . . . . . (52,971) 400,880 ___________ ___________ Change in cash and cash equivalents. . . . . 239,301 (68,411) Cash and cash equivalents, January 1 . . . . 600,111 822,844 ___________ ___________ Cash and cash equivalents, September 30. . . $ 839,412 $ 754,433 =========== =========== Supplemental schedule of noncash investing and financing activities: In May 1999, the Company purchased selected assets from the leasing portfolio of Comdisco, Inc. The purchase price was financed, in part, through the assumption of debt of $102.0 million and through the issuance of a credit on account of $195.4 million, which had been fully utilized at September 30, 1999. The accompanying notes are an integral part of this statement.
-5- 7 IBM CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION: In the opinion of management of IBM Credit Corporation (the Company), all adjustments necessary for a fair statement of the results for the three- and nine-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 2.12 and 2.16 for the nine months ended September 30, 2000, and 1999, respectively. ACCOUNTING CHANGES: In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, _Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133._ This statement defers the effective date of SFAS No. 133, _Accounting for Derivative Instruments and Hedging Activities,_ to fiscal years beginning after September 15, 2000, although early adoption is encouraged. SFAS No. 133 and SFAS No. 138, _Accounting for Certain Derivative Instruments and Certain Hedging Activities an Amendment to FASB Statement No. 133,_ (SFAS 133) establish accounting and reporting standards for derivative instruments. They require an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholder's equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The Company will adopt these standards as of January 1, 2001. Based on the Company's risk management portfolio, market rates and currently published guidelines as of September 30, 2000, the Company does not currently expect the adoption of SFAS 133 to have a material effect on the Company's results of operations and financial condition. The actual effect on the Company's financial statements will depend on the fair value of the Company's derivatives and related financial instruments at the date of adoption. The effect is also contingent upon the outcome of current deliberations on certain issues by the Derivatives Implementation Group (DIG) and the approval of the DIG's recommendations by the Financial Accounting Standards Board. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), _Revenue Recognition in Financial Statements,_ which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The Company is currently reviewing the provisions of SAB 101 and will complete this review by the end of the fourth quarter of 2000. 8 RELATED COMPANY TRANSACTIONS: -6- The Company provides equipment, software and services financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $456.8 million and $690.1 million of such financings during the nine months ended September 30, 2000, and 1999, respectively. At September 30, 2000, and December 31, 1999, $1,326.4 million and $1,437.1 million, respectively, of such financings were included in the Company's lease and loan portfolio. The operating lease income, net of depreciation, and income from loans earned from transactions with IBM and affiliated companies, was approximately $167.8 million and $137.3 million for the first nine months of 2000, and 1999, respectively. The Company provides working capital financing, at market rates, to certain remarketers of IBM products. IBM pays the Company a fee to provide an interest-free financing period to its remarketers. Included in income from working capital financing is $62.9 million and $74.9 million of fee income earned from divisions of IBM for the nine months ended September 30, 2000, and 1999, respectively. The Company sells used equipment to IBM at the conclusion of IBM's lease or from the Company's inventory. For the nine months ended September 30, 2000, and 1999, the Company's sales of equipment to IBM amounted to $103.1 million and $134.8 million, respectively. In 1999, as part of IBM's sale of its global network to AT&T, the Company sold approximately $76.3 million in leased assets to IBM with a cost of $56.5 million resulting in gross profit of $19.8 million. In the first quarter of 2000, the Company and IBM amended their operating agreement to allow IBM to charge the Company for shared expenses at the corporate and geographic levels. Where practical, shared expenses are determined based upon measurable drivers of expense. When a clear and measurable driver cannot be identified, shared expenses are determined on a financial basis that is consistent with the Company's management system. Management believes that these methods are reasonable. These expenses amounted to $66.9 million for the nine months ended September 30, 2000, and are included in selling, general and administrative expenses. SEGMENT REPORTING: The Company is organized on the basis of its finance offerings. The Company's reportable segments are strategic business units that offer different financing solutions based upon the customers' needs. The Company's operations are conducted primarily through its two operating segments: Customer Financing and Commercial Financing. The Customer Financing segment provides lease and loan financing of IBM and non-IBM advanced information processing products and services to end users. The Commercial Financing segment provides primarily secured inventory and accounts receivable financing (_working capital financing_) for dealers and remarketers of information industry products. Also included in the commercial financing segment are participation loans. Participation loans -7- 9 SEGMENT REPORTING (Continued): are loans in which the Company has purchased a fixed percentage of a specific customer's loan facility from a bank or other lending institution. The Company then receives its fixed percentage of interest and loan fees less administrative fees charged by the agent bank. The accounting policies of the segments are the same as those followed by the Company. Segment data includes an allocation of interest expense and all corporate headquarters costs to each of its operating segments. Interest expense is allocated primarily on the basis of a planned leverage ratio using an average interest rate. Corporate headquarters expenses are allocated on the basis of headcount, an annual survey of the corporate staff to determine the time spent on each business segment, and asset utilization depending on the type of expense. The Company evaluates the performance of its segments and allocates resources to them based upon their earnings before taxes. The following schedules represent disaggregated income and expense information for both segments. There are no intersegment transactions. (in thousands) For the Three Months Ended September 30: Customer Commercial 2000 Financing Financing Total ______________________ _____________ ____________ ___________ Finance and other income $ 461,467 $ 78,433 $ 539,900 Interest expense....... $ 130,154 $ 26,234 $ 156,388 Earnings before income taxes................ $ 126,084 $ 43,436 $ 169,520 1999 ______________________ Finance and other income $ 361,518 $ 64,252 $ 425,770 Interest expense....... $ 116,413 $ 16,427 $ 132,840 Earnings before income taxes................ $ 129,732 $ 34,722 $ 164,454 For the Nine Months Ended September 30: Customer Commercial 2000 Financing Financing Total ______________________ _____________ ____________ ___________ Finance and other income $ 1,315,716 $ 215,200 $ 1,530,916 Interest expense....... $ 366,052 $ 69,182 $ 435,234 Earnings before income taxes................ $ 385,888 $ 106,025 $ 491,913 -8- 10 SEGMENT REPORTING (Continued): Customer Commercial 1999 Financing Financing Total ________________________ _____________ ____________ ___________ Finance and other income $ 1,187,654 $ 172,866 $ 1,360,520 Interest expense....... $ 353,566 $ 40,564 $ 394,130 Earnings before income taxes................ $ 377,702 $ 93,611 $ 471,313 At September 30, 2000: Assets................. $ 11,684,812 $ 3,051,462 $14,736,274 At December 31, 1999: Assets................. $ 12,537,711 $ 2,993,245 $15,530,956 A reconciliation of total segment revenues, total segment interest expense, total segment earnings before income taxes and total segment assets to the Company's consolidated amounts is as follows: Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 _________ _________ __________ __________ (in thousands) Finance and other income: Total finance and other income for reportable segments..... $ 539,900 $ 425,770 $1,530,916 $1,360,520 Other revenues............... 9,605 12,801 33,726 42,972 _________ _________ __________ __________ Total consolidated finance and other income........... $ 549,505 $ 438,571 $1,564,642 $1,403,492 ========= ========= ========== ========== Interest Expense: Total interest expense for reportable segments......... $ 156,388 $ 132,840 $ 435,234 $ 394,130 Other interest expense....... 5,830 8,415 17,620 25,815 _________ ________ _________ __________ Total consolidated interest expense..................... $ 162,218 $ 141,255 $ 452,854 $ 419,945 ========= ========= ========== ========== Earnings Before Income Taxes: Total earnings before income taxes for reportable segments$ 169,520 $ 164,454 $ 491,913 $ 471,313 Other earnings before income taxes...................... 3,773 4,310 16,105 17,077 _________ _________ __________ __________ Total consolidated earnings before income taxes......... $ 173,293 $ 168,764 $ 508,018 $ 488,390 ========= ========= ========== ========== -9- 11 SEGMENT REPORTING (Continued): At At September 30, December 31, 2000 1999 _____________ ______________ Assets: Total assets for reportable segments.................... $ 14,736,274 $ 15,530,956 Other assets.................. 1,138,168 813,749 _____________ _____________ Total consolidated assets..... $ 15,874,442 $ 16,344,705 ============= ============= For the three months ended September 30, 2000, and 1999, IBM accounted for $128.7 million and $85.0 million, respectively, of the Company's consolidated revenues. For the nine months ended September 30, 2000, and 1999, IBM accounted for $357.5 million and $385.9 million, respectively, of the Company's consolidated revenues. The Company's business is conducted principally in the United States; foreign operations are not material. The Company continues to evaluate its organizational structure which could lead to changes in future reportable segments. -10- 12 IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended September 30, 2000, were $105.0 million. Net earnings for the nine months ended September 30, 2000, were $307.9 million, yielding an annualized return on average equity of 18.4 percent. Net earnings for the three and nine months ended September 30, 1999, were $102.3 million and $296.0 million, respectively. FINANCING ORIGINATED For the three months ended September 30, 2000, the Company originated customer equipment financing for end users of $1,654.1 million, an 11 percent increase from $1,486.5 million for the same period of 1999. For the nine months ended September 30, 2000, the Company originated customer equipment financing for end users of $4,332.7 million, a 10 percent decrease from $4,817.2 million for the same period of 1999. The overall decline in customer equipment financing originated is related to a decrease in demand in the first half of 2000 for IBM's advanced information processing products caused by the lingering effects of the Year 2000 computer issue. These effects have eased in the third quarter of 2000, as the Company's customers fully utilized the capacity that had been reserved for Year 2000 issues, which caused the increase in originations the Company experienced in the third quarter of 2000. For the nine months ended September 30, 2000, customer financing originations for end users included purchases of $2,184.8 million of IBM information handling systems, consisting of $1,538.1 million for capital leases and $646.7 million for operating leases. In addition, customer financing originations for end users also included the following: (1) financing for IBM software and services of $1,231.1 million; (2) financing of $683.4 million for remarketed IBM equipment, as well as related non-IBM equipment, software and services to meet IBM customers' total solution requirements; (3) installment and lease financing for state and local government customers of $131.5 million for the account of IBM; and (4) financing originated for installment receivables of $101.9 million. The Company's capital lease portfolio primarily includes direct financing leases. Both direct financing leases and operating leases consist principally of advanced information processing products with terms generally from two to three years. For the three months ended September 30, 2000, originations of working capital financing of inventory for dealers and remarketers of information industry products decreased by 10 percent to $3,407.9 million, from $3,766.4 million for the same period of 1999. For the nine months ended September 30, 2000, originations of working capital financing of inventory for dealers and remarketers of information industry products decreased by 10 percent to $9,538.0 million, from $10,644.5 million for the same period of 1999. -11- 13 FINANCING ORIGINATED (Continued) The decline in working capital financing originations of inventory reflects volume decreases in IBM's workstation products, as well as volume decreases, in non-IBM products, for remarketers financed by the Company during the first nine months of 2000. Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory secured financing generally range from 30 days to 75 days. Payment terms for accounts receivable secured financing generally range from 30 days to 90 days. REMARKETING ACTIVITIES In addition to originating new financing, the Company remarkets used IBM and non-IBM equipment. This equipment is primarily sourced from the conclusion of lease transactions and is often remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities comprise income from follow-on capital and operating leases, extensions of existing leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment. For the three months ended September 30, 2000, the remarketing activities contributed $63.3 million to pretax earnings, an increase of 2 percent compared with $62.3 million for the same period of 1999. For the nine months ended September 30, 2000, the remarketing activities contributed $212.7 million to pretax earnings, an increase of 7 percent compared with $198.6 million for the first nine months of 1999. At September 30, 2000, the investment in remarketed equipment on capital and operating leases totaled $289.5 million, compared with the 1999 year-end investment of $281.5 million. FINANCIAL CONDITION ASSETS Total assets decreased to $15.9 billion at September 30, 2000, compared with $16.3 billion at December 31, 1999. This decrease is primarily due to the decrease in volumes for operating lease assets during the first nine months of 2000, caused by the lingering effects of the Year 2000 computer issue, which have eased during the third quarter of 2000. Additionally, the decline in working capital financing receivables caused by the traditional seasonality of IBM's business contributed to the overall decline in the Company's assets. Increases in the Company's capital lease and loan portfolio and cash balances partially offset these decreases. -12- 14 LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the Company were financed with $11,299.0 million of debt at September 30, 2000, an increase of $495.0 million, from $10,804.0 million at December 31, 1999. This increase was the result of increases in short-term debt-IBM of $1,482.4 million and long-term debt-IBM of $196.2 million, offset by decreases in commercial paper outstanding of $1.4 million, short-term debt of $547.1 million, and long-term debt of $635.1 million. Long-term debt-IBM of $1,587.9 million at September 30, 2000, is payable at market terms and conditions and had maturity dates ranging from October 15, 2001, to May 13, 2004. Interest expense of $148.5 million and $93.6 million was incurred on loans from IBM and affiliates during the nine months ended September 30, 2000, and 1999, respectively. At September 30, 2000, the Company had available $9.8 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. The Company may issue debt securities under this shelf registration as the need arises. This allows the Company rapid access to domestic financial markets. The Company has no firm commitments for the purchase of debt securities that it may issue from the unused portion of this shelf registration. The Company has the option, together with IBM, to issue and sell debt securities under a Euro Medium Term Note Programme(EMTN)in an aggregate nominal amount of up to EUR 4.0 billion, or its equivalent in any other currency. At September 30, 2000, there was EUR 14.2 million available for the issuance of debt securities under this program. The Company may issue debt securities during the next twelve months under this program, dependent on prevailing market conditions and its need for such funding. The Company is an authorized borrower of up to $3.0 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. At September 30, 2000, the Company had $320.1 million of borrowings outstanding under this agreement. At December 31, 1999, the Company had no borrowings outstanding under this agreement. The Company and IBM have also signed an additional master loan agreement which allows for longer-term funding, made available at market terms and conditions, upon the request of the Company. At September 30, 2000, and December 31, 1999, the Company had $4,391.7 million and $3,033.1 million, respectively, of borrowings outstanding under this agreement. The Company periodically pays dividends to IBM in order to maintain its capital structure at appropriate levels. -13- 15 FINANCIAL CONDITION (Continued) These financing sources, along with the Company's internally generated cash and medium-term note and commercial paper programs, provide flexibility to the Company to grow its lease, working capital financing and loan portfolios, to fund working capital requirements and to service debt. Amounts due to IBM and affiliates include trade payables arising from purchases of equipment for term leases and installment receivables, working capital financing receivables for dealers and remarketers, and software license and service fees. Also included in amounts due to IBM and affiliates are amounts due for services received from IBM under the intercompany operating agreement, as well as income taxes currently payable under the intercompany tax allocation agreement. Amounts due to IBM and affiliates decreased by approximately $772.9 million to $1,203.3 million at September 30, 2000, from $1,976.2 million at December 31, 1999. This decrease was primarily attributable to a decrease in the amount payable for capital equipment purchases during 2000 due to the lingering effects of the Year 2000 computer issue, the traditional seasonality of IBM's volumes and a decrease in the amount due to IBM for income taxes due to the timing the Company's income tax payments. At September 30, 2000, the Company's debt to equity ratio was 5.7:1, compared with 4.8:1 at December 31, 1999. TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash provided before dividends was $789.3 million for the first nine months of 2000, compared with $6.6 million for the same period of 1999. For the first nine months of 2000, total cash provided before dividends reflects $1,376.4 million of cash provided by operating activities, offset by $587.1 million of cash used in investing and financing activities before dividends. For the first nine months of 1999, total cash provided before dividends reflects $1,025.8 million of cash provided by operating activities, offset by $1,019.2 million of cash used by investing and financing activities before dividends. Cash and cash equivalents at September 30, 2000, totaled $839.4 million, an increase of $239.3 million, compared with the balance at December 31, 1999. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 10 percent to $235.3 million for the quarter ended September 30, 2000, from $214.7 million for the same period in 1999; for the nine months ended September 30, 2000, income from leases increased 9 percent to $674.3 million from $621.1 million for the same 1999 period. These increases are primarily due to improved average lease yields. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions decreased 10 percent to $51.5 million, compared with $57.5 million for the same 1999 period. For the nine months ended September 30, 2000, lease income from remarketing transactions increased 8 percent to $177.6 million, compared with $165.1 million for the first nine months of 1999. -14- 16 RESULTS OF OPERATIONS (Continued) On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized currently. A review of the Company's $1,054.0 million residual value portfolio at September 30, 2000, indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, which is the lower of the Company's cost or net realizable value. Although the Company did not recognize a write-down of residual values during the third quarter of 2000, the Company did record a $7.3 million reduction to income from leases during the first nine months of 2000, to recognize decreases in the expected future residual value of specific leased equipment. The Company recorded a write-down of residual values of $2.0 million during the third quarter of 1999, for a total of $8.1 million for the first nine months of 1999. INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing increased 10 percent to $70.3 million for the three months ended September 30, 2000, compared with $63.8 million for the same period of 1999. For the nine months ended September 30, 2000, income from working capital financing increased 16 percent to $198.0 million, compared with $171.2 million for the same period of 1999. These increases were primarily due to additional income from revolving participation loans. Income from revolving participation loans increased to $28.5 million for the first nine months of 2000, compared with $13.2 million for the same period of 1999. Additionally, an increase of $10.5 million in interest income from dealers due to higher yields contributed to the increase in income from working capital financing for the first nine months of 2000, compared with the same period of 1999. INCOME FROM LOANS Income from loans increased 21 percent to $76.5 million for the third quarter of 2000, compared with $63.0 million for the third quarter of 1999. For the nine months ended September 30, 2000, income from loans increased 19 percent to $218.8 million, compared with $183.5 million for the same 1999 period. These increases were due to higher average loan balances for the first nine months of 2000, compared with the same period of 1999. Additionally, income from term participation loans contributed to the increase in loan income. Income from term participation loans amounted to $17.2 million and $0.9 million for the nine months ended September 30, 2000, and 1999, respectively. EQUIPMENT SALES Equipment sales amounted to $152.8 million for the third quarter of 2000, compared with $75.3 million for the same period of 1999; for the first nine months of 2000, equipment sales amounted to $423.3 million, compared with $356.0 million for the same 1999 period. 17 RESULTS OF OPERATIONS (Continued) -15- Gross profit on equipment sales for the third quarter of 2000 was $14.9 million compared with $6.8 million for the third quarter of 1999. For the first nine months of 2000, gross profit from equipment sales decreased to $39.0 million compared with $41.6 million for the same period of 1999. The gross profit margin for the third quarter of 2000 increased to 9.7 percent, compared with 9.1 percent for the same 1999 period. For the first nine months of 2000, the gross profit margin decreased to 9.2 percent, compared with 11.7 percent for the first nine months of 1999. Excluding the sale of $76.3 million of leased equipment, with a gross profit of $19.8 million, to IBM in relation to IBM's sale of its global network business to AT&T in the second quarter of 1999, equipment sales, gross profit and gross profit margin increased for the first nine months of 2000, compared with the same period of 1999. OTHER INCOME Other income decreased 33 percent to $14.6 million for the third quarter of 2000, compared with $21.8 million for the same period of 1999. For the nine months ended September 30, 2000, other income decreased 30 percent to $50.3 million, compared with $71.7 million for the nine months ended September 30, 1999. These decreases in other income are primarily attributable to a decline in the fees for the servicing of IBM's federal, state and local lease and loan portfolio, interest income on cash and factoring income. INTEREST EXPENSE Interest expense increased 15 percent to $162.2 million for the third quarter of 2000, compared with $141.3 million for the same 1999 period. For the first nine months of 2000, interest expense increased 8 percent to $452.9 million, compared with $419.9 million for the first nine months of 1999. These increases in interest expense are primarily due to higher interest rates. The Company's year-to-date average cost of debt for the first nine months of 2000 increased to 5.9 percent from 5.4 percent for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $75.9 million for the third quarter of 2000, an increase of 46 percent compared with $52.1 million for the same period in 1999. For the first nine months of 2000, selling, general and administrative expenses increased 34 percent to $210.6 million, compared with $157.7 million for the first nine months of 1999. These increases are primarily attributable to the increase in the amount IBM charged the Company for services received. In the first quarter of 2000, the Company renegotiated its operating agreement with IBM at IBM's request. Refer to Related Company Transactions in the Notes to Consolidated Financial Statements on page 6. -16- 18 PROVISION FOR RECEIVABLE LOSSES The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally retains ownership or takes a security interest in any underlying equipment financed. The Company provides for receivable losses at the time financings are originated and, from time to time, for capital equipment as conditions warrant. The portfolio is diversified by region, industry and individual unaffiliated customer. The Company provides for working capital financing receivable losses on the basis of actual collection experience and estimated collectibility of the related financing receivables. With the continued trend toward consolidation in this industry, the concentration of such financings for certain large dealers and remarketers of information industry products, while continuously declining, remains significant. At September 30, 2000, and December 31, 1999, approximately 35 percent and 55 percent, respectively, of the working capital financing receivables outstanding were concentrated in ten working capital accounts. The Company's working capital financing business is predominantly with non-investment grade customers. Such financing receivables are typically collateralized by the inventory and accounts receivable of the dealers and remarketers. The Company did not experience material losses in 1999 or in the first nine months of 2000. The overall provision for receivable losses decreased to $0.1 million for the third quarter of 2000, compared with $8.0 million for the same period in 1999. For the nine months ended September 30, 2000, the provision for receivable losses decreased to $9.0 million, compared with $23.0 million for the same period of 1999. The decline in the provision for receivable losses was primarily attributable to lower reserve requirements, based upon the Company's historical loss experience, assessment of collectibility of specific receivables and its ability to effectively manage credit risk. INCOME TAXES The provision for income taxes increased 3 percent to $68.3 million for the quarter ended September 30, 2000, compared with $66.5 million for the same period in 1999. For the first nine months of 2000, the provision for income taxes increased 4 percent to $200.2 million, compared with $192.4 million for the nine months ended September 30, 1999. These increases are due to the increase in pretax earnings for the third quarter and the first nine months of 2000, compared with the same periods of 1999. RETURN ON AVERAGE EQUITY The results for the first nine months of 2000 yielded an annualized return on average equity of 18.4 percent, compared with 20.1 percent for the same period of 1999. -17- 19 CLOSING DISCUSSION The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing and providing information technology remarketers with inventory and accounts receivable financing, which contributes to the growth and stability of IBM earnings. -18- 20 FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Quarterly Report on Form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the Company's level of equipment financing originations; the propensity for customers to finance their acquisition of IBM products and services with the Company; the competitive environment in which the Company operates; the success of the Company in developing strategies to manage debt levels; the ultimate impact of the various Year 2000 issues on the Company's business, financial condition or results of operations; non-performance by a customer of contractual requirements; the concentration of credit risk and creditworthiness of the customers; the Company's associated collection and asset management efforts; the Company's determination and subsequent recoverabiltiy of recorded residual values; currency fluctuations on the associated debt and liabilities; change in interest rates; non-performance by the counterparty in derivative transactions; the Company's ability to attract and retain key personnel; the Company's ability to manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors inherent in the Company's business and otherwise discussed in this Form 10-Q and in the Company's other filings with the SEC and in IBM's filings with the SEC. -19- 21 Part II - Other Information Item 1. Legal Proceedings None material. Item 6(b). Reports on Form 8-K A Form 8-K dated July 17, 2000, was filed with respect to the Company's financial results for the six month period ended June 30, 2000. -20- 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBM CREDIT CORPORATION _______________________________ (Registrant) Date: November 13, 2000 By: /s/ Paula L. Summa (Paula L. Summa) Vice President, Finance and Chief Financial Officer -21- -22- EX-27 2 q3fds.frm FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from IBM Credit Corporation's consolidated financial statements at and for the nine months ended September 30, 2000, and is qualified in its entirety by reference to such financial statements. 1,000 U.S.DOLLARS 9-MOS Jan-01-2000 Dec-31-2000 Sep-30-2000 1 839,412 0 6,435,925 0 0 0 0 0 15,874,442 0 0 0 0 457,411 1,532,779 15,874,442 423,253 1,564,642 384,215 384,215 210,603 8,952 452,854 508,018 200,162 307,856 0 0 0 307,856 0 0
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