UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
000-55786
(Commission file number)
IBM CREDIT LLC
(Exact name of registrant as specified in its charter)
Delaware |
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22-2351962 |
(State or Other Jurisdiction of |
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(IRS employer identification number) |
Armonk, New York |
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10504 |
(Address of principal executive offices) |
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(Zip Code) |
914-765-1900
(Registrant’s telephone number)
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☒ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
All of the limited liability company interests ("Interests") in the registrant are held by an affiliate of the registrant. None of the Interests are publicly traded.
REDUCED DISCLOSURE FORMAT
IBM Credit LLC, an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM), 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
Item 1. Consolidated Financial Statements:
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(Dollars in millions) |
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2018 |
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2017 |
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2018 |
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2017 |
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Revenue |
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Financing revenue |
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$ |
367 |
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$ |
321 |
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$ |
1,084 |
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$ |
986 |
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Operating lease revenue |
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85 |
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96 |
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250 |
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288 |
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Total revenue |
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$ |
452 |
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$ |
418 |
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$ |
1,334 |
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$ |
1,274 |
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Financing cost (related party cost for three and nine months: $81 and $215 in 2018, $66 and $201 in 2017) |
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$ |
135 |
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$ |
95 |
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$ |
362 |
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$ |
267 |
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Depreciation of equipment under operating lease |
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50 |
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59 |
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146 |
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178 |
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Net margin |
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$ |
268 |
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$ |
264 |
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$ |
827 |
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$ |
829 |
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Expense and other (income) |
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Selling, general and administrative |
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$ |
89 |
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$ |
94 |
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$ |
292 |
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$ |
303 |
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Provision for/(benefit from) credit losses |
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(10) |
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2 |
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24 |
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11 |
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Other (income) and expense |
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5 |
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3 |
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(11) |
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28 |
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Total expense and other (income) |
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$ |
84 |
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$ |
99 |
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$ |
305 |
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$ |
341 |
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Income from before income taxes |
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$ |
184 |
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$ |
165 |
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$ |
522 |
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$ |
488 |
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Provision for income taxes |
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39 |
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38 |
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112 |
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|
112 |
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Net income |
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$ |
144 |
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$ |
127 |
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$ |
410 |
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$ |
376 |
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(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
3
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(Dollars in millions) |
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2018 |
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2017 |
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2018 |
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2017 |
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Net income |
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$ |
144 |
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$ |
127 |
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$ |
410 |
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$ |
376 |
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Other comprehensive income/(loss), before tax: |
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Foreign currency translation |
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(20) |
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151 |
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(119) |
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368 |
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Retirement-related benefit plans (1) |
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0 |
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0 |
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1 |
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2 |
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Other comprehensive income/(loss), before tax |
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(20) |
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151 |
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(117) |
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370 |
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Income tax (expense)/benefit related to items of other comprehensive income |
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(6) |
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(8) |
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(22) |
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(8) |
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Other comprehensive income/(loss), net of tax |
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$ |
(26) |
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$ |
143 |
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$ |
(139) |
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$ |
361 |
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Total comprehensive income |
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$ |
118 |
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$ |
270 |
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$ |
270 |
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$ |
737 |
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(1) |
Amounts represented relate to multiple-employer plans. |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
4
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
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At September 30, |
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At December 31, |
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(Dollars in millions) |
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2018 |
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2017 |
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Assets: |
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Cash and cash equivalents |
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$ |
1,961 |
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$ |
2,680 |
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Financing receivables |
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22,653 |
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26,066 |
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(net of allowances of $189 in 2018 and $173 in 2017) |
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Equipment under operating leases |
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425 |
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401 |
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(net of accumulated depreciation of $273 in 2018 and $288 in 2017) |
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Financing receivables from IBM |
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3,779 |
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3,743 |
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Receivables purchased/participated from IBM |
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4,890 |
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5,239 |
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(net of allowances of $33 in 2018 and $39 in 2017) |
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Other receivables from IBM |
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2,549 |
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1,024 |
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Other assets |
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439 |
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364 |
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Total assets |
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$ |
36,694 |
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$ |
39,516 |
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Liabilities: |
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Accounts payable |
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$ |
1,516 |
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$ |
1,776 |
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Accounts payable to IBM |
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1,142 |
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2,903 |
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Debt |
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7,928 |
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5,779 |
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Debt payable to IBM |
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21,946 |
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24,698 |
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Taxes |
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562 |
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530 |
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Other liabilities |
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240 |
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269 |
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Total liabilities |
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$ |
33,334 |
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$ |
35,954 |
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Member’s interest: |
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Member's interest |
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3,215 |
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3,101 |
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Retained earnings |
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131 |
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302 |
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Accumulated other comprehensive income/(loss) |
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13 |
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158 |
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Total member's interest |
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$ |
3,360 |
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$ |
3,562 |
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Total liabilities and member’s interest |
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$ |
36,694 |
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$ |
39,516 |
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(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
5
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended September 30, |
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(Dollars in millions) |
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2018 |
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2017 |
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Cash flows from operating activities: |
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Net income |
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$ |
410 |
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$ |
376 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Provision for credit losses |
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24 |
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11 |
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Depreciation |
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146 |
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178 |
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Deferred taxes |
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(6) |
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(35) |
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Net (gain)/loss on asset sales and other |
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(67) |
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187 |
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Change in operating assets and liabilities: |
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Other assets/other liabilities |
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306 |
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(111) |
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Net cash provided by operating activities |
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$ |
812 |
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$ |
607 |
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Cash flows from investing activities: |
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Originations of financing receivables |
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$ |
(10,978) |
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$ |
(8,323) |
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Collection of financing receivables |
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10,566 |
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9,097 |
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Short-term financing receivables - net (1) |
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1,320 |
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673 |
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Purchase of equipment under operating leases |
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(221) |
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(202) |
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Proceeds from disposition of equipment under operating lease |
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53 |
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79 |
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Other receivables from IBM - net |
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(1,682) |
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(1,287) |
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Other investing activities - net |
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90 |
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(63) |
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Net cash used in investing activities |
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$ |
(853) |
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$ |
(26) |
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Cash flows from financing activities: |
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Proceeds from issuance of debt from IBM |
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$ |
8,696 |
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$ |
5,735 |
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Principal payments on debt from IBM |
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(8,262) |
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(6,234) |
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Proceeds from issuance of debt |
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2,581 |
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3,822 |
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Principal payments on debt |
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(755) |
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(371) |
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Short-term borrowings from/(repayments to) IBM - net (1) |
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(2,897) |
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(2,206) |
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Short-term borrowings/(repayments) - net (1) |
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448 |
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(32) |
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Net transfers (to)/from IBM |
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— |
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(942) |
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Contributions from IBM |
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148 |
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|
88 |
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Distributions to IBM |
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(620) |
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(365) |
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Net cash used in financing activities |
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$ |
(661) |
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$ |
(504) |
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Effect of exchange rate changes on cash and cash equivalents |
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$ |
(17) |
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$ |
43 |
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Net change in cash and cash equivalents |
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$ |
(719) |
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$ |
120 |
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Cash and cash equivalents at January 1 |
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2,680 |
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|
1,772 |
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Cash and cash equivalents at September 30 |
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$ |
1,961 |
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$ |
1,892 |
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(1) |
Short-term represents original maturities of 90 days or less. |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
6
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST
(UNAUDITED)
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Accumulated |
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Other |
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Total |
||||
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Member's |
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Retained |
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Comprehensive |
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Member’s |
|||||
(Dollars in millions) |
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|
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Interest |
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Earnings |
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Income/(Loss) |
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Interest |
||||
Member’s Interest, January 1, 2018 |
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|
|
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$ |
3,101 |
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$ |
302 |
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$ |
158 |
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$ |
3,562 |
Cumulative effect of change in accounting principle* |
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|
|
|
|
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|
|
5 |
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(5) |
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|
— |
Net income plus other comprehensive income/(loss): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
|
|
|
|
|
|
|
410 |
|
|
|
|
|
410 |
Other comprehensive income/(loss), net of tax |
|
|
|
|
|
|
|
|
|
|
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(139) |
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|
(139) |
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
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$ |
270 |
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Contributions from IBM |
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|
|
|
|
148 |
|
|
|
|
|
|
|
|
148 |
Distributions to IBM |
|
|
|
|
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(34) |
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|
(586) |
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|
|
|
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(620) |
Member’s Interest, September 30, 2018 |
|
|
|
|
$ |
3,215 |
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$ |
131 |
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$ |
13 |
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$ |
3,360 |
* Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes".
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
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Prior |
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Accumulated |
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Investment |
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Other |
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Total |
||||
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From |
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Member's |
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Retained |
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Comprehensive |
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Member’s |
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(Dollars in millions) |
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Member |
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Interest |
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Earnings |
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Income/(Loss) |
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Interest |
|||||
Member’s Interest, January 1, 2017 |
|
$ |
3,912 |
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$ |
— |
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$ |
— |
|
$ |
(209) |
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$ |
3,703 |
Net income plus other comprehensive income/(loss): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
|
137 |
|
|
|
|
|
239 |
|
|
|
|
|
376 |
Other comprehensive income/(loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
361 |
|
|
361 |
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
737 |
Net transfers (to)/from IBM |
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|
(942) |
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|
|
|
|
|
|
|
|
|
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(942) |
Prior investment from member, March 31, 2017 |
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|
3,106 |
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|
|
|
|
|
|
|
|
|
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Transfer upon consolidation |
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|
(3,106) |
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|
3,106 |
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|
|
|
|
|
|
|
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Contributions from IBM |
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|
|
|
|
88 |
|
|
|
|
|
|
|
|
88 |
Distributions to IBM |
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|
|
|
|
(126) |
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|
(239) |
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|
|
|
|
(365) |
Member’s Interest, September 30, 2017 |
|
$ |
— |
|
$ |
3,068 |
|
$ |
— |
|
$ |
152 |
|
$ |
3,220 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
7
Notes to Consolidated Financial Statements:
1. Basis of Presentation:
The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to pages 41 through 43 of the company’s 2017 Form 10-K, filed with the Securities and Exchange Commission (SEC) on March 1, 2018, for a discussion of the company’s critical accounting estimates.
During the second quarter of 2017, certain non-U.S. affiliates of IBM Credit became subsidiaries of the company, which are subsequently reported on a consolidated basis. All prior periods have been recast to reflect the consolidation of the financial statements and conform to the current year presentation as a result of changes to certain financial statement line items. These changes include other receivables from IBM and accounts payable, which are separately reported in the Consolidated Statement of Financial Position and were previously reported within other assets and other liabilities, respectively. Other receivables from IBM are separately reported in the Consolidated Statement of Cash Flows and were previously reported within other investing activities-net. The reporting for accounts payable within the Consolidated Statement of Cash Flows did not change.
Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Prior to the consolidation of the financial statements in the second quarter of 2017, net non-trade intercompany transactions between IBM Credit and IBM (for example, contributions from IBM and distributions to IBM), were reflected as net transfers (to)/from IBM in the financing activities section of the Statement of Cash Flows. Distributions by the company to IBM are considered first to be a return of profit as reflected in the balance of retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of the balance of member’s interest as reflected in the Consolidated Statement of Financial Position.
Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (U.S. tax reform) was enacted, resulting in the company recording a provisional net benefit of $162 million to tax expense in the fourth-quarter and year-ended December 31, 2017. An additional provisional charge of $4 million was recorded in the first quarter as a result of Internal Revenue Service (IRS) guidance issued in January 2018 and a provisional benefit of $2 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment. The company has not completed its assessment and the net tax benefit remains provisional as of September 30, 2018. Any changes to the net tax benefit will be finalized in the fourth quarter of 2018 which is within the 12 month time limit provided by the SEC.
8
The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.
All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.
Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements included in the Form 10-K.
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.
2. Accounting Changes:
New Standards to be Implemented
In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changes the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results.
In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established which is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020, with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date.
The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes certain changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the sales-type lease test, initial direct cost capitalization, lease termination guidance and sale-leaseback accounting and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements.
A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company will elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The company is evaluating the other practical expedients available under the guidance.
As a lessee, the recording of operating lease right-of-use assets and liabilities in the Consolidated Statement of Financial Position is not expected to have a material impact to the company’s consolidated financial results. IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. For additional information, see Note 8, “Relationship with IBM and Related Party Transactions”.
9
As a lessor, under the new capitalization requirements for initial direct costs, the company expects to capitalize lower lease origination expenses than under the previous guidance. However, this change is not expected to have a material impact to the company’s consolidated financial results.
Due to changes to lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount of receivables that would have been reclassified from lease to loan in 2017 under the application of this new guidance would have been approximately $450 million.
The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change.
Standards Implemented
In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist. This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption, $5 million was reclassified from AOCI to retained earnings.
In August 2017, the FASB issued guidance to simplify the application of current hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results for the three and nine months ended September 30, 2018.
The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified-retrospective transition method).
The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company has concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there is no material change to disclosures as a result of the adoption of the guidance.
3. Financial Instruments:
Fair Value Measurements
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
10
· |
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date; |
· |
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and |
· |
Level 3—Unobservable inputs for the asset or liability. |
The guidance requires the use of observable market data if such data is available without undue cost and effort.
When available the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.
The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.
In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
· |
Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument. |
· |
Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market. |
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.
Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.
Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.
11
The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
$ |
— |
|
$ |
1,314 |
|
$ |
— |
|
$ |
1,314 |
|
Money market funds |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total |
|
|
— |
|
|
1,314 |
|
|
— |
|
|
1,314 |
|
Derivative assets (2) |
|
|
— |
|
|
27 |
|
|
— |
|
|
27 |
(4) |
Total assets |
|
$ |
— |
|
$ |
1,341 |
|
$ |
— |
|
$ |
1,341 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (3) |
|
$ |
— |
|
$ |
71 |
|
$ |
— |
|
$ |
71 |
(4) |
(1) |
Included within cash and cash equivalents in the Consolidated Statement of Financial Position. |
(2) |
Included within other assets in the Consolidated Statement of Financial Position. |
(3) |
Included within other liabilities in the Consolidated Statement of Financial Position. |
(4) |
If derivative exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $21 million. |
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
$ |
— |
|
$ |
1,883 |
|
$ |
— |
|
$ |
1,883 |
|
Money market funds |
|
|
5 |
|
|
— |
|
|
— |
|
|
5 |
|
Total |
|
|
5 |
|
|
1,883 |
|
|
— |
|
|
1,888 |
|
Derivative assets (2) |
|
|
— |
|
|
3 |
|
|
— |
|
|
3 |
|
Total assets |
|
$ |
5 |
|
$ |
1,886 |
|
$ |
— |
|
$ |
1,891 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (3) |
|
$ |
— |
|
$ |
56 |
|
$ |
— |
|
$ |
56 |
|
(1) |
Included within cash and cash equivalents in the Consolidated Statement of Financial Position. |
(2) |
Included within other assets in the Consolidated Statement of Financial Position. |
(3) |
Included within other liabilities in the Consolidated Statement of Financial Position. |
Financial Assets and Liabilities Not Measured at Fair Value
Short-Term Receivables and Payables
Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.
Long-Term Receivables
Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2018 and December 31, 2017, the difference between the carrying amount and estimated fair value for long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
12
Long-Term Debt
Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt, which includes debt payable to IBM, for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt (including debt payable to IBM) was $15,389 million and $13,750 million and the estimated fair value was $15,351 million and $13,695 million at September 30, 2018 and December 31, 2017, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
Derivative Financial Instruments
The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.
Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At September 30, 2018, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $27 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $71 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $21 million. There were no derivative instruments activity impacted by master netting agreements at December 31, 2017.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the capital markets to fund its operations. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2018 and December 31, 2017, the total notional amount of the company's interest rate swap contracts with IBM was $3,350 million and $1,800 million, respectively. The weighted average remaining maturity of these instruments at September 30, 2018 and December 31, 2017, was approximately 2.7 years and 2.9 years, respectively. These interest rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at September 30, 2018 and December 31, 2017.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At September 30, 2018 and December 31, 2017, the total notional amount of derivative contracts with IBM designated as net investment hedges was $2,066 million and
13
$2,331 million, respectively. The weighted average remaining maturity of these instruments was 0.2 years at both periods.
Foreign Currency Asset/Liability Management
The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows.
There were no foreign exchange derivative contracts with third parties outstanding at September 30, 2018. At December 31, 2017, the total notional amount of foreign exchange derivative contracts with third parties was $120 million.
The following tables provide a quantitative summary of the derivative instrument-related risk management activity at September 30, 2018 and December 31, 2017, as well as for the three and nine months ended September 30, 2018 and 2017, respectively.
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
|
|
Fair Value of Derivative Assets |
|
Fair Value of Derivative Liabilities |
||||||||||||
|
|
Balance Sheet |
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
(Dollars in millions) |
|
Classification |
|
9/30/2018 |
|
12/31/2017 |
|
Classification |
|
9/30/2018 |
|
12/31/2017 |
||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts with IBM |
|
Other assets |
|
$ |
— |
|
$ |
— |
|
Other liabilities |
|
$ |
71 |
|
$ |
19 |
Foreign exchange contracts with IBM |
|
Other assets |
|
|
27 |
|
|
— |
|
Other liabilities |
|
|
— |
|
|
37 |
|
|
Fair value of derivative assets |
|
$ |
27 |
|
$ |
— |
|
Fair value of derivative liabilities |
|
$ |
71 |
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other assets |
|
|
— |
|
|
3 |
|
Other liabilities |
|
|
— |
|
|
— |
|
|
Fair value of derivative assets |
|
$ |
— |
|
$ |
3 |
|
Fair value of derivative liabilities |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
27 |
|
$ |
3 |
|
|
|
$ |
71 |
|
$ |
56 |
As of September 30, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges.
(Dollars in millions) |
|
|
|
|
Cumulative Amount of |
|
Line Item in the |
|
Carrying Amount of the |
|
Fair Value Hedging Adjustment |
||
Consolidated Statement of Financial Position |
|
Hedged Item |
|
Included in the Carrying |
||
in which the Hedged Item is Included: |
|
Assets/(Liabilities) |
|
Amount of Assets/(Liabilities) |
||
Debt |
|
$ |
(3,273) |
|
$ |
70 |
14
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items, are as follows:
(Dollars in millions) |
|
|
|
|
|
|
For the three months ended September 30, 2018: |
|
Financing cost |
|
Other (income) and expense |
||
Total |
|
$ |
135 |
|
$ |
5 |
Gains/(losses) of total hedge activity |
|
|
6 |
|
|
— |
|
|
Gain/(Loss) Recognized in Earnings |
||||||||||||
|
|
Consolidated |
|
Recognized on |
|
Attributable to Risk |
||||||||
(Dollars in millions) |
|
Statement of |
|
Derivatives |
|
Being Hedged (2) |
||||||||
For the three months ended September 30: |
|
Earnings Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Derivative instruments in fair value hedges (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts with IBM |
|
Financing cost |
|
$ |
(10) |
|
$ |
(14) |
|
$ |
7 |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts with IBM |
|
Other (income) and expense |
|
|
— |
|
|
— |
|
|
N/A |
|
|
N/A |
Foreign exchange contracts |
|
Other (income) and expense |
|
|
— |
|
|
(4) |
|
|
N/A |
|
|
N/A |
Total |
|
|
|
$ |
(10) |
|
$ |
(18) |
|
$ |
7 |
|
$ |
14 |
N/A - Not Applicable
|
|
Gain/(Loss) Recognized in Earnings and Other Comprehensive Income |
||||||||||||||||||
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
Reclassified |
|
Amounts Excluded from |
||||||||
(Dollars in millions) |
|
Recognized in OCI |
|
Earnings |
|
from AOCI |
|
Effectiveness Testing (3) |
||||||||||||
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||||
Derivative instruments in net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts with IBM |
|
$ |
23 |
|
$ |
20 |
|
Financing cost |
|
$ |
— |
|
$ |
— |
|
$ |
8 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23 |
|
$ |
20 |
|
|
|
$ |
— |
|
$ |
— |
|
$ |
8 |
|
$ |
0 |
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for additional information.
Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
(1) |
The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
(2) |
The amount includes basis adjustments to the carrying value of the hedged item recorded during the period. |
(3) |
The company's policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
(Dollars in millions) |
|
|
|
|
|
|
For the nine months ended September 30, 2018 |
|
Financing cost |
|
Other (income) and expense |
||
Total |
|
$ |
362 |
|
$ |
(11) |
Gains/(losses) of total hedge activity |
|
|
22 |
|
|
7 |
15
|
|
Gain/(Loss) Recognized in Earnings |
||||||||||||
|
|
Consolidated |
|
Recognized |
|
Attributable to Risk |
||||||||
(Dollars in millions) |
|
Statement of |
|
on Derivatives |
|
Being Hedged(2) |
||||||||
For the nine months ended September 30: |
|
Earnings Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Derivative instruments in fair value hedges (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts with IBM |
|
Financing cost |
|
$ |
(45) |
|
$ |
(14) |
|
$ |
43 |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts with IBM |
|
Other (income) and expense |
|
|
— |
|
|
(222) |
|
|
N/A |
|
|
N/A |
Foreign exchange contracts |
|
Other (income) and expense |
|
|
7 |
|
|
(22) |
|
|
N/A |
|
|
N/A |
Total |
|
|
|
$ |
(39) |
|
$ |
(259) |
|
$ |
43 |
|
$ |
14 |
N/A-Not Applicable
|
|
Gain/(Loss) Recognized in Earnings and Other Comprehensive Income |
||||||||||||||||||
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
Reclassified |
|
Amounts Excluded from |
||||||||||||
(Dollars in millions) |
|
Recognized in OCI |
|
Earnings |
|
from AOCI |
|
Effectiveness Testing(3) |
||||||||||||
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||||
Derivative instruments in net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts with IBM |
|
$ |
84 |
|
$ |
20 |
|
Financing cost |
|
$ |
— |
|
$ |
— |
|
$ |
24 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
84 |
|
$ |
20 |
|
|
|
$ |
— |
|
$ |
— |
|
$ |
24 |
|
$ |
0 |
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, "Accounting Changes," for additional information.
Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
(1) |
The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
(2) |
The amount includes basis adjustments to the carrying value of the hedged item recorded during the period. |
(3) |
The company's policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
For the three and nine months ending September 30, 2018 and 2017, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.
4. Financing Receivables, Receivables Purchased/Participated from IBM:
Financing receivables consist of Client Financing leases, loans, installment payment plans and participated receivables to end-user clients as well as loans to IBM for terms up to seven years. Assets financed are primarily IT products and services where IBM and the company have experience. Client Financing arrangements are priced to achieve a market yield. Financing receivables also include Commercial Financing, which generally consists of working capital financing to suppliers, distributors and resellers of IBM and OEM IT products and services. Payment terms for working capital financing receivables generally range from 30 to 90 days.
The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are primarily for IT related products and services, which are due within 30 days, and IBM performs all servicing under these
16
arrangements. These receivables are included within the Commercial Financing segment. The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.
|
|
|
|
|
|
Client Loans and |
|
|
||||
|
|
Investment in |
|
Commercial |
|
Installment |
|
|
||||
(Dollars in millions) |
|
Direct Financing |
|
Financing |
|
Payments |
|
|
||||
At September 30, 2018: |
|
Leases |
|
Receivables |
|
(Loans) |
|
Total |
||||
Financing receivables, gross |
|
$ |
5,086 |
|
$ |
9,063 |
|
$ |
8,875 |
|
$ |
23,024 |
Unearned income |
|
|
(392) |
|
|
(29) |
|
|
(419) |
|
|
(841) |
Deferred initial direct costs |
|
|
44 |
|
|
— |
|
|
70 |
|
|
114 |
Recorded investment |
|
$ |
4,738 |
|
$ |
9,034 |
|
$ |
8,526 |
|
$ |
22,298 |
Allowance for credit losses |
|
|
(71) |
|
|
(10) |
|
|
(108) |
|
|
(189) |
Unguaranteed residual value |
|
|
463 |
|
|
— |
|
|
— |
|
|
463 |
Guaranteed residual value |
|
|
81 |
|
|
— |
|
|
— |
|
|
81 |
Total financing receivables, net |
|
$ |
5,212 |
|
$ |
9,023 |
|
$ |
8,417 |
|
$ |
22,653 |
|
|
Purchased and |
|
|
|
Participated |
|
(Dollars in millions) |
|
Receivables |
|
At September 30, 2018: |
|
From IBM |
|
Short-term purchased receivables from IBM |
|
$ |
1,182 |
Allowance for credit losses |
|
|
(22) |
Total short-term purchased receivables from IBM, net |
|
$ |
1,160 |
|
|
|
|
Long-term participated receivables from IBM |
|
$ |
3,741 |
Allowance for credit losses |
|
|
(11) |
Total long-term participated receivables from IBM, net |
|
$ |
3,730 |
|
|
|
|
Total purchased and participated receivables from IBM, net |
|
$ |
4,890 |
|
|
|
|
|
|
Client Loans and |
|
|
||||
|
|
Investment in |
|
Commercial |
|
Installment |
|
|
||||
(Dollars in millions) |
|
Direct Financing |
|
Financing |
|
Payments |
|
|
||||
At December 31, 2017: |
|
Leases |
|
Receivables |
|
(Loans) |
|
Total |
||||
Financing receivables, gross |
|
$ |
5,462 |
|
$ |
11,177 |
|
$ |
9,762 |
|
$ |
26,402 |
Unearned income |
|
|
(411) |
|
|
(35) |
|
|
(473) |
|
|
(919) |
Deferred initial direct costs |
|
|
56 |
|
|
— |
|
|
73 |
|
|
128 |
Recorded investment |
|
$ |
5,107 |
|
$ |
11,142 |
|
$ |
9,362 |
|
$ |
25,611 |
Allowance for credit losses |
|
|
(62) |
|
|
(15) |
|
|
(96) |
|
|
(173) |
Unguaranteed residual value |
|
|
533 |
|
|
— |
|
|
— |
|
|
533 |
Guaranteed residual value |
|
|
94 |
|
|
— |
|
|
— |
|
|
94 |
Total financing receivables, net |
|
$ |
5,672 |
|
$ |
11,127 |
|
$ |
9,267 |
|
$ |
26,066 |
17
|
|
Purchased and |
|
|
|
Participated |
|
(Dollars in millions) |
|
Receivables |
|
At December 31, 2017: |
|
From IBM |
|
Short-term purchased receivables from IBM |
|
$ |
1,466 |
Allowance for credit losses |
|
|
(25) |
Total short-term purchased receivables from IBM, net |
|
$ |
1,441 |
|
|
|
|
Long-term participated receivables from IBM |
|
$ |
3,812 |
Allowance for credit losses |
|
|
(14) |
Total long-term participated receivables from IBM, net |
|
$ |
3,798 |
|
|
|
|
Total purchased and participated receivables from IBM, net |
|
$ |
5,239 |
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $754 million and $773 million at September 30, 2018 and December 31, 2017, respectively.
The company did not have any financing receivables held for sale as of September 30, 2018 and December 31, 2017.
Financing Receivables by Portfolio Segment
The following tables present the recorded investment in financing receivables and participated receivables from IBM, by portfolio segment and by class, excluding commercial financing receivables, purchased receivables from IBM and other miscellaneous financing receivables at September 30, 2018 and December 31, 2017. Commercial financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
18
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018: |
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Total |
||||
Recorded investment |
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables |
|
$ |
3,272 |
|
$ |
776 |
|
$ |
690 |
|
$ |
4,738 |
Loan receivables |
|
|
5,549 |
|
|
2,077 |
|
|
899 |
|
|
8,526 |
Participated receivables from IBM |
|
|
668 |
|
|
1,630 |
|
|
1,443 |
|
|
3,741 |
Ending balance |
|
$ |
9,489 |
|
$ |
4,484 |
|
$ |
3,032 |
|
$ |
17,005 |
Recorded investment collectively evaluated for impairment |
|
$ |
9,384 |
|
$ |
4,441 |
|
$ |
3,013 |
|
$ |
16,839 |
Recorded investment individually evaluated for impairment |
|
$ |
105 |
|
$ |
42 |
|
$ |
19 |
|
$ |
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables |
|
$ |
42 |
|
$ |
6 |
|
$ |
15 |
|
$ |
62 |
Loan receivables |
|
|
57 |
|
|
34 |
|
|
4 |
|
|
96 |
Participated receivables from IBM |
|
|
9 |
|
|
4 |
|
|
2 |
|
|
14 |
Total |
|
$ |
107 |
|
$ |
43 |
|
$ |
21 |
|
$ |
172 |
Write-offs |
|
$ |
(3) |
|
$ |
(1) |
|
$ |
(2) |
|
$ |
(6) |
Recoveries |
|
|
0 |
|
|
0 |
|
|
2 |
|
|
2 |
Provision |
|
|
12 |
|
|
14 |
|
|
3 |
|
|
29 |
Foreign currency translation adjustment |
|
|
(5) |
|
|
(2) |
|
|
(1) |
|
|
(8) |
Other |
|
|
0 |
|
|
1 |
|
|
1 |
|
|
2 |
Ending balance at September 30, 2018 |
|
$ |
112 |
|
$ |
55 |
|
$ |
23 |
|
$ |
190 |
Lease receivables |
|
$ |
46 |
|
$ |
8 |
|
$ |
17 |
|
$ |
71 |
Loan receivables |
|
$ |
63 |
|
$ |
41 |
|
$ |
4 |
|
$ |
108 |
Participated receivables from IBM |
|
$ |
3 |
|
$ |
6 |
|
$ |
2 |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related allowance, collectively evaluated for impairment |
|
$ |
43 |
|
$ |
15 |
|
$ |
4 |
|
$ |
62 |
Related allowance, individually evaluated for impairment |
|
$ |
69 |
|
$ |
40 |
|
$ |
19 |
|
$ |
128 |
Write-offs of lease and loan receivables were $4 million and $2 million, respectively, for the nine months ended September 30, 2018. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $2 million, $18 million and $9 million, respectively, for the nine months ended September 30, 2018.
The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $87 million, $43 million and $20 million, respectively, for the three months ended September 30, 2018 and $89 million, $11 million and $33 million, respectively, for the three months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended September 30, 2018 and 2017.
The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $76 million, $41 million and $19 million, respectively, for the nine months ended September 30, 2018 and $96 million, $10 million and $44 million, respectively, for the nine months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the nine months ended September 30, 2018 and 2017.
19
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017: |
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Total |
||||
Recorded investment |
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables |
|
$ |
3,593 |
|
$ |
662 |
|
$ |
852 |
|
$ |
5,107 |
Loan receivables |
|
|
6,110 |
|
|
2,315 |
|
|
937 |
|
|
9,362 |
Participated receivables from IBM |
|
|
744 |
|
|
1,525 |
|
|
1,543 |
|
|
3,812 |
Ending balance |
|
$ |
10,447 |
|
$ |
4,502 |
|
$ |
3,332 |
|
$ |
18,282 |
Recorded investment collectively evaluated for impairment |
|
$ |
10,388 |
|
$ |
4,463 |
|
$ |
3,312 |
|
$ |
18,163 |
Recorded investment individually evaluated for impairment |
|
$ |
59 |
|
$ |
39 |
|
$ |
20 |
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables |
|
$ |
38 |
|
$ |
2 |
|
$ |
55 |
|
$ |
95 |
Loan receivables |
|
|
113 |
|
|
11 |
|
|
0 |
|
|
125 |
Participated receivables from IBM |
|
|
8 |
|
|
3 |
|
|
2 |
|
|
13 |
Total |
|
$ |
160 |
|
$ |
16 |
|
$ |
58 |
|
$ |
233 |
Write-offs |
|
$ |
(42) |
|
$ |
(2) |
|
$ |
(33) |
|
$ |
(77) |
Recoveries |
|
|
1 |
|
|
— |
|
|
0 |
|
|
1 |
Provision |
|
|
(7) |
|
|
27 |
|
|
(6) |
|
|
14 |
Foreign currency translation adjustment |
|
|
0 |
|
|
4 |
|
|
4 |
|
|
8 |
Other |
|
|
(4) |
|
|
(2) |
|
|
(3) |
|
|
(8) |
Ending balance at December 31, 2017 |
|
$ |
107 |
|
$ |
43 |
|
$ |
21 |
|
$ |
172 |
Lease receivables |
|
$ |
42 |
|
$ |
6 |
|
$ |
15 |
|
$ |
62 |
Loan receivables |
|
$ |
57 |
|
$ |
34 |
|
$ |
4 |
|
$ |
96 |
Participated receivables from IBM |
|
$ |
9 |
|
$ |
4 |
|
$ |
2 |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related allowance, collectively evaluated for impairment |
|
$ |
49 |
|
$ |
14 |
|
$ |
5 |
|
$ |
67 |
Related allowance, individually evaluated for impairment |
|
$ |
59 |
|
$ |
30 |
|
$ |
17 |
|
$ |
105 |
Write-offs of lease receivables and loan receivables were $39 million and $37 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for loan receivables and participated receivables from IBM were $15 million and $1 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for lease receivables were a reduction of $2 million for the year ended December 31, 2017.
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable.
In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.
Past Due Financing Receivables
The company considers a clients’ financing receivables past due when an installment is aged over 90 days. The following table summarizes the information about the recorded investment in lease and loan receivables and participated receivables from IBM, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.
20
|
|
|
|
|
|
|
|
Recorded |
|
Billed |
|
Recorded |
|||
|
|
Total |
|
Recorded |
|
Investment |
|
Invoices |
|
Investment |
|||||
(Dollars in millions) |
|
Recorded |
|
Investment |
|
> 90 Days and |
|
> 90 Days and |
|
Not |
|||||
At September 30, 2018: |
|
Investment |
|
> 90 Days (1) |
|
Accruing (1) |
|
Accruing |
|
Accruing (2) |
|||||
Americas |
|
$ |
3,272 |
|
$ |
251 |
|
$ |
210 |
|
$ |
25 |
|
$ |
41 |
EMEA |
|
|
776 |
|
|
24 |
|
|
9 |
|
|
2 |
|
|
15 |
Asia Pacific |
|
|
690 |
|
|
18 |
|
|
1 |
|
|
0 |
|
|
17 |
Total lease receivables |
|
$ |
4,738 |
|
$ |
294 |
|
$ |
220 |
|
$ |
27 |
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
5,549 |
|
$ |
336 |
|
$ |
271 |
|
$ |
26 |
|
$ |
65 |
EMEA |
|
|
2,077 |
|
|
87 |
|
|
22 |
|
|
4 |
|
|
65 |
Asia Pacific |
|
|
899 |
|
|
9 |
|
|
5 |
|
|
2 |
|
|
3 |
Total loan receivables |
|
$ |
8,526 |
|
$ |
431 |
|
$ |
298 |
|
$ |
32 |
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
668 |
|
$ |
4 |
|
$ |
4 |
|
$ |
4 |
|
$ |
— |
EMEA |
|
|
1,630 |
|
|
7 |
|
|
2 |
|
|
1 |
|
|
5 |
Asia Pacific |
|
|
1,443 |
|
|
23 |
|
|
22 |
|
|
4 |
|
|
1 |
Total participated receivables from IBM |
|
$ |
3,741 |
|
$ |
35 |
|
$ |
28 |
|
$ |
8 |
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,005 |
|
$ |
760 |
|
$ |
547 |
|
$ |
67 |
|
$ |
212 |
(1) |
At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days. |
(2) |
Of the recorded investment not accruing, $166 million is individually evaluated for impairment with a related allowance of $128 million. |
|
|
|
|
|
|
|
|
Recorded |
|
Billed |
|
Recorded |
|||
|
|
Total |
|
Recorded |
|
Investment |
|
Invoices |
|
Investment |
|||||
(Dollars in millions) |
|
Recorded |
|
Investment |
|
> 90 Days and |
|
> 90 Days and |
|
Not |
|||||
At December 31, 2017: |
|
Investment |
|
> 90 Days (1) |
|
Accruing (1) |
|
Accruing |
|
Accruing (2)(3) |
|||||
Americas |
|
$ |
3,593 |
|
$ |
203 |
|
$ |
185 |
|
$ |
27 |
|
$ |
20 |
EMEA |
|
|
662 |
|
|
21 |
|
|
5 |
|
|
3 |
|
|
16 |
Asia Pacific |
|
|
852 |
|
|
22 |
|
|
4 |
|
|
1 |
|
|
18 |
Total lease receivables |
|
$ |
5,107 |
|
$ |
245 |
|
$ |
194 |
|
$ |
31 |
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
6,110 |
|
$ |
281 |
|
$ |
237 |
|
$ |
37 |
|
$ |
41 |
EMEA |
|
|
2,315 |
|
|
82 |
|
|
17 |
|
|
0 |
|
|
66 |
Asia Pacific |
|
|
937 |
|
|
9 |
|
|
4 |
|
|
2 |
|
|
5 |
Total loan receivables |
|
$ |
9,362 |
|
$ |
372 |
|
$ |
258 |
|
$ |
39 |
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
744 |
|
$ |
11 |
|
$ |
11 |
|
$ |
3 |
|
$ |
— |
EMEA |
|
|
1,525 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
— |
Asia Pacific |
|
|
1,543 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
— |
Total participated receivables from IBM |
|
$ |
3,812 |
|
$ |
12 |
|
$ |
12 |
|
$ |
4 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,282 |
|
$ |
629 |
|
$ |
464 |
|
$ |
74 |
|
$ |
166 |
(1) |
At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days. |
(2) |
Of the recorded investment not accruing, $118 million is individually evaluated for impairment with a related allowance of $105 million. |
(3) |
Recast to conform to current period presentation, which includes billed impaired amounts. |
21
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, as well as other information, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.
The following tables present the recorded investment, net of the allowance for credit losses, for each class of receivables, by credit quality indicator, at September 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All other credit quality indicators are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.
|
|
Lease Receivables |
|
Loan Receivables |
|
Participated Receivables with IBM |
|||||||||||||||||||||
(Dollars in millions) |
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
Asia |
||||
At September 30, 2018: |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|||||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa – Aa3 |
|
$ |
360 |
|
$ |
31 |
|
$ |
54 |
|
$ |
612 |
|
$ |
81 |
|
$ |
72 |
|
$ |
74 |
|
$ |
65 |
|
$ |
115 |
A1 – A3 |
|
|
692 |
|
|
96 |
|
|
269 |
|
|
1,178 |
|
|
256 |
|
|
358 |
|
|
143 |
|
|
204 |
|
|
575 |
Baa1 – Baa3 |
|
|
744 |
|
|
239 |
|
|
173 |
|
|
1,266 |
|
|
635 |
|
|
230 |
|
|
154 |
|
|
506 |
|
|
370 |
Ba1 – Ba2 |
|
|
703 |
|
|
234 |
|
|
103 |
|
|
1,196 |
|
|
619 |
|
|
136 |
|
|
145 |
|
|
494 |
|
|
219 |
Ba3 – B1 |
|
|
427 |
|
|
106 |
|
|
44 |
|
|
725 |
|
|
281 |
|
|
58 |
|
|
88 |
|
|
224 |
|
|
93 |
B2 – B3 |
|
|
270 |
|
|
57 |
|
|
27 |
|
|
460 |
|
|
150 |
|
|
36 |
|
|
56 |
|
|
120 |
|
|
58 |
Caa – D |
|
|
29 |
|
|
5 |
|
|
4 |
|
|
49 |
|
|
14 |
|
|
6 |
|
|
6 |
|
|
11 |
|
|
9 |
Total |
|
$ |
3,226 |
|
$ |
768 |
|
$ |
674 |
|
$ |
5,486 |
|
$ |
2,036 |
|
$ |
895 |
|
$ |
666 |
|
$ |
1,624 |
|
$ |
1,440 |
|
|
Lease Receivables |
|
Loan Receivables |
|
Participated Receivables with IBM |
|||||||||||||||||||||
(Dollars in millions) |
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
Asia |
|||
At December 31, 2017 |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|||||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa – Aa3 |
|
$ |
384 |
|
$ |
24 |
|
$ |
40 |
|
$ |
655 |
|
$ |
85 |
|
$ |
45 |
|
$ |
80 |
|
$ |
57 |
|
$ |
74 |
A1 – A3 |
|
|
786 |
|
|
93 |
|
|
367 |
|
|
1,340 |
|
|
324 |
|
|
409 |
|
|
163 |
|
|
217 |
|
|
676 |
Baa1 – Baa3 |
|
|
921 |
|
|
177 |
|
|
224 |
|
|
1,571 |
|
|
616 |
|
|
250 |
|
|
191 |
|
|
411 |
|
|
413 |
Ba1 – Ba2 |
|
|
681 |
|
|
218 |
|
|
115 |
|
|
1,160 |
|
|
756 |
|
|
129 |
|
|
141 |
|
|
505 |
|
|
213 |
Ba3 – B1 |
|
|
406 |
|
|
98 |
|
|
46 |
|
|
692 |
|
|
341 |
|
|
51 |
|
|
84 |
|
|
228 |
|
|
84 |
B2 – B3 |
|
|
326 |
|
|
39 |
|
|
36 |
|
|
555 |
|
|
135 |
|
|
40 |
|
|
67 |
|
|
90 |
|
|
66 |
Caa – D |
|
|
47 |
|
|
6 |
|
|
9 |
|
|
80 |
|
|
23 |
|
|
10 |
|
|
10 |
|
|
15 |
|
|
16 |
Total |
|
$ |
3,551 |
|
$ |
657 |
|
$ |
837 |
|
$ |
6,054 |
|
$ |
2,280 |
|
$ |
933 |
|
$ |
735 |
|
$ |
1,522 |
|
$ |
1,541 |
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2018 or for the year ended December 31, 2017.
5. Segments:
The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.
22
Client Financing provides leases and loan financing to end-user clients and acquires installment payment plans offered to end-user clients by IBM; as well as acquires participation interests in IBM financing receivables for which the company assumes the IBM client’s credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBM’s hardware, software, and services, as well as OEM IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBM’s Technology Services & Cloud Platforms segment’s acquisition of IT assets, which IBM uses in external, revenue-producing services contracts.
Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. Commercial Financing also purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the credit risk with IBM’s client.
The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.
IBM Credit and its consolidated subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business.
SEGMENT INFORMATION
|
|
Client |
|
Commercial |
|
Total |
|||
(Dollars in millions) |
|
Financing |
|
Financing |
|
Segments |
|||
For the three months ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
307 |
|
$ |
145 |
|
$ |
452 |
Pre-tax income |
|
|
124 |
|
|
59 |
|
|
184 |
Depreciation of equipment under operating lease |
|
|
50 |
|
|
— |
|
|
50 |
Financing cost (interest expense) |
|
|
91 |
|
|
44 |
|
|
135 |
Provision for/(benefit from) credit losses |
|
|
(6) |
|
|
(4) |
|
|
(10) |
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
309 |
|
$ |
109 |
|
$ |
418 |
Pre-tax income |
|
|
123 |
|
|
42 |
|
|
165 |
Depreciation of equipment under operating lease |
|
|
59 |
|
|
— |
|
|
59 |
Financing cost (interest expense) |
|
|
66 |
|
|
29 |
|
|
95 |
Provision for/(benefit from) credit losses |
|
|
2 |
|
|
0 |
|
|
2 |
SEGMENT INFORMATION
|
|
Client |
|
Commercial |
|
Total |
|||
(Dollars in millions) |
|
Financing |
|
Financing |
|
Segments |
|||
For the nine months ended September 30, 2018: |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
913 |
|
$ |
421 |
|
$ |
1,334 |
Pre-tax income |
|
|
354 |
|
|
168 |
|
|
522 |
Depreciation of equipment under operating lease |
|
|
146 |
|
|
— |
|
|
146 |
Financing cost (interest expense) |
|
|
242 |
|
|
119 |
|
|
362 |
Provision for/(benefit from) credit losses |
|
|
29 |
|
|
(5) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
945 |
|
$ |
330 |
|
$ |
1,274 |
Pre-tax income |
|
|
363 |
|
|
125 |
|
|
488 |
Depreciation of equipment under operating lease |
|
|
178 |
|
|
— |
|
|
178 |
Financing cost (interest expense) |
|
|
184 |
|
|
83 |
|
|
267 |
Provision for/(benefit from) credit losses |
|
|
13 |
|
|
(2) |
|
|
11 |
23
6. Equity Activity:
IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
|||
For the three months ended September 30, 2018: |
|
Amount |
|
Benefit |
|
Amount |
|||
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
(20) |
|
$ |
(6) |
|
$ |
(26) |
Retirement-related benefit plans (1): |
|
|
|
|
|
|
|
|
|
Prior service costs/(credits) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Net (losses)/gains arising during the period |
|
|
— |
|
|
— |
|
|
— |
Curtailments and settlements |
|
|
— |
|
|
— |
|
|
— |
Amortization of prior service (credits)/costs |
|
|
0 |
|
|
0 |
|
|
0 |
Amortization of net (gains)/losses |
|
|
0 |
|
|
0 |
|
|
0 |
Total retirement-related benefit plans |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
Other comprehensive income/(loss) |
|
$ |
(20) |
|
$ |
(6) |
|
$ |
(26) |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 7, "Retirement-Related Benefits," for additional information.) |
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
|||
For the three months ended September 30, 2017: |
|
Amount |
|
Benefit |
|
Amount |
|||
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
151 |
|
$ |
(8) |
|
$ |
143 |
Retirement-related benefit plans (1): |
|
|
|
|
|
|
|
|
|
Prior service costs/(credits) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Net (losses)/gains arising during the period |
|
|
— |
|
|
0 |
|
|
0 |
Curtailments and settlements |
|
|
— |
|
|
— |
|
|
— |
Amortization of prior service (credits)/costs |
|
|
0 |
|
|
0 |
|
|
0 |
Amortization of net (gains)/losses |
|
|
0 |
|
|
0 |
|
|
0 |
Total retirement-related benefit plans |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
Other comprehensive income/(loss) |
|
$ |
151 |
|
$ |
(8) |
|
$ |
143 |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 7, "Retirement-Related Benefits," for additional information.) |
24
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
|||
For the nine months ended September 30, 2018: |
|
Amount |
|
Benefit |
|
Amount |
|||
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
(119) |
|
$ |
(22) |
|
$ |
(140) |
Retirement-related benefit plans (1): |
|
|
|
|
|
|
|
|
|
Prior service costs/(credits) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Net (losses)/gains arising during the period |
|
|
1 |
|
|
0 |
|
|
0 |
Curtailments and settlements |
|
|
— |
|
|
— |
|
|
— |
Amortization of prior service (credits)/costs |
|
|
(1) |
|
|
0 |
|
|
0 |
Amortization of net (gains)/losses |
|
|
1 |
|
|
0 |
|
|
1 |
Total retirement-related benefit plans |
|
$ |
1 |
|
$ |
0 |
|
$ |
1 |
Other comprehensive income/(loss) |
|
$ |
(117) |
|
$ |
(22) |
|
$ |
(139) |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 7, "Retirement-Related Benefits," for additional information.) |
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
|||
For the nine months ended September 30, 2017: |
|
Amount |
|
Benefit |
|
Amount |
|||
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
368 |
|
$ |
(8) |
|
$ |
360 |
Retirement-related benefit plans (1): |
|
|
|
|
|
|
|
|
|
Prior service costs/(credits) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
Net (losses)/gains arising during the period |
|
|
1 |
|
|
0 |
|
|
1 |
Curtailments and settlements |
|
|
— |
|
|
— |
|
|
— |
Amortization of prior service (credits)/costs |
|
|
(1) |
|
|
0 |
|
|
(1) |
Amortization of net (gains)/losses |
|
|
1 |
|
|
0 |
|
|
1 |
Total retirement-related benefit plans |
|
$ |
2 |
|
$ |
0 |
|
$ |
1 |
Other comprehensive income/(loss) |
|
$ |
370 |
|
$ |
(8) |
|
$ |
361 |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 7, "Retirement-Related Benefits," for additional information.) |
Accumulated Other Comprehensive Income/(Loss) (net of tax)
|
|
|
|
|
Net Change |
|
|
|
|
|
|
Foreign |
|
Retirement- |
|
Accumulated |
|||
|
|
Currency |
|
Related |
|
Other |
|||
|
|
Translation |
|
Benefit |
|
Comprehensive |
|||
(Dollars in millions) |
|
Adjustments* |
|
Plans |
|
Income/(Loss) |
|||
January 1, 2018 |
|
$ |
165 |
|
$ |
(7) |
|
$ |
158 |
Cumulative effect of a change in accounting principle** |
|
|
(5) |
|
|
— |
|
|
(5) |
Other comprehensive income before reclassification |
|
|
(140) |
|
|
0 |
|
|
(140) |
Amount reclassified from accumulated other comprehensive income |
|
|
— |
|
|
0 |
|
|
0 |
Total change for the period |
|
|
(140) |
|
|
1 |
|
|
(139) |
September 30, 2018 |
|
$ |
20 |
|
$ |
(6) |
|
$ |
13 |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
** Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes".
25
|
|
|
|
|
Net Change |
|
|
|
|
|
|
Foreign |
|
Retirement- |
|
Accumulated |
|||
|
|
Currency |
|
Related |
|
Other |
|||
|
|
Translation |
|
Benefit |
|
Comprehensive |
|||
(Dollars in millions) |
|
Adjustments* |
|
Plans |
|
Income/(Loss) |
|||
January 1, 2017 |
|
$ |
(200) |
|
$ |
(9) |
|
$ |
(209) |
Other comprehensive income before reclassification |
|
|
360 |
|
|
1 |
|
|
361 |
Amount reclassified from accumulated other comprehensive income |
|
|
— |
|
|
0 |
|
|
0 |
Total change for the period |
|
|
360 |
|
|
1 |
|
|
361 |
September 30, 2017 |
|
$ |
161 |
|
$ |
(8) |
|
$ |
152 |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
7. Retirement-Related Benefits:
IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations.
Multiemployer Plans:
For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings. The amounts of expense attributed to the company by IBM for the three and nine months ended September 30, 2018 and 2017 were not material.
Charges from IBM to the company in relation to these plans (including non pension post retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM.
Multiple-Employer Plans:
For multiple-employer plans (mainly in Germany, Japan and Spain), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.
Any gains or losses recorded to Accumulated Other Comprehensive Income in the three and nine months ended September 30, 2018 and 2017 were not material.
Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings. The total costs for multiple-employer plans for the three and nine months ended September 30, 2018 and 2017 were not material.
8. Relationship with IBM and Related Party Transactions:
IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client. The following is a description of certain material relationships between IBM Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements.
Support Agreement
Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible
26
assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.
Operating Relationship
The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBM’s hardware, software, and services.
In the second half of 2016, the company began participating in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all participated receivables from IBM. These receivables earned interest income of $47 million and $144 million in the three and nine months ended September 30, 2018, an increase of $4 million and $25 million as compared to the same periods in 2017, respectively. The interest income is included in the Consolidated Statement of Earnings as financing revenue. For additional information, see note 4, “Financing Receivables, Receivables Purchased/Participated from IBM.”
The company purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the associated credit risk of IBM’s client. For the three months ended September 30, 2018, finance income earned from these receivables was $10 million, an increase of $2 million as compared to the same period in 2017. For the nine months ended September 30, 2018, finance income earned from these receivables was $32 million, an increase of $5 million as compared to the same period in 2017. The finance income is included in financing revenue in the Consolidated Statement of Earnings. For additional information, see note 4, “Financing Receivables, Receivables Purchased/Participated from IBM.”
In certain countries, the company provides loans to IBM, primarily in support of IBM’s Technology Services & Cloud Platforms segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. For the three months ended September 30, 2018, the interest income earned from these receivables was $45 million, an increase of $8 million as compared to the same period in 2017. For the nine months ended September 30, 2018, interest income earned was $128 million, an increase of $27 million as compared to the same period in 2017. Interest income is included in financing revenue in the Consolidated Statement of Earnings. The amount of such financings outstanding was $3,779 million at September 30, 2018 and $3,743 million at December 31, 2017.
The amount of other receivables from IBM of $2,549 million and $1,024 million at September 30, 2018 and December 31, 2017, respectively, primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The company's investment of excess cash with IBM was $2,538 million at September 30, 2018 and $911 million at December 31, 2017. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and the investing section of the Consolidated Statement of Cash Flows. Interest income earned from these investments was $17 million and $38 million in the three months and nine months ended September 30, 2018, respectively. Interest income earned for these investments was $9 million and $28 million for the three and nine months ended September 30, 2017, respectively. The interest income is included in financing revenue in the Consolidated Statement of Earnings.
In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements for the three months ended September 30, 2018 was $39 million, an increase of $4 million as compared to the same period in 2017. Fee income earned for the nine
27
months ended September 30, 2018 was $119 million, an increase of $13 million as compared to the same period in 2017. These fees are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement.
Borrowing Relationship
The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense incurred on loans from IBM was $81 million and $215 million for the three and nine months ended September 30, 2018, respectively, as compared to $66 million and $201 million for the three and nine months ended September 30, 2017, respectively. Interest expense is included in financing cost in the Consolidated Statement of Earnings. For additional information on short-term and long-term funding, see note 9, “Borrowings.”
Services and Other Arrangements
The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $53 million and $54 million in the third quarter of 2018 and 2017, respectively, and $163 million and $173 million for the nine months ended September 30, 2018 and 2017, respectively.
The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation and multiemployer retirement-related plans expense during the periods reported were not material.
Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party.
The outstanding amount of accounts payable to IBM of $1,142 million at September 30, 2018, and $2,903 million at December 31, 2017, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business.
The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The company's net profit from sales of returned equipment to IBM was $8 million and $12 million for the three months ended September 30, 2018 and 2017, respectively. The company's net profit from sales of returned equipment to IBM was $35 million and $40 million for the nine months ended September 30, 2018 and 2017 respectively. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings.
Tax Sharing Agreement
The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return.
28
9. Borrowings:
The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. The amount of these secured borrowings is reflected in the following short-term and long-term debt tables.
Short-Term Debt
|
|
Balance |
|
Balance |
|
||
(Dollars in millions) |
|
9/30/2018 |
|
12/31/2017 |
|
||
Commercial paper |
|
$ |
1,996 |
|
$ |
1,496 |
|
Short-term loans |
|
|
31 |
|
|
60 |
|
Secured borrowings |
|
|
3 |
|
|
12 |
|
Debt |
|
$ |
2,031 |
|
$ |
1,568 |
|
Debt payable to IBM |
|
|
12,454 |
|
|
15,159 |
|
Total |
|
$ |
14,485 |
|
$ |
16,727 |
|
IBM Credit maintains a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper can be used for general corporate purposes, including, among other items, the repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued can vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer.
The weighted-average interest rate for commercial paper was 2.2 percent and 1.5 percent at September 30, 2018 and December 31, 2017, respectively.
The weighted-average interest rate for short-term loans was 4.1 percent and 2.4 percent at September 30, 2018 and December 31, 2017, respectively.
The weighted-average interest rate for secured borrowings was 5.3 percent and 4.7 percent at September 30, 2018 and December 31, 2017, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $3 million at September 30, 2018 and $12 million at December 31, 2017.
The weighted-average interest rate for debt payable to IBM was 1.7 percent and 1.1 percent at September 30, 2018 and December 31, 2017, respectively.
29
Long-Term Debt
|
|
|
|
Balance |
|
Balance |
||
(Dollars in millions) |
|
Maturities |
|
9/30/2018 |
|
12/31/2017 |
||
Long-term notes (average interest rate at September 30, 2018) |
|
|
|
|
|
|
|
|
2.0% |
|
2019 |
|
$ |
1,400 |
|
$ |
1,400 |
2.4% |
|
2021 |
|
|
2,350 |
|
|
1,100 |
2.2% |
|
2022 |
|
|
500 |
|
|
500 |
3.0% |
|
2023 |
|
|
750 |
|
|
— |
|
|
|
|
$ |
5,000 |
|
$ |
3,000 |
|
|
|
|
|
|
|
|
|
Long-term loans (6.3% average interest rate at September 30, 2018) |
|
2018-2021 |
|
|
226 |
|
|
486 |
Secured borrowings (4.9% average interest rate at September 30, 2018) |
|
2018-2023 |
|
|
751 |
|
|
762 |
Long-term debt |
|
|
|
$ |
5,977 |
|
$ |
4,248 |
Less: net unamortized discount |
|
|
|
|
2 |
|
|
1 |
Less: net unamortized debt issuance costs |
|
|
|
|
8 |
|
|
9 |
Less: fair value adjustment* |
|
|
|
|
70 |
|
|
26 |
Debt |
|
|
|
$ |
5,898 |
|
$ |
4,211 |
Debt payable to IBM (1.2% average interest rate at September 30, 2018) |
|
|
|
|
9,491 |
|
|
9,539 |
Total |
|
|
|
$ |
15,389 |
|
$ |
13,750 |
*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt's carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
The company utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $751 million at September 30, 2018 and $762 million at December 31, 2017.
The company has a shelf registration statement in place with the SEC allowing it to offer for sale public debt securities. In the first quarter of 2018, the company issued fixed and floating rate debt securities in the aggregate amount of $2,000 million. The maturity dates of these debt securities range from 2021 to 2023. The net proceeds from the issuance of debt securities are utilized for general corporate purposes.
The company’s indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens) to 15 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met.
Contractual obligations of long-term debt and long-term debt payable to IBM outstanding at September 30, 2018, are as follows:
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
2023 and |
|
|
|
|||
(Dollars in millions) |
|
(Q4) |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
beyond |
|
Total |
|||||||
Long-term debt |
|
$ |
121 |
|
$ |
1,818 |
|
$ |
260 |
|
$ |
2,474 |
|
$ |
551 |
|
$ |
753 |
|
$ |
5,977 |
Debt payable to IBM |
|
|
1,444 |
|
|
3,454 |
|
|
2,542 |
|
|
1,106 |
|
|
853 |
|
|
93 |
|
|
9,491 |
Total |
|
$ |
1,566 |
|
$ |
5,272 |
|
$ |
2,801 |
|
$ |
3,580 |
|
$ |
1,404 |
|
$ |
846 |
|
$ |
15,469 |
Interest on Debt
The company recognized interest expense of $135 million and $362 million for the three and nine months ended September 30, 2018, of which $81 million and $215 million was interest expense on debt payable to IBM, respectively.
30
The company recognized interest expense of $95 million and $267 million for the three and nine months ended September 30, 2017, of which $66 million and $201 million was interest expense on debt payable to IBM, respectively.
Lines of Credit
The company has committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.
On July 19, 2018, IBM and the company (the Borrowers) entered into a new $2.5 billion, 364-Day Credit Agreement to replace the maturing $2.5 billion, 364-Day agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year. The new maturity date for the Three-Year Agreement is July 20, 2021. The facility size remains unchanged. The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions. As of September 30, 2018, the company has no borrowings outstanding against the Credit Agreements.
The company’s Credit Agreements each contain significant debt covenants, which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of IBM’s consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) IBM will not permit the consolidated net interest expense ratio, for any period of four consecutive fiscal quarters taken as a single accounting period, to be less than 2.20 to 1.0; (ii) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (iii) the company’s leverage ratio cannot be greater than 11 to 1 as of the last day of the fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million.
The company is in compliance with all of its significant debt covenants, and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. For additional information on the Support Agreement , see note 8, “Relationship with IBM and Related Party Transactions.”
The company is or may be involved in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning client allegations of wrongful repossession or defamation of credit.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations.
31
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses. As of September 30, 2018, there were no matters for which the likelihood of material loss is at least reasonably possible.
11. Commitments:
The company’s extended lines of credit to third-party entities include unused amounts of $8,211 million and $7,755 million at September 30, 2018 and December 31, 2017, respectively. A portion of these amounts is available to the company’s Commercial Financing clients to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $550 million and $749 million at September 30, 2018 and December 31, 2017, respectively.
12. Subsequent Events:
On October 28, 2018, IBM announced its intent to acquire all of the outstanding shares of Red Hat, Inc. (Red Hat). The transaction is subject to customary closing conditions, including regulatory clearance and approval by the Red Hat shareholders. IBM will continue with a disciplined financial policy and is committed to maintaining strong investment grade credit ratings. As a result of the proposed transaction, Standard and Poor’s has lowered IBM and IBM Credit’s long-term debt rating to A from A+, with no change to the short-term debt rating of A-1 and Fitch Ratings has lowered IBM and IBM Credit’s long-term debt rating to A from A+, with no change to the short-term debt rating of F1. Additionally, Moody’s placed IBM and IBM Credit’s long-term debt rating of A1 on review for downgrade, with no change to the short-term debt rating of Prime-1.
32
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018
Financial Results Summary - Three Months Ended September 30:
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Revenue |
|
$ |
452 |
|
$ |
418 |
|
8.3 |
% |
Net margin |
|
$ |
268 |
|
$ |
264 |
|
1.4 |
% |
Net margin percentage |
|
|
59.2 |
% |
|
63.2 |
% |
(4.0) |
pts. |
Total expense and other (income) |
|
$ |
84 |
|
$ |
99 |
|
(15.0) |
% |
Income before income taxes |
|
$ |
184 |
|
$ |
165 |
|
11.3 |
% |
Provision for income taxes |
|
$ |
39 |
|
$ |
38 |
|
4.0 |
% |
Net income |
|
$ |
144 |
|
$ |
127 |
|
13.4 |
% |
Net income margin |
|
|
31.9 |
% |
|
30.4 |
% |
1.5 |
pts |
Financial Performance Summary — Three Months Ended September 30:
In the third quarter of 2018, the company delivered revenue of $452 million and net income of $144 million compared to revenue of $418 million and net income of $127 million in the same period of 2017. In the third quarter of 2018, return on equity was 17.1 percent, compared to 15.6 percent in the prior year period.
Total revenue increased $34 million, or 8.3 percent, in the third quarter of 2018 as compared to 2017, driven by increases in financing revenue of $46 million, or 14.2 percent, partially offset by declines in operating lease revenue of $11 million, or 11.5 percent. The increase in financing revenue was driven primarily by an increase in commercial financing average assets and yields. Yields from any category of assets are the company’s rate of return on these assets and are calculated by dividing income from these assets by the average assets during the period. The decline in operating lease revenue was driven by lower originations and asset sales to third parties in the prior year.
From a segment perspective, Client Financing revenue of $307 million in the third quarter of 2018 declined 0.5 percent as compared to the prior year. The decline was driven by lower operating lease revenues. Commercial Financing revenue of $145 million in the third quarter of 2018 increased 33.2 percent as compared to the third quarter of 2017. The increase in revenue was driven by increases in average financing assets and increases in yields.
From a geographic perspective, Americas revenue of $263 million in the third quarter increased 15.7 percent when compared to the prior year period. Asia Pacific revenue of $74 million was flat, and EMEA revenue of $115 million declined 1.1 percent when compared to the third quarter of 2017.
In the third quarter of 2018, net margin, which is calculated as revenue minus financing costs and depreciation of equipment under operating lease, was $268 million, an increase of 1.4 percent, when compared to the same period in 2017. Increases in revenues and declines in depreciation expense of $9 million, or 15.3 percent, were partially offset by increased financing costs of $40 million, or 41.7 percent, when compared to the same period in the prior year. The increase in financing cost was due to an increase in interest rates and an increase in the average debt balance when compared to the same period in 2017. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin percentage of 59.2 percent in the third quarter of 2018 decreased 4.0 points as compared to the net margin percentage in the same period in 2017.
33
Total expense and other (income) of $84 million in the third quarter of 2018 decreased $15 million, or 15.0 percent, compared to the same period in 2017. The year-to-year decline was driven by lower provisions for credit losses and a reduction in selling, general and administrative expenses.
Pre-tax income of $184 million in the third quarter of 2018 increased 11.3 percent as compared to the third quarter of 2017. The increase in 2018 was primarily driven by lower provisions for credit losses. The pre-tax income margin in the third quarter of 2018 of 40.6 percent increased on a year-to-year basis by 1.1 points.
The effective tax rate was 21.5 percent in the third quarter of 2018, a decrease of 1.5 points compared to the third quarter of 2017, driven by a more favorable geographic mix of pre-tax earnings and a lower U.S. income tax rate.
Net income of $144 million increased $17 million, or 13.4 percent, in the third quarter of 2018 as compared to the same period in 2017. In the third quarter of 2018, net income margin was 31.9 percent, an increase of 1.5 points on a year-to-year basis.
Return on equity was 17.1 percent in the third quarter of 2018, an increase of 1.6 points when compared to the prior year period, driven by increases in net income, partially offset by a higher average equity balance.
The company generated $283 million in cash flow from operating activities in the third quarter of 2018, an increase of $139 million when compared to the third quarter of 2017. Net cash provided by investing activities of $72 million in the third quarter of 2018 was lower by $357 million when compared to the prior year period, primarily driven by an increase in the investment of excess cash with IBM. Net cash used for financing activities of $471 million in the third quarter of 2018 was essentially flat when compared to the third quarter of 2017.
Financial Results Summary - Nine Months Ended September 30:
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Revenue |
|
$ |
1,334 |
|
$ |
1,274 |
|
4.7 |
% |
Net margin |
|
$ |
827 |
|
$ |
829 |
|
(0.3) |
% |
Net margin percentage |
|
|
62.0 |
% |
|
65.1 |
% |
(3.1) |
pts. |
Total expense and other (income) |
|
$ |
305 |
|
$ |
341 |
|
(10.7) |
% |
Income before income taxes |
|
$ |
522 |
|
$ |
488 |
|
7.0 |
% |
Provision for income taxes |
|
$ |
112 |
|
$ |
112 |
|
0.0 |
% |
Net income |
|
$ |
410 |
|
$ |
376 |
|
9.1 |
% |
Net income margin |
|
|
30.7 |
% |
|
29.5 |
% |
1.2 |
pts |
|
|
|
|
|
|
|
|
Yr.-to-Date |
|
|
|
At September 30, |
|
At December 31, |
|
Percent |
|
||
(Dollars in millions) |
|
2018 |
|
2017 |
|
Change |
|
||
Assets |
|
$ |
36,694 |
|
$ |
39,516 |
|
(7.1) |
% |
Liabilities |
|
$ |
33,334 |
|
$ |
35,954 |
|
(7.3) |
% |
Member’s interest |
|
$ |
3,360 |
|
$ |
3,562 |
|
(5.7) |
% |
|
|
At September 30, |
|
At December 31, |
|
|
|
2018 |
|
2017 |
|
Debt-to-Equity Ratio * |
|
8.9x |
|
8.6x |
|
*The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of member’s interest in the company at the end of the reporting period presented.
34
Return on Equity
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||
(Dollars in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
||||
Net income |
|
$ |
144 |
|
$ |
127 |
|
|
$ |
410 |
|
$ |
376 |
|
Annualized net income (1) |
|
|
576 |
|
|
508 |
|
|
|
546 |
|
|
501 |
|
Average equity (2) * |
|
|
3,364 |
|
|
3,264 |
|
|
|
3,398 |
|
|
3,329 |
|
Return on equity (1)/(2) |
|
|
17.1 |
% |
|
15.6 |
% |
|
|
16.1 |
% |
|
15.1 |
% |
*Average of the ending member’s interest for the last two quarters and four quarters, for the three and nine months ended September 30, respectively.
Financial Performance Summary — Nine Months Ended September 30:
In the first nine months of 2018, the company delivered revenue of $1,334 million and net income of $410 million. In the first nine months of 2017, the company had revenue of $1,274 million and net income of $376 million. In the first nine months of 2018 and 2017, return on equity was 16.1 percent and 15.1 percent, respectively.
Total revenue increased $60 million, or 4.7 percent, in the first nine months of 2018 as compared to 2017, driven by increases in financing revenue of $98 million, or 9.9 percent, partially offset by declines in operating lease revenue of $38 million, or 13.3 percent. The increase in financing revenue was driven by an increase in commercial financing average assets and increased yields. The decline in operating lease revenue was driven by lower originations and asset sales to third parties in the prior year.
From a segment perspective, Client Financing revenue of $913 million in the first nine months of 2018 declined 3.4 percent as compared to the prior year. The decline was driven by lower operating lease revenues. Commercial Financing revenue of $421 million in the first nine months of 2018 increased 27.9 percent as compared to the first nine months of 2017. The increase in revenue was driven by increases in average financing assets and increases in yields.
From a geographic perspective, revenue in the first nine months of 2018 increased across all three geographies, as compared to the same period in 2017. Americas revenue of $756 million increased 7.8 percent, EMEA revenue of $353 million increased 1.2 percent and Asia Pacific revenue of $225 million increased 0.3 percent.
Net margin in the first nine months of 2018 was $827 million, a decline of 0.3 percent when compared to the same period in 2017. Increases in financing cost of $95 million, or 35.7 percent, were partially offset by increases in revenue and declines in depreciation expense of $33 million, or 18.4 percent, when compared to the same period in the prior year. The increase in financing cost was due to higher interest rates and a higher average debt balance compared to the same period in 2017. The decline in depreciation expense was driven by lower average operating lease asset balances. The net margin of 62.0 percent in the first nine months of 2018 decreased 3.1 points as compared to the net margin in the same period in 2017.
Total expense and other (income) of $305 million in the first nine months of 2018 decreased $37 million, or 10.7 percent, compared to the same period in 2017. The year-to-year decline was driven by lower net losses from derivatives and foreign currency transactions and increased profits on sales of equipment returned from lease, partially offset by higher provisions for credit losses.
Pre-tax income of $522 million in the first nine months of 2018 increased 7.0 percent as compared to the first nine months of 2017. The increase in 2018 was primarily driven by an increase in other income. The pre-tax income margin in the first nine months of 2018 of 39.1 percent increased on a year-to-year basis by 0.8 points.
The effective tax rate was 21.5 percent in the first nine months of 2018, a decrease of 1.5 points compared to the first nine months of 2017, driven by a more favorable geographic mix of pre-tax earnings and a lower U.S. income tax rate, partially offset by the first-half 2018 provisional net tax charge related to U.S. tax reform enactment.
35
Net income of $410 million increased 9.1 percent, in the first nine months of 2018 as compared to the same period in 2017. In the first nine months of 2018, net income margin of 30.7 percent increased 1.2 points on a year-to-year basis.
Return on equity of 16.1 percent increased 1.0 point in the first nine months of 2018 driven by increases in net income which were partially offset by a higher average equity balance year-to-year.
Total assets of $36,694 million at September 30, 2018 declined $2,822 million from December 31, 2017, driven primarily by a decline in total net financing receivables of $3,726 million and declines in cash and cash equivalents of $719 million. These declines were partially offset by an increase in other receivables from IBM of $1,525 million due to increased investment of excess cash with IBM.
The company generated $812 million in cash flow from operating activities in the first nine months of 2018, an increase of $205 million when compared to the first nine months of 2017. Net cash used by investing activities was $853 million for the nine months ended September 30, 2018, an increase of $827 million when compared to the same period in 2017. The increase was primarily driven by higher levels of financing originations in the current year. Net cash used in financing activities was $661 million for the nine months ended September 30, 2018, an increase of $157 million when compared to the prior year period, driven primarily by lower net debt issuances.
Third Quarter and First Nine Months in Review
Results of Operations
Segment Details
The following is an analysis of the reportable segment results for the third quarter and first nine months of 2018 versus the third quarter and first nine months of 2017. The table below presents each reportable segment’s revenue and net margin results.
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
Three Months Ended |
|
Percent/ |
|
|
Nine Months Ended |
|
Percent/ |
|
||||||||
|
|
September 30, |
|
Margin |
|
|
September 30, |
|
Margin |
|
||||||||
(Dollars in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
2018 |
|
2017 |
|
Change |
|
||||
Client Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
307 |
|
$ |
309 |
|
(0.5) |
% |
|
$ |
913 |
|
$ |
945 |
|
(3.4) |
% |
Net margin |
|
|
166 |
|
|
184 |
|
(9.7) |
% |
|
|
525 |
|
|
582 |
|
(9.9) |
% |
Net margin percentage |
|
|
54.1 |
% |
|
59.6 |
% |
(5.5) |
pts. |
|
|
57.5 |
% |
|
61.6 |
% |
(4.1) |
pts. |
Pre-tax income |
|
$ |
124 |
|
$ |
123 |
|
0.8 |
% |
|
$ |
354 |
|
$ |
363 |
|
(2.6) |
% |
Pre-tax margin |
|
|
40.5 |
% |
|
39.9 |
% |
0.5 |
pts. |
|
|
38.8 |
% |
|
38.5 |
% |
0.3 |
pts. |
Commercial Financing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
145 |
|
$ |
109 |
|
33.2 |
% |
|
$ |
421 |
|
$ |
330 |
|
27.9 |
% |
Net margin |
|
|
101 |
|
|
80 |
|
27.0 |
% |
|
|
302 |
|
|
247 |
|
22.3 |
% |
Net margin percentage |
|
|
69.9 |
% |
|
73.3 |
% |
(3.4) |
pts. |
|
|
71.7 |
% |
|
74.9 |
% |
(3.3) |
pts. |
Pre-tax income |
|
$ |
59 |
|
$ |
42 |
|
42.2 |
% |
|
$ |
168 |
|
$ |
125 |
|
34.9 |
% |
Pre-tax margin |
|
|
40.9 |
% |
|
38.3 |
% |
2.6 |
pts. |
|
|
39.9 |
% |
|
37.8 |
% |
2.1 |
pts. |
Total Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
452 |
|
$ |
418 |
|
8.3 |
% |
|
$ |
1,334 |
|
$ |
1,274 |
|
4.7 |
% |
Net margin |
|
|
268 |
|
|
264 |
|
1.4 |
% |
|
|
827 |
|
|
829 |
|
(0.3) |
% |
Net margin percentage |
|
|
59.2 |
% |
|
63.2 |
% |
(4.0) |
pts. |
|
|
62.0 |
% |
|
65.1 |
% |
(3.1) |
pts. |
Pre-tax income |
|
$ |
184 |
|
$ |
165 |
|
11.3 |
% |
|
$ |
522 |
|
$ |
488 |
|
7.0 |
% |
Pre-tax margin |
|
|
40.6 |
% |
|
39.5 |
% |
1.1 |
pts. |
|
|
39.1 |
% |
|
38.3 |
% |
0.8 |
pts. |
36
Client Financing
Client Financing revenue of $307 million in the third quarter of 2018 decreased $2 million, or 0.5 percent, as compared to the same period in 2017. For the first nine months of 2018, Client Financing revenue decreased $32 million, or 3.4 percent, as compared to the same period in 2017. In both periods the decrease was driven by operating lease revenue which declined $11 million and $38 million respectively for the first three and nine months of 2018 on a year-to-year basis.
Net margin decreased $18 million, or 9.7 percent and decreased $58 million, or 9.9 percent as compared to the prior year period, for the three and nine month periods ended, respectively. The decreases were primarily driven by increases in interest expense of $25 million and $58 million for the three and nine month periods, respectively. The increases in interest expense were due to rising interest rates and higher debt levels in support of a larger asset base in 2018 when compared to the prior year.
Pre-tax income in the third quarter of 2018 increased $1 million, or 0.8 percent, as compared to the same period in 2017. Lower expense allocations and provisions for credit losses were offset by declines in net margin when compared to the prior year. For the nine months ended September 30, 2018, pre-tax income declined $9 million, or 2.6 percent, when compared to the prior year period. The decline was driven by an increase in interest expense and higher provisions for credit losses of $16 million, partially offset by higher income from sales of equipment returned from lease of $22 million and lower levels of expense allocations.
Commercial Financing
Commercial Financing revenue of $145 million and $421 million in the three and nine month periods ended 2018 increased $36 million, or 33.2 percent, and $92 million, or 27.9 percent, respectively, when compared to the same periods of 2017. The revenue growth in both periods was driven by increases in average financing receivable assets due to increased volumes, primarily with existing OEM suppliers.
Net margin in the third quarter of 2018 increased $22 million, or 27.0 percent, as compared to the same period in 2017. The increase was primarily driven by the growth in revenue, partially offset by an increase in interest expense of $15 million. For the first nine months of 2018, net margin increased $55 million, or 22.3 percent, as compared to the same period in 2017.
Pre-tax income in the third quarter of 2018 increased $18 million, or 42.2 percent, as compared to the same period in 2017. For the first nine months of 2018, pre-tax income increased $44 million, or 34.9 percent, as compared to the same period in 2017. The year-to-year increase in both periods was driven by higher net margin due to increases in average financing receivable asset balances.
Geographic Revenue
The following provides revenue performance by geography.
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Percent |
|
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Revenue |
|
$ |
452 |
|
$ |
418 |
|
8.3 |
% |
Geographies |
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
263 |
|
$ |
227 |
|
15.7 |
% |
Europe/Middle East/Africa (EMEA) |
|
|
115 |
|
|
116 |
|
(1.1) |
|
Asia Pacific |
|
|
74 |
|
|
74 |
|
0.0 |
|
37
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Percent |
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Revenue |
|
$ |
1,334 |
|
$ |
1,274 |
|
4.7 |
% |
Geographies |
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
756 |
|
$ |
701 |
|
7.8 |
% |
Europe/Middle East/Africa (EMEA) |
|
|
353 |
|
|
349 |
|
1.2 |
|
Asia Pacific |
|
|
225 |
|
|
224 |
|
0.3 |
|
Total revenue of $452 million increased $34 million, or 8.3 percent, in the third quarter of 2018 compared to the same period in 2017, primarily driven by the Americas.
Americas revenue of $263 million increased $36 million, or 15.7 percent, in the third quarter of 2018 compared to the same period in 2017. Increased financing revenue of $44 million was driven by improvements in both the client and commercial segments. These improvements were offset by operating lease revenue declines of $8 million when compared to the prior year period.
EMEA revenue of $115 million decreased $1 million, or 1.1 percent, in the third quarter of 2018 compared to the same period in 2017. Operating lease declines of $3 million were partially offset by increased financing revenues of $1 million, when compared to the third quarter of 2017.
Asia Pacific revenue of $74 million was flat in the third quarter of 2018 when compared to the same period in 2017. Increases of $4 million from commercial financing were offset by declines in sales-type lease revenues of $3 million when compared to the prior year period.
Total revenue of $1,334 million increased $60 million, or 4.7 percent, in the first nine months of 2018 compared to the same period in 2017, with increases across all geographies.
Americas revenue of $756 million increased $55 million, or 7.8 percent, in the first nine months of 2018 compared to the first nine months of the prior year, primarily driven by an increase in financing revenue of $84 million, partially offset by declines in operating leases. EMEA revenue of $353 million increased $4 million, or 1.2 percent, driven by increases in financing revenue of $7 million. Asia Pacific revenue of $225 million increased $1 million, or 0.3 percent.
Expense
Total Expense and Other (Income)
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Total expense and other (income) |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
89 |
|
$ |
94 |
|
(5.2) |
% |
Provisions for/(benefits from) credit losses |
|
|
(10) |
|
|
2 |
|
NM |
|
Other (income) and expense |
|
|
5 |
|
|
3 |
|
83.6 |
|
Total expense and other (income) |
|
$ |
84 |
|
$ |
99 |
|
(15.0) |
% |
Total expense-to-revenue ratio |
|
|
18.6 |
% |
|
23.7 |
% |
(5.1) |
pts. |
NM - Not Meaningful
38
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Total expense and other (income) |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
292 |
|
$ |
303 |
|
(3.7) |
% |
Provisions for credit losses |
|
|
24 |
|
|
11 |
|
123.7 |
|
Other (income) and expense |
|
|
(11) |
|
|
28 |
|
NM |
|
Total expense and other (income) |
|
$ |
305 |
|
$ |
341 |
|
(10.7) |
% |
Total expense-to-revenue ratio |
|
|
22.8 |
% |
|
26.8 |
% |
(3.9) |
pts. |
NM - Not Meaningful
Total expense and other (income) of $84 million decreased $15 million, or 15.0 percent, in the third quarter of 2018 as compared to the same period in 2017. For the nine months ended September 30, 2018, total expense and other (income) of $305 million decreased $37 million, or 10.7 percent, as compared to the prior year period. For additional information regarding total expense and other (income), see the following analysis by category.
Selling, General and Administrative
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative - other |
|
$ |
32 |
|
$ |
37 |
|
(13.5) |
% |
Contracted services |
|
|
4 |
|
|
4 |
|
15.6 |
|
Functional support services and other related party expenses |
|
|
53 |
|
|
54 |
|
(0.9) |
|
Total selling, general and administrative expense |
|
$ |
89 |
|
$ |
94 |
|
(5.2) |
% |
Selling, General and Administrative
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Selling, general and administrative expense: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative - other |
|
$ |
115 |
|
$ |
108 |
|
6.6 |
% |
Contracted services |
|
|
13 |
|
|
23 |
|
(40.8) |
|
Functional support services and other related party expenses |
|
|
163 |
|
|
173 |
|
(5.3) |
|
Total selling, general and administrative expense |
|
$ |
292 |
|
$ |
303 |
|
(3.7) |
% |
SG&A expense decreased $5 million, or 5.2 percent, in the third quarter of 2018 as compared to the third quarter of 2017. Other SG&A improved $5 million while contracted services and functional support services and other related party expenses were essentially flat for the third quarter when compared to the prior year period. SG&A expense decreased $11 million, or 3.7 percent, in the first nine months of 2018 as compared to the prior year period, driven by lower contracted services expenses and functional support services expenses charged by IBM, partially offset by increases in compensation expense. The decline in contracted services expense is driven by higher charges in the prior year relating to the establishment of IBM Credit LLC. For additional information on functional support services, see note 8, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.
Provision for Credit Losses
Provisions for credit losses decreased $12 million in the third quarter of 2018 when compared to the third quarter of 2017, due primarily to lower unallocated reserve requirements in the Americas and EMEA in the current year.
39
Provisions for credit losses increased $13 million in the first nine months of 2018 when compared to the prior year period primarily due to higher specific reserve requirements in the Americas and EMEA in the current year. For additional information on provisions for credit losses, see note 4, “Financing Receivables, Receivables Purchased/Participated from IBM,” to the Consolidated Financial Statements.
Other (Income) and Expense
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the three months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Other (income) and expense: |
|
|
|
|
|
|
|
|
|
Foreign currency transaction (gains)/losses |
|
$ |
1 |
|
$ |
1 |
|
(24.0) |
% |
(Gains)/losses on derivative instruments |
|
|
0 |
|
|
4 |
|
(98.8) |
|
(Gains)/losses on sale of equipment upon lease termination |
|
|
(14) |
|
|
(12) |
|
14.2 |
|
Other expense and (income) |
|
|
18 |
|
|
10 |
|
76.4 |
|
Total other (income) and expense |
|
$ |
5 |
|
$ |
3 |
|
83.6 |
% |
Other (Income) and Expense
|
|
|
|
|
|
|
|
Yr.-to-Yr. |
|
|
|
|
|
|
|
|
|
Percent/ |
|
(Dollars in millions) |
|
|
|
|
|
|
|
Margin |
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
Change |
|
||
Other (income) and expense: |
|
|
|
|
|
|
|
|
|
Foreign currency transaction (gains)/losses |
|
$ |
8 |
|
$ |
(211) |
|
NM |
% |
(Gains)/losses on derivative instruments |
|
|
(7) |
|
|
245 |
|
NM |
|
(Gains)/losses on sale of equipment upon lease termination |
|
|
(61) |
|
|
(40) |
|
54.6 |
|
Other expense and (income) |
|
|
49 |
|
|
34 |
|
44.9 |
|
Total other (income) and expense |
|
$ |
(11) |
|
$ |
28 |
|
NM |
% |
NM - Not Meaningful
Other (income) and expense was $5 million of expense in the third quarter of 2018, an increase of $2 million when compared to the same period of 2017. Other expenses increased by $8 million in third quarter of 2018 and were partially offset by lower losses on derivative instruments of $4 million when compared to the prior year. Other (income) and expense was $11 million of income in the first nine months of 2018 as compared to $28 million of expense in the same period of 2017. Other (income) and expense in the first nine months of 2018 includes gains on derivative instruments of $7 million, offset by foreign currency transaction losses of $8 million. The losses on derivative instruments of $245 million in the prior year period were offset by gains from foreign currency transactions of $211 million. For additional information on currency impacts and derivative instruments, see note 3, “Financial Instruments,” to the Consolidated Financial Statements.
Taxes
On December 22, 2017, U.S. tax reform was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate income tax rate to 21 percent, allowing for full expensing for investments in certain property placed in service after September 27, 2017 and before January 1, 2023, changes in incentives, provisions to prevent U.S. tax base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform resulted in the company recording a provisional one-time net benefit of $162 million to tax expense in the fourth-quarter and year ended December 31, 2017. This benefit was the result of the re-measurement of deferred tax balances to the new U.S. federal tax rate, as well as the U.S. transition tax and any foreign tax costs on undistributed foreign earnings.
40
All components of the provisional net benefit of $162 million were based on the company’s estimates as of December 31, 2017. Specifically, the transition tax, any foreign tax costs, as well as the re-measurement of deferred tax balances, are provisional and have been calculated based on existing tax law and the best information available as of the date of estimate. The effect of tax law changes on deferred tax assets and liabilities was a benefit of $171 million driven by U.S. tax reform and was included in the one-time net benefit. An additional provisional charge of $4 million was recorded in the first quarter as a result of IRS guidance issued in January 2018 and a benefit of $2 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment, conclusion of the effects of the “Global Intangible Low-Taxed Income” (GILTI) provisions, further refinement of the company’s calculations, and additional guidance that may be issued by the U.S. government, among other items. The company is still evaluating the Act’s GILTI provisions and has not yet elected an accounting policy.
The company has not completed its assessment and the net tax benefit remains provisional as of September 30, 2018. Any changes to the net tax benefit will be finalized in the fourth quarter of 2018 which is within the 12 month time limit provided by the SEC.
For the three months ended September 30, 2018, the company reported a provision for income taxes of $39 million and an effective tax rate of 21.5 percent, compared to a provision of $38 million and an effective tax rate of 23.0 percent for the three months ended September 30, 2017. For the nine-month period ended September 30, 2018, the company reported a provision for income taxes of $112 million and an effective tax rate of 21.5 percent compared to a provision of $112 million and an effective tax rate of 23.0 percent for the same period in 2017. The change in the effective tax rates for both periods was primarily attributable to the geographic mix of pre-tax earnings and the lower U.S. corporate income tax rate.
The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to the company’s U.S. federal and certain state and foreign operations that are included in applicable IBM consolidated tax returns, pursuant to the Tax Sharing Agreement, any subsequent changes to the company’s income tax liability as a result of valuation allowances and tax examinations are the responsibility of IBM. Therefore, any recognition and subsequent changes in assessment about the sustainability of related tax positions, including interest and penalties, are the responsibility of IBM. As such, there have been no uncertain tax liabilities recorded in the Consolidated Financial Statements for entities that file as part of IBM’s consolidated tax filings as the company bears no risk associated with any subsequent change in the sustainability of uncertain tax positions.
For the company’s separate income tax return filings, the company is generally no longer subject to tax examinations for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result for these years.
The amount of unrecognized tax benefits at September 30, 2018 of $1 million was unchanged from December 31, 2017.
If the company’s provision for income taxes had been prepared using the separate return method without modification for the benefits-for-loss approach, there would be no material difference in the total taxes included in net income reported in each of the periods above. For additional information, see note 1, “Basis of Presentation.”
Financial Position Summary
The company’s primary use of funds is to originate financing receivables and operating leases with end-users, suppliers, distributors, resellers and IBM. Financing receivables consist of direct financing leases and loans to end-user clients, purchases of installment payment plans from IBM and working capital financing to suppliers, distributors and resellers. Operating leases are for IBM and OEM IT products. Receivables purchased/participated from IBM include purchased interests in certain of IBM’s trade accounts receivable and IBM receivables that have been participated to IBM Credit. Financing receivables from IBM include loan financing to IBM’s Technology Services & Cloud Platforms’ segment. For
41
additional information relating to financing activities with IBM, see note 8, “Relationship with IBM and Related Party Transactions.”
Total assets of $36,694 million at September 30, 2018 declined $2,822 million (including a decrease of $691 million from currency) as compared to year-end 2017, primarily driven by:
· |
A decline in total financing receivables of $3,726 million (including a decrease of $592 million from currency), primarily driven by a decline in Commercial Financing receivables of $2,103 million and a decline in Client Financing loans and installment payment receivables of $849 million. These declines are seasonal, resulting from collections of higher year-end balances, and |
· |
A decline of $719 million in cash and cash equivalents (including a decrease of $17 million from currency); partially offset by |
· |
An increase in other receivables from IBM of $1,525 million (including a decrease of $54 million from currency), predominantly due to increased cash invested with IBM of $1,628 million. For additional information relating to other receivables from IBM originating from excess cash invested with IBM, see note 8, “Relationship with IBM and Related Party Transactions.” |
At September 30, 2018, substantially all client and commercial financing assets were IT related assets with no direct exposure to consumers. Approximately 55 percent of the total portfolio, excluding financing receivables from IBM and receivables purchased from IBM, was with investment grade clients. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 15 points to 70 percent.
Total liabilities of $33,334 million at September 30, 2018 decreased $2,620 million (including a decrease of $443 million from currency), as compared to year-end 2017, primarily driven by:
· |
A decline in accounts payable to IBM of $1,760 million (including a decrease of $22 million from currency) and a decline in accounts payable to third-parties of $260 million (including a decrease of $20 million from currency), both of which were primarily driven by settlement of fourth-quarter 2017 originations, and |
· |
A decrease in total debt of $603 million (including a decrease of $386 million from currency), including an increase in debt with third parties of $2,150 million and a decrease in debt payable to IBM of $2,753 million. |
Total member’s interest of $3,360 million at September 30, 2018 decreased $202 million as compared to year-end 2017, primarily driven by:
· |
Cash distributions to IBM of $620 million, and |
· |
Foreign currency translation declines of $146 million; partially offset by |
· |
Net income for the first nine months of 2018 of $410 million, and |
· |
Capital contributions from IBM of $148 million. |
Originations of Financing Receivables and Operating Leases
Originations are management’s estimate of the gross additions for Client Financing and Commercial Financing assets. There are no industry standards or requirements governing the reporting of financing asset originations. Management believes that the estimated values of financing asset originations disclosed in the table below provide insight into the potential future cash flows and earnings of the company.
42
The Client Financing origination values presented below exclude the company’s loans to IBM’s Technology Services & Cloud Platforms segment, which are executed under a loan facility and are not considered originations.
Originations
|
|
Three Months Ended |
|
Yr.-to-Yr. |
|
|
Nine Months Ended |
|
Yr.-to-Yr. |
|
|
||||||||
|
|
September 30, |
|
Percent |
|
|
September 30, |
|
Percent |
|
|
||||||||
(Dollars in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
2018 |
|
2017 |
|
Change |
|
|
||||
Client Financing |
|
$ |
3,126 |
|
$ |
3,110 |
|
0.5 |
% |
|
$ |
9,798 |
|
$ |
8,277 |
|
18.4 |
% |
|
Commercial Financing |
|
|
16,571 |
|
|
15,497 |
|
6.9 |
% |
|
|
50,587 |
|
|
43,951 |
|
15.1 |
% |
|
Total originations |
|
$ |
19,697 |
|
$ |
18,608 |
|
5.9 |
% |
|
$ |
60,385 |
|
$ |
52,229 |
|
15.6 |
% |
|
In the third quarter of 2018, the company originated $3,126 million of Client Financing receivables as compared to $3,110 million in the third quarter of 2017. The company originated $9,798 million of Client Financing receivables in the first nine months of 2018 as compared to $8,277 million in the first nine months of 2017. The increases of $16 million and $1,521 million in the third quarter and first nine months, respectively, as compared to the same periods in the prior year, were driven by higher installment payment plan originations for IBM services and continuing strong lease volumes due to client migration to the IBM z14 mainframe.
In the third quarter of 2018, the company originated $16,571 million of Commercial Financing receivables as compared to $15,497 million in the third quarter of 2017. The company originated $50,587 million of Commercial Financing receivables in the first nine months of 2018 as compared to $43,951 million in the first nine months of 2017. The increases of $1,074 million and $6,635 million in the third quarter and first nine months, respectively, as compared to the same periods in the prior year, were driven by higher OEM IT originations primarily with existing OEM suppliers.
Segment Assets
|
|
|
|
|
|
|
|
Yr.-to-Date |
|
(Dollars in millions) |
|
At September 30, |
|
At December 31, |
|
Percent |
|
||
Client Financing |
|
2018 |
|
2017 |
|
Change |
|
||
Financing receivables, net |
|
$ |
13,629 |
|
$ |
14,939 |
|
(8.8) |
% |
Equipment under operating leases, net |
|
|
425 |
|
|
401 |
|
5.9 |
|
Financing receivables from IBM |
|
|
3,779 |
|
|
3,743 |
|
1.0 |
|
Receivables participated from IBM, net |
|
|
3,730 |
|
|
3,798 |
|
(1.8) |
|
Total assets |
|
$ |
21,562 |
|
$ |
22,880 |
|
(5.8) |
% |
|
|
|
|
|
|
|
|
Yr.-to-Date |
|
(Dollars in millions) |
|
At September 30, |
|
At December 31, |
|
Percent |
|
||
Commercial Financing |
|
2018 |
|
2017 |
|
Change |
|
||
Financing receivables, net |
|
$ |
9,023 |
|
$ |
11,127 |
|
(18.9) |
% |
Receivables purchased from IBM, net |
|
|
1,160 |
|
|
1,441 |
|
(19.5) |
|
Total assets |
|
$ |
10,184 |
|
$ |
12,568 |
|
(19.0) |
% |
The decrease in Client Financing assets of $1,318 million at September 30, 2018 as compared to December 31, 2017 was primarily driven by cash collections of financing receivables in excess of new originations, as a result of higher year-end balances.
The decrease in Commercial Financing assets of $2,384 million at September 30, 2018 as compared to December 31, 2017 was driven by cash collections exceeding new originations, primarily due to declines from higher year-end balances.
The company’s receivables portfolio at September 30, 2018 represented the following industry profile: Financial (32 percent), Government (14 percent), Manufacturing (14 percent), Services (13 percent), Retail (7 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
43
The company’s receivables portfolio at December 31, 2017 represented the following industry profile: Financial (33 percent), Government (15 percent), Manufacturing (13 percent), Services (13 percent), Retail (8 percent), Communications (6 percent), Healthcare (6 percent) and Other (6 percent).
The assets of the company were financed with $29,874 million of total debt at September 30, 2018, as compared to $30,477 million of debt at December 31, 2017.
Financing Receivables and Allowances
The following table presents financing receivables excluding residual values, miscellaneous receivables and loan financing to IBM’s Technology Services & Cloud Platforms segment which the company considers collectable and without third party risk.
|
|
At September 30, |
|
At December 31, |
|
||
(Dollars in millions) |
|
2018 |
|
2017 |
|
||
Recorded investment |
|
$ |
27,221 |
|
$ |
30,890 |
|
Specific allowance for credit losses |
|
|
128 |
|
|
107 |
|
Unallocated allowance for credit losses |
|
|
94 |
|
|
106 |
|
Total allowance for credit losses |
|
|
222 |
|
|
213 |
|
Net financing receivables |
|
$ |
26,998 |
|
$ |
30,677 |
|
Allowance for credit losses coverage |
|
|
0.8 |
% |
|
0.7 |
% |
Roll Forward of Financing Receivables Allowance for Credit Losses
(Dollars in millions)
At January 1, 2018 |
|
Additions |
|
Write-offs * |
|
Other ** |
|
At September 30, 2018 |
|||||
$ |
213 |
|
$ |
24 |
|
$ |
(8) |
|
$ |
(7) |
|
$ |
222 |
* Represents reserved receivables that were written off during the period.
** Represents primarily translation adjustments.
The allowance for credit losses on financing receivables at September 30, 2018 was $222 million, or 0.8 percent of gross financing receivables. At December 31, 2017, the allowance for credit losses on financing receivables was $213 million, or 0.7 percent of gross financing receivables. The increase was driven by the 2018 additions of $24 million, primarily due to higher reserve requirements in the Americas and EMEA and a decrease in the gross financing receivables balance when compared to December 31, 2017.
Specific reserves were $128 million at September 30, 2018, an increase of $22 million as compared to year-end 2017, primarily due to additional reserve requirements in the Americas and EMEA.
Unallocated reserves were $94 million at September 30, 2018, a decrease of $12 million as compared to year-end 2017, with lower unallocated reserve requirements in the United States offset by additional unallocated reserve requirements in Brazil.
Bad debt expense was $10 million of income for the three months ended September 30, 2018 as compared to $2 million of expense for the same period in 2017. The year-to-year decrease in expense was driven by lower unallocated reserve requirements in the United States in the current year period. Bad debt expense was $24 million for the nine months ended September 30, 2018 as compared to $11 million for the same period in 2017. The nine-month year-to-year increase of $13 million in bad debt expense was due to higher specific reserve requirements in the Americas and EMEA.
44
Residual Value
Residual value is a risk of the company’s business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for IBM products and closely monitors OEM IT product announcements. Based upon this product information, the company continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
The company optimizes the recovery of residual values by extending lease arrangements with current clients. Assets returned from lease are sold to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early lease termination, IBM will purchase the returned equipment from the company at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value.
The following table presents the recorded amount of unguaranteed residual value for direct financing and operating leases at September 30, 2018 and December 31, 2017. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at September 30, 2018 and December 31, 2017, is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, IBM Credit will obtain guarantees from a third party for 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 IT 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 direct financing lease or operating lease. The aggregate incremental asset value of direct financing leases of IBM equipment with residual value guarantees was $55 million and $68 million in the third quarter of 2018 and 2017, respectively, and $205 million and $167 million for the first nine months of 2018 and 2017, respectively. In addition, the company obtains guarantees from third parties for direct financing leases of OEM IT products. The aggregate incremental asset value of these leases was $54 million and $38 million in the third quarter of 2018 and 2017, respectively. The aggregate incremental asset value of these leases was $155 million and $115 million in the first nine months of 2018 and 2017, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $4 million and $5 million for the financing transactions originated in the third quarter of 2018 and 2017, respectively, and were $15 million and $12 million for the financing transactions originated in the first nine months of 2018 and 2017, respectively. The cost of guarantees was $0.4 million and $0.5 million in the third quarter of 2018 and 2017, respectively, and $1.5 million and $1.2 million for the first nine months of 2018 and 2017, respectively.
Unguaranteed Residual Value
|
|
At |
|
At |
|
Estimated Run Out of September 30, 2018 Balance |
||||||||||||
|
|
January 1, |
|
September 30, |
|
|
|
|
|
|
|
|
|
|
2021 and |
|||
(Dollars in millions) |
|
2018 |
|
2018 |
|
2018 |
|
2019 |
|
2020 |
|
Beyond |
||||||
Direct financing leases |
|
$ |
533 |
|
$ |
463 |
|
$ |
42 |
|
$ |
116 |
|
$ |
109 |
|
$ |
196 |
Operating leases |
|
|
112 |
* |
|
115 |
|
|
30 |
|
|
28 |
|
|
34 |
|
|
23 |
Total unguaranteed residual value |
|
$ |
645 |
|
$ |
578 |
|
$ |
73 |
|
$ |
143 |
|
$ |
142 |
|
$ |
219 |
Related original amount financed |
|
$ |
10,851 |
|
$ |
9,759 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
5.9 |
% |
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
*Operating lease residual value at January 1, 2018 was recast to conform with current year methodology.
Liquidity and Capital Resources
IBM Credit funds current and future obligations through the generation of cash flows from operations and its access to the short-term and long-term capital markets, as well as the support given by IBM’s overall liquidity position and access
45
to capital markets. The debt used to fund the company’s financing assets as of September 30, 2018 was primarily comprised of loans from IBM.
In the company’s 2017 Form 10‑K, there is a discussion of the company’s liquidity, including a table presenting the company’s cash flow and liquidity trending for the past four years. The table includes net cash provided by operating activities, cash and cash equivalents and cash invested with IBM. For the nine months ended, or as of, as applicable, September 30, 2018, those amounts are $812 million for net cash provided by operating activities, $1,961 million of cash and cash equivalents and $2,538 million in cash invested with IBM.
In early 2017, the company announced an increase in its target debt-to-equity ratio from 7:1 to 9:1. At September 30, 2018, the debt-to-equity ratio was 8.9 to 1 as compared to 8.6 to 1 at December 31, 2017 and 8.9 to 1 at September 30, 2017. See the discussion on page 49 regarding the company’s debt-to-equity ratio.
In the first quarter of 2018, the company issued fixed and floating rate debt securities totaling $2 billion. In the second quarter of 2018, IBM made a cash contribution to the company in the amount of $145 million. During the first nine months of 2018, the company has made cash distributions to IBM, including a return of profit, of $620 million. The future amount of third-party debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio of 9 to 1. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.
In 2017, the company established a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. As of September 30, 2018, there was $1,996 million of commercial paper outstanding.
The company entered into two committed credit facilities in 2017, a $2.5 billion 364‑Day Credit Agreement and a $2.5 billion Three-Year Credit Agreement. On July 19, 2018, the company and IBM entered into a new $2.5 billion, 364‑Day Credit Agreement to replace the maturing $2.5 billion, 364‑Day Credit Agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement. The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year. The new maturity date for the Three-Year Credit Agreement is July 20, 2021. The facility size remains unchanged. As of September 30, 2018, the company has no borrowings outstanding against these Credit Agreements.
The major rating agencies’ ratings on the company’s debt securities at September 30, 2018 appear in the table below. The ratings remain unchanged from December 31, 2017. The company does not have “ratings trigger” provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating.
|
|
STANDARD |
|
MOODY’S |
|
|
|
|
AND |
|
INVESTORS |
|
FITCH |
|
|
POOR’S |
|
SERVICE |
|
RATINGS |
Long-term debt |
|
A+ |
|
A1 |
|
A+ |
Commercial paper |
|
A-1 |
|
Prime-1 |
|
F1 |
In the normal course of business, the company may be exposed to the impact of foreign currency fluctuations and interest rate changes. Although the company seeks to substantially match fund the term, currency and interest rate variability of its debt against its underlying financing assets, risks may arise from a mismatch between assets and the related liabilities used for funding. The company also employs a rigorous process to optimize portfolio risk management. Portfolio risks include credit and residual value risk. For additional information on the management of these risks by the company, see note A, “Significant Accounting Policies” and note D, “Financial Instruments”, to the Consolidated Financial Statements, as well as the section entitled “Portfolio Risk Management” in Item 1, “Business” and Item 7A, “Quantitative and Qualitative Disclosure About Market Risks” in the company’s 2017 Form 10‑K filed with the SEC.
46
Cash Flow and Liquidity Trends
(Dollars in millions) |
|
|
|
|
|
|
|
For the nine months ended September 30: |
|
2018 |
|
2017 |
|
||
Net cash provided by operating activities |
|
$ |
812 |
|
$ |
607 |
|
Net cash used in investing activities |
|
|
(853) |
|
|
(26) |
|
Net cash used in financing activities |
|
|
(661) |
|
|
(504) |
|
|
|
|
|
|
|
|
|
At September 30: |
|
2018 |
|
2017 |
|
||
Cash and cash equivalents |
|
$ |
1,961 |
|
$ |
1,892 |
|
Cash invested with IBM, available on-demand (1) |
|
|
2,538 |
|
|
1,869 |
|
Committed credit facilities |
|
|
5,000 |
|
|
5,000 |
|
(1) |
Excess cash is periodically invested in interest bearing, on-demand accounts with IBM and is presented in other receivables from IBM in the Consolidated Statement of Financial Position and the Consolidated Statement of Cash Flows. For additional information, see note 8, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements. |
Net cash provided by operating activities in the first nine months of 2018 increased by $205 million as compared to the first nine months of 2017 driven by the following factors:
· |
Lower net cash income tax payments of $250 million, partially offset by |
· |
Lower foreign currency transaction gains within net income of $220 million when compared to the prior year period. |
Net cash used in investing activities in the first nine months of 2018 increased by $827 million as compared to the first nine months of 2017 driven by the following factors:
· |
Higher net originations of financing receivables of $539 million, and |
· |
An increase in the investment of excess cash with IBM of $395 million, and |
· |
Prior year proceeds from the divestiture of the U.S. remanufacturing and remarketing business of $121 million; partially offset by |
· |
Lower cash payments relating to derivative contracts of $279 million. |
Net cash used in financing activities in the first nine months of 2018 increased by $157 million as compared to the first nine months of 2017 driven by the following factors:
· |
A decrease in net proceeds on total debt of $903 million, offset by |
· |
A decrease in net cash transfers and distributions to IBM of $748 million. |
47
Debt
|
|
At September 30, |
|
At December 31, |
||
(Dollars in millions) |
|
2018 |
|
2017 |
||
Short-term debt |
|
|
|
|
|
|
Debt |
|
$ |
2,031 |
|
$ |
1,568 |
Debt payable to IBM |
|
|
12,454 |
|
|
15,159 |
Total short-term debt |
|
$ |
14,485 |
|
$ |
16,727 |
Long-term debt |
|
|
|
|
|
|
Debt |
|
$ |
5,898 |
|
$ |
4,211 |
Debt payable to IBM |
|
|
9,491 |
|
|
9,539 |
Total long-term debt |
|
$ |
15,389 |
|
$ |
13,750 |
Total debt |
|
$ |
29,874 |
|
$ |
30,477 |
Total debt changes generally correspond with the level of Client Financing and Commercial Financing receivables, the level of cash and cash equivalents, the change in payables to IBM and external parties and the change in net investment from IBM.
Total debt was $29,874 million at September 30, 2018, a decrease of $603 million from year-end 2017. Total debt payable to IBM was $21,946 million at September 30, 2018, a decrease of $2,753 million from December 31, 2017. Total third-party debt was $7,928 million at September 30, 2018, an increase of $2,150 million from December 31, 2017. The decrease in total debt during the first nine months of 2018 was primarily due to lower funding requirements associated with financing receivables, while continuing to maintain the company’s targeted debt-to-equity ratio of 9 to 1.
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for these borrowings was $754 million at September 30, 2018 and $773 million at December 31, 2017.
The company’s interest rate and foreign currency rate risk management policies and procedures are discussed in note 3, “Financial Instruments.”
Interest on Debt
The company recognized interest expense of $135 million and $362 million for the three and nine months ended September 30, 2018, respectively, of which $81 million and $215 million was interest expense on debt payable to IBM in each of those periods, respectively. The company recognized interest expense of $95 million and $267 million for the three and nine months ended September 30, 2017, respectively, of which $66 million and $201 million was interest expense on debt payable to IBM in each of those periods, respectively.
The increase in interest expense in the third quarter and first nine months of 2018 versus the same periods in 2017 was driven by an increase in interest rates on both internal and external borrowings and an increase in the average debt balance. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings.
For additional information on interest expense, see note 9, “Borrowings.”
48
The debt-to-equity ratio as reported in the following table is the ratio of total debt to total member’s interest.
|
|
At September 30, |
|
At December 31, |
|
|
|
2018 |
|
2017 |
|
Debt-to-Equity Ratio * |
|
8.9x |
|
8.6x |
|
*The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of member’s interest in the company at the end of the reporting period presented.
The company’s debt-to-equity ratio was 8.9 to 1 at September 30, 2018, as compared to the debt-to-equity ratio of 8.6 to 1 at December 31, 2017. Total member’s interest of $3,360 million declined by $202 million, or 5.7 percent, while debt of $29,874 million decreased $603 million, or 2.0 percent. The debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.
Looking Forward
In 2017, IGF’s legal entity structure was reorganized globally to consolidate Client Financing and Commercial Financing under IBM Credit, driving operational benefits. The company has access to the short-term and long-term debt markets as an issuer in the capital markets and as a borrower from IBM. In the first nine months of 2018, the company issued third-party debt and made distributions to IBM including a return of profit. The company will continue to target a debt-to-equity ratio of 9 to 1. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations. The future amount of third-party debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio. Absent other funding alternatives, a protracted period where the company or IBM could not access the capital markets would likely lead to a slowdown in originations. Financing originations, which determine the asset base of the company’s annuity-like business, are also dependent upon the demand for IT products and services as well as client participation rates.
The company’s financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. As a captive financier, the company’s financing assets result primarily from the financing of IBM products and services, but also include OEM IT products and services to meet the total financing requirements of the company’s and IBM’s clients. Moving forward, the company plans to increase its focus on IBM IT products and services, which will likely result in a decrease of its OEM IT financing assets over time. Substantially all financing assets are IT related assets which provide a stable base of business. The company’s financing offerings are competitive and available to clients as a result of factors including the company’s borrowing cost, financing incentive programs and access to the capital market.
IBM Credit has policies in place designed to manage each of the key risks involved in financing, including credit losses, residual values, liquidity, currency and interest rates.
The economy could impact the credit quality of the company’s receivables portfolio and, therefore, the level of provision for credit losses. IBM Credit will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio and will take risk mitigation actions when necessary.
The company has historically been able to manage residual value risk both through insight into IBM’s product cycles and monitoring of OEM IT product announcements.
Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and net margin. Interest rates directly impact the company by increasing or decreasing financing revenue and associated borrowing costs. The company’s interest rate risk management policy, combined with its pricing strategy should mitigate margin erosion due to changes in interest rates.
49
The company’s geographically diverse client base, product and client knowledge, and strategy to substantially match fund the term, currency and interest rate variability of its debt to the underlying financing assets should enable prudent management of the business going forward, even during periods of uncertainty with respect to the global economy.
Forward-looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10‑Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: the company’s financial condition being in large part dependent upon IBM; a downturn in the economic environment; innovations in the technology sector impacting clients’ propensity to enter in financing arrangements; the company’s reliance on partner relationships; client credit risk and an inability to collect receivables in a timely manner, which could impact financial results; changes to residual value, which could affect the profitability of lease transactions; impact of exposure to currency and financing risks and changes in market liquidity conditions; changes in financial regulation, supervision and licensing laws and regulations; changes in local legal, economic, political and health conditions; cybersecurity and data privacy considerations; risks from legal proceedings and investigatory risks; adverse effects from tax matters; impacts of business with government clients; the company’s use of accounting estimates; ineffective internal controls; and other risks, uncertainties and factors discussed in Item 1A, “Risk Factors” in the company’s Annual Report Form 10‑K filed on March 1, 2018 with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.
50
Item 4. Controls and Procedures
The company’s management evaluated, with the participation of the Chairman and President, and the Vice President of Finance, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chairman and President, and the Vice President of Finance have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
51
Refer to note 10, “Contingencies,” on page 31 of this Form 10‑Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
Not applicable.
Exhibit Number |
|
Description |
|
|
|
12 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
52
SIGNATURE
Pursuant to the requirements of Section 12 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 LLC |
|||
|
(Registrant) |
|||
|
|
|
||
Date: |
November 1, 2018 |
|
|
|
|
|
|
||
|
By: |
/s/ Adam Wilson |
||
|
|
Adam Wilson |
||
|
|
Vice President, Finance |
53
EXHIBIT 12
COMPUTATION OF RATIO OF INCOME
TO FIXED CHARGES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
(Dollars in millions) |
|
2018 |
|
2017 |
||
Income before income taxes (1) |
|
$ |
522 |
|
$ |
488 |
|
|
|
|
|
|
|
Add: fixed charges, excluding capitalized interest |
|
|
362 |
|
|
267 |
|
|
|
|
|
|
|
Income as adjusted before income taxes |
|
$ |
884 |
|
$ |
754 |
|
|
|
|
|
|
|
Fixed charges: |
|
|
|
|
|
|
Interest expense |
|
$ |
362 |
|
$ |
267 |
Portion of rental expense representative of interest (2) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Total fixed charges |
|
$ |
362 |
|
$ |
267 |
|
|
|
|
|
|
|
Ratio of income to fixed charges |
|
|
2.44 |
|
|
2.83 |
(1)Income before income taxes excludes (a) amortization of capitalized interest, and (b) the company’s share in the income and losses of less-than-fifty percent-owned affiliates.
(2)The company is globally located and conducts business primarily from parent-leased and parent-owned facilities for which it is charged occupancy charges. These costs may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party. The amounts charged to the company by IBM in the periods presented were not material.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, William J. Smith III, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of IBM Credit LLC; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
[not applicable]; |
c. |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a. |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 1, 2018 |
|
|
|
/s/ William J. Smith III |
|
|
|
William J. Smith III |
|
Chairman and President |
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Adam Wilson, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of IBM Credit LLC; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
a. |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
[not applicable]; |
c. |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a. |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 1, 2018
/s/ Adam Wilson |
|
|
|
Adam Wilson |
|
Vice President, Finance |
|
EXHIBIT 32.1
IBM CREDIT LLC
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of IBM Credit LLC (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Smith III, Chairman and President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ William J. Smith III |
|
|
|
William J. Smith III |
|
Chairman and President |
|
November 1, 2018 |
|
A signed original of this written statement required by Section 906 has been provided to IBM Credit LLC and will be retained by IBM Credit LLC and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
IBM CREDIT LLC
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of IBM Credit LLC (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Adam Wilson, Vice President, Finance of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Adam Wilson |
|
|
|
Adam Wilson |
|
Vice President, Finance |
|
November 1, 2018 |
|
A signed original of this written statement required by Section 906 has been provided to IBM Credit LLC and will be retained by IBM Credit LLC and furnished to the Securities and Exchange Commission or its staff upon request.
Document and Entity Information |
9 Months Ended |
---|---|
Sep. 30, 2018
shares
| |
Document and Entity Information | |
Entity Registrant Name | IBM CREDIT LLC |
Entity Central Index Key | 0001225307 |
Document Type | 10-Q |
Document Period End Date | Sep. 30, 2018 |
Amendment Flag | false |
Current Fiscal Year End Date | --12-31 |
Entity Current Reporting Status | Yes |
Entity Filer Category | Non-accelerated Filer |
Entity Small Business | false |
Entity Emerging Growth Company | false |
Entity Common Stock, Shares Outstanding | 0 |
Document Fiscal Year Focus | 2018 |
Document Fiscal Period Focus | Q3 |
CONSOLIDATED STATEMENT OF EARNINGS - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Revenue | ||||
Financing revenue | $ 367 | $ 321 | $ 1,084 | $ 986 |
Operating lease revenue | 85 | 96 | 250 | 288 |
Total revenue | 452 | 418 | 1,334 | 1,274 |
Financing cost (related party cost for three and nine months: $81 and $215 in 2018, $66 and $201 in 2017) | 135 | 95 | 362 | 267 |
Depreciation of equipment under operating lease | 50 | 59 | 146 | 178 |
Net margin | 268 | 264 | 827 | 829 |
Expense and other (income) | ||||
Selling, general and administrative | 89 | 94 | 292 | 303 |
Provision for/(benefit from) credit losses | (10) | 2 | 24 | 11 |
Other (income) and expense | 5 | 3 | (11) | 28 |
Total expense and other (income) | 84 | 99 | 305 | 341 |
Income from before income taxes | 184 | 165 | 522 | 488 |
Provision for income taxes | 39 | 38 | 112 | 112 |
Net income | $ 144 | $ 127 | $ 410 | $ 376 |
CONSOLIDATED STATEMENT OF EARNINGS (Parenthetical) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
CONSOLIDATED STATEMENT OF EARNINGS | ||||
Financing cost - related party | $ 81 | $ 66 | $ 215 | $ 201 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | ||||||
Net income | $ 144 | $ 127 | $ 410 | $ 376 | ||
Other comprehensive income/(loss), before tax: | ||||||
Foreign currency translation | (20) | 151 | (119) | 368 | ||
Retirement-related benefit plans | [1] | 0 | 0 | 1 | 2 | |
Other comprehensive income/(loss), before tax | (20) | 151 | (117) | 370 | ||
Income tax (expense)/benefit related to items of other comprehensive income | (6) | (8) | (22) | (8) | ||
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 | ||
Total comprehensive income | $ 118 | $ 270 | $ 270 | $ 737 | ||
|
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Parenthetical) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Equipment under operating leases - accumulated depreciation | $ 273 | $ 288 |
Financing Receivable Portfolio | ||
Receivables - allowances | 189 | 173 |
Purchased and participated receivables from IBM | ||
Receivables - allowances | $ 33 | $ 39 |
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|
Jan. 01, 2018 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Mar. 31, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
||||
Member's Interest | |||||||||
Balance at the beginning of the period | $ 3,562 | $ 3,703 | $ 3,562 | $ 3,703 | |||||
Net income | $ 144 | $ 127 | 410 | 376 | |||||
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 | |||||
Total comprehensive income | 118 | 270 | 270 | 737 | |||||
Net transfers (to)/from IBM | (942) | ||||||||
Contributions from IBM | 148 | 88 | |||||||
Distributions to IBM | (620) | (365) | |||||||
Balance at the end of the period | 3,360 | 3,220 | 3,360 | 3,220 | |||||
Prior Investment From Member | |||||||||
Member's Interest | |||||||||
Balance at the beginning of the period | 3,912 | 3,912 | |||||||
Net income | 137 | ||||||||
Net transfers (to)/from IBM | (942) | ||||||||
Transfer upon consolidation | (3,106) | ||||||||
Balance at the end of the period | 3,106 | ||||||||
Member's Interest | |||||||||
Member's Interest | |||||||||
Balance at the beginning of the period | 3,101 | 3,101 | |||||||
Transfer upon consolidation | 3,106 | ||||||||
Contributions from IBM | 148 | 88 | |||||||
Distributions to IBM | (34) | (126) | |||||||
Balance at the end of the period | 3,215 | 3,068 | 3,215 | 3,068 | |||||
Retained Earnings | |||||||||
Member's Interest | |||||||||
Balance at the beginning of the period | 302 | 302 | |||||||
Cumulative effect of change in accounting principle | 5 | 5 | [1] | ||||||
Net income | 410 | 239 | |||||||
Distributions to IBM | (586) | (239) | |||||||
Balance at the end of the period | 131 | 131 | |||||||
Accumulated Other Comprehensive Income/(Loss) | |||||||||
Member's Interest | |||||||||
Balance at the beginning of the period | 158 | $ (209) | 158 | (209) | |||||
Cumulative effect of change in accounting principle | $ (5) | (5) | [1] | ||||||
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 | |||||
Balance at the end of the period | $ 13 | $ 152 | $ 13 | $ 152 | |||||
|
Basis of Presentation |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
Basis of Presentation: | |
Basis of Presentation: | 1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to pages 41 through 43 of the company’s 2017 Form 10-K, filed with the Securities and Exchange Commission (SEC) on March 1, 2018, for a discussion of the company’s critical accounting estimates. During the second quarter of 2017, certain non-U.S. affiliates of IBM Credit became subsidiaries of the company, which are subsequently reported on a consolidated basis. All prior periods have been recast to reflect the consolidation of the financial statements and conform to the current year presentation as a result of changes to certain financial statement line items. These changes include other receivables from IBM and accounts payable, which are separately reported in the Consolidated Statement of Financial Position and were previously reported within other assets and other liabilities, respectively. Other receivables from IBM are separately reported in the Consolidated Statement of Cash Flows and were previously reported within other investing activities-net. The reporting for accounts payable within the Consolidated Statement of Cash Flows did not change. Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Prior to the consolidation of the financial statements in the second quarter of 2017, net non-trade intercompany transactions between IBM Credit and IBM (for example, contributions from IBM and distributions to IBM), were reflected as net transfers (to)/from IBM in the financing activities section of the Statement of Cash Flows. Distributions by the company to IBM are considered first to be a return of profit as reflected in the balance of retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of the balance of member’s interest as reflected in the Consolidated Statement of Financial Position. Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company. On December 22, 2017, the U.S. Tax Cuts and Jobs Act (U.S. tax reform) was enacted, resulting in the company recording a provisional net benefit of $162 million to tax expense in the fourth-quarter and year-ended December 31, 2017. An additional provisional charge of $4 million was recorded in the first quarter as a result of Internal Revenue Service (IRS) guidance issued in January 2018 and a provisional benefit of $2 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment. The company has not completed its assessment and the net tax benefit remains provisional as of September 30, 2018. Any changes to the net tax benefit will be finalized in the fourth quarter of 2018 which is within the 12 month time limit provided by the SEC. The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented. All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements. Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements included in the Form 10-K. Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable. |
Accounting Changes |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
Accounting Changes: | |
Accounting Changes: |
2. Accounting Changes: New Standards to be Implemented In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changes the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results. In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established which is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020, with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date. The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes certain changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the sales-type lease test, initial direct cost capitalization, lease termination guidance and sale-leaseback accounting and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company will elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The company is evaluating the other practical expedients available under the guidance. As a lessee, the recording of operating lease right-of-use assets and liabilities in the Consolidated Statement of Financial Position is not expected to have a material impact to the company’s consolidated financial results. IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. For additional information, see Note 8, “Relationship with IBM and Related Party Transactions”. As a lessor, under the new capitalization requirements for initial direct costs, the company expects to capitalize lower lease origination expenses than under the previous guidance. However, this change is not expected to have a material impact to the company’s consolidated financial results. Due to changes to lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount of receivables that would have been reclassified from lease to loan in 2017 under the application of this new guidance would have been approximately $450 million. The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change. Standards Implemented In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist. This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption, $5 million was reclassified from AOCI to retained earnings. In August 2017, the FASB issued guidance to simplify the application of current hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results for the three and nine months ended September 30, 2018. The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified-retrospective transition method). The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company has concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there is no material change to disclosures as a result of the adoption of the guidance. |
Financial Instruments |
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Financial Instruments: | 3. Financial Instruments: Fair Value Measurements Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
The guidance requires the use of observable market data if such data is available without undue cost and effort. When available the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above. Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities. The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017.
Financial Assets and Liabilities Not Measured at Fair Value Short-Term Receivables and Payables Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2. Long-Term Receivables Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2018 and December 31, 2017, the difference between the carrying amount and estimated fair value for long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Long-Term Debt Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt, which includes debt payable to IBM, for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt (including debt payable to IBM) was $15,389 million and $13,750 million and the estimated fair value was $15,351 million and $13,695 million at September 30, 2018 and December 31, 2017, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy. Derivative Financial Instruments The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives. Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At September 30, 2018, the aggregate fair value of derivative contracts with IBM that were in an asset position totaled $27 million and the aggregate fair value of derivative contracts with IBM that were in a liability position totaled $71 million. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $21 million. There were no derivative instruments activity impacted by master netting agreements at December 31, 2017. Interest Rate Risk Fixed and Variable Rate Borrowings The company issues debt in the capital markets to fund its operations. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2018 and December 31, 2017, the total notional amount of the company's interest rate swap contracts with IBM was $3,350 million and $1,800 million, respectively. The weighted average remaining maturity of these instruments at September 30, 2018 and December 31, 2017, was approximately 2.7 years and 2.9 years, respectively. These interest rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at September 30, 2018 and December 31, 2017. Foreign Exchange Risk Long-Term Investments in Foreign Subsidiaries (Net Investment) The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At September 30, 2018 and December 31, 2017, the total notional amount of derivative contracts with IBM designated as net investment hedges was $2,066 million and $2,331 million, respectively. The weighted average remaining maturity of these instruments was 0.2 years at both periods. Foreign Currency Asset/Liability Management The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows. There were no foreign exchange derivative contracts with third parties outstanding at September 30, 2018. At December 31, 2017, the total notional amount of foreign exchange derivative contracts with third parties was $120 million. The following tables provide a quantitative summary of the derivative instrument-related risk management activity at September 30, 2018 and December 31, 2017, as well as for the three and nine months ended September 30, 2018 and 2017, respectively. Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of September 30, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges.
The Effect of Derivative Instruments in the Consolidated Statement of Earnings The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items, are as follows:
N/A - Not Applicable
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for additional information. Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
N/A-Not Applicable
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, "Accounting Changes," for additional information. Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
For the three and nine months ending September 30, 2018 and 2017, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business. |
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Financing Receivables, Receivables Purchased/Participated from IBM: | 4. Financing Receivables, Receivables Purchased/Participated from IBM: Financing receivables consist of Client Financing leases, loans, installment payment plans and participated receivables to end-user clients as well as loans to IBM for terms up to seven years. Assets financed are primarily IT products and services where IBM and the company have experience. Client Financing arrangements are priced to achieve a market yield. Financing receivables also include Commercial Financing, which generally consists of working capital financing to suppliers, distributors and resellers of IBM and OEM IT products and services. Payment terms for working capital financing receivables generally range from 30 to 90 days. The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are primarily for IT related products and services, which are due within 30 days, and IBM performs all servicing under these arrangements. These receivables are included within the Commercial Financing segment. The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $754 million and $773 million at September 30, 2018 and December 31, 2017, respectively. The company did not have any financing receivables held for sale as of September 30, 2018 and December 31, 2017. Financing Receivables by Portfolio Segment The following tables present the recorded investment in financing receivables and participated receivables from IBM, by portfolio segment and by class, excluding commercial financing receivables, purchased receivables from IBM and other miscellaneous financing receivables at September 30, 2018 and December 31, 2017. Commercial financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
Write-offs of lease and loan receivables were $4 million and $2 million, respectively, for the nine months ended September 30, 2018. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $2 million, $18 million and $9 million, respectively, for the nine months ended September 30, 2018. The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $87 million, $43 million and $20 million, respectively, for the three months ended September 30, 2018 and $89 million, $11 million and $33 million, respectively, for the three months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended September 30, 2018 and 2017. The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $76 million, $41 million and $19 million, respectively, for the nine months ended September 30, 2018 and $96 million, $10 million and $44 million, respectively, for the nine months ended September 30, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the nine months ended September 30, 2018 and 2017.
Write-offs of lease receivables and loan receivables were $39 million and $37 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for loan receivables and participated receivables from IBM were $15 million and $1 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for lease receivables were a reduction of $2 million for the year ended December 31, 2017. When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Past Due Financing Receivables The company considers a clients’ financing receivables past due when an installment is aged over 90 days. The following table summarizes the information about the recorded investment in lease and loan receivables and participated receivables from IBM, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.
Credit Quality Indicators The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, as well as other information, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings. The following tables present the recorded investment, net of the allowance for credit losses, for each class of receivables, by credit quality indicator, at September 30, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All other credit quality indicators are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.
Troubled Debt Restructurings The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2018 or for the year ended December 31, 2017. |
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Segments: | 5. Segments: The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.
Client Financing provides leases and loan financing to end-user clients and acquires installment payment plans offered to end-user clients by IBM; as well as acquires participation interests in IBM financing receivables for which the company assumes the IBM client’s credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBM’s hardware, software, and services, as well as OEM IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBM’s Technology Services & Cloud Platforms segment’s acquisition of IT assets, which IBM uses in external, revenue-producing services contracts.
Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. Commercial Financing also purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the credit risk with IBM’s client.
The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.
IBM Credit and its consolidated subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business. SEGMENT INFORMATION
SEGMENT INFORMATION
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Equity Activity: | 6. Equity Activity: IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables: Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Accumulated Other Comprehensive Income/(Loss) (net of tax)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. ** Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes".
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. |
Retirement-Related Benefits |
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Retirement-Related Benefits: | |
Retirement-Related Benefits | 7. Retirement-Related Benefits:
IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations. Multiemployer Plans: For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings. The amounts of expense attributed to the company by IBM for the three and nine months ended September 30, 2018 and 2017 were not material. Charges from IBM to the company in relation to these plans (including non pension post retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM. Multiple-Employer Plans: For multiple-employer plans (mainly in Germany, Japan and Spain), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position. Any gains or losses recorded to Accumulated Other Comprehensive Income in the three and nine months ended September 30, 2018 and 2017 were not material. Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings. The total costs for multiple-employer plans for the three and nine months ended September 30, 2018 and 2017 were not material. |
Relationship with IBM and Related Party Transactions |
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Relationship with IBM and Related Party Transactions: | |
Relationship with IBM and Related Party Transactions: | 8. Relationship with IBM and Related Party Transactions: IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client. The following is a description of certain material relationships between IBM Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements. Support Agreement Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit. Operating Relationship The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBM’s hardware, software, and services. In the second half of 2016, the company began participating in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all participated receivables from IBM. These receivables earned interest income of $47 million and $144 million in the three and nine months ended September 30, 2018, an increase of $4 million and $25 million as compared to the same periods in 2017, respectively. The interest income is included in the Consolidated Statement of Earnings as financing revenue. For additional information, see note 4, “Financing Receivables, Receivables Purchased/Participated from IBM.” The company purchases interests in certain of IBM’s trade accounts receivable at a discount and assumes the associated credit risk of IBM’s client. For the three months ended September 30, 2018, finance income earned from these receivables was $10 million, an increase of $2 million as compared to the same period in 2017. For the nine months ended September 30, 2018, finance income earned from these receivables was $32 million, an increase of $5 million as compared to the same period in 2017. The finance income is included in financing revenue in the Consolidated Statement of Earnings. For additional information, see note 4, “Financing Receivables, Receivables Purchased/Participated from IBM.” In certain countries, the company provides loans to IBM, primarily in support of IBM’s Technology Services & Cloud Platforms segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. For the three months ended September 30, 2018, the interest income earned from these receivables was $45 million, an increase of $8 million as compared to the same period in 2017. For the nine months ended September 30, 2018, interest income earned was $128 million, an increase of $27 million as compared to the same period in 2017. Interest income is included in financing revenue in the Consolidated Statement of Earnings. The amount of such financings outstanding was $3,779 million at September 30, 2018 and $3,743 million at December 31, 2017. The amount of other receivables from IBM of $2,549 million and $1,024 million at September 30, 2018 and December 31, 2017, respectively, primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The company's investment of excess cash with IBM was $2,538 million at September 30, 2018 and $911 million at December 31, 2017. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and the investing section of the Consolidated Statement of Cash Flows. Interest income earned from these investments was $17 million and $38 million in the three months and nine months ended September 30, 2018, respectively. Interest income earned for these investments was $9 million and $28 million for the three and nine months ended September 30, 2017, respectively. The interest income is included in financing revenue in the Consolidated Statement of Earnings. In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements for the three months ended September 30, 2018 was $39 million, an increase of $4 million as compared to the same period in 2017. Fee income earned for the nine months ended September 30, 2018 was $119 million, an increase of $13 million as compared to the same period in 2017. These fees are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement. Borrowing Relationship The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense incurred on loans from IBM was $81 million and $215 million for the three and nine months ended September 30, 2018, respectively, as compared to $66 million and $201 million for the three and nine months ended September 30, 2017, respectively. Interest expense is included in financing cost in the Consolidated Statement of Earnings. For additional information on short-term and long-term funding, see note 9, “Borrowings.” Services and Other Arrangements The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $53 million and $54 million in the third quarter of 2018 and 2017, respectively, and $163 million and $173 million for the nine months ended September 30, 2018 and 2017, respectively. The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation and multiemployer retirement-related plans expense during the periods reported were not material. Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party. The outstanding amount of accounts payable to IBM of $1,142 million at September 30, 2018, and $2,903 million at December 31, 2017, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business. The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The company's net profit from sales of returned equipment to IBM was $8 million and $12 million for the three months ended September 30, 2018 and 2017, respectively. The company's net profit from sales of returned equipment to IBM was $35 million and $40 million for the nine months ended September 30, 2018 and 2017 respectively. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings. Tax Sharing Agreement The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return. |
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Borrowings: | 9. Borrowings: The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. The amount of these secured borrowings is reflected in the following short-term and long-term debt tables. Short-Term Debt
IBM Credit maintains a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper can be used for general corporate purposes, including, among other items, the repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued can vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer. The weighted-average interest rate for commercial paper was 2.2 percent and 1.5 percent at September 30, 2018 and December 31, 2017, respectively. The weighted-average interest rate for short-term loans was 4.1 percent and 2.4 percent at September 30, 2018 and December 31, 2017, respectively. The weighted-average interest rate for secured borrowings was 5.3 percent and 4.7 percent at September 30, 2018 and December 31, 2017, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $3 million at September 30, 2018 and $12 million at December 31, 2017. The weighted-average interest rate for debt payable to IBM was 1.7 percent and 1.1 percent at September 30, 2018 and December 31, 2017, respectively. Long-Term Debt
*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt's carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. The company utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $751 million at September 30, 2018 and $762 million at December 31, 2017. The company has a shelf registration statement in place with the SEC allowing it to offer for sale public debt securities. In the first quarter of 2018, the company issued fixed and floating rate debt securities in the aggregate amount of $2,000 million. The maturity dates of these debt securities range from 2021 to 2023. The net proceeds from the issuance of debt securities are utilized for general corporate purposes. The company’s indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens) to 15 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. Contractual obligations of long-term debt and long-term debt payable to IBM outstanding at September 30, 2018, are as follows:
Interest on Debt The company recognized interest expense of $135 million and $362 million for the three and nine months ended September 30, 2018, of which $81 million and $215 million was interest expense on debt payable to IBM, respectively. The company recognized interest expense of $95 million and $267 million for the three and nine months ended September 30, 2017, of which $66 million and $201 million was interest expense on debt payable to IBM, respectively. Lines of Credit The company has committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions. On July 19, 2018, IBM and the company (the Borrowers) entered into a new $2.5 billion, 364-Day Credit Agreement to replace the maturing $2.5 billion, 364-Day agreement, and also amended their existing $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The amended Three-Year Credit Agreement included a modification of terms to account for the potential discontinuation of LIBOR and to extend the maturity date by one year. The new maturity date for the Three-Year Agreement is July 20, 2021. The facility size remains unchanged. The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions. As of September 30, 2018, the company has no borrowings outstanding against the Credit Agreements. The company’s Credit Agreements each contain significant debt covenants, which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of IBM’s consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) IBM will not permit the consolidated net interest expense ratio, for any period of four consecutive fiscal quarters taken as a single accounting period, to be less than 2.20 to 1.0; (ii) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (iii) the company’s leverage ratio cannot be greater than 11 to 1 as of the last day of the fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million. The company is in compliance with all of its significant debt covenants, and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. For additional information on the Support Agreement , see note 8, “Relationship with IBM and Related Party Transactions.” |
Contingencies |
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Contingencies: | 10. Contingencies: The company is or may be involved in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning client allegations of wrongful repossession or defamation of credit. In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations. The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses. As of September 30, 2018, there were no matters for which the likelihood of material loss is at least reasonably possible. |
Commitments |
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Commitments: | 11. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $8,211 million and $7,755 million at September 30, 2018 and December 31, 2017, respectively. A portion of these amounts is available to the company’s Commercial Financing clients to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $550 million and $749 million at September 30, 2018 and December 31, 2017, respectively. |
Subsequent Events |
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Subsequent Events: | 12. Subsequent Events:
On October 28, 2018, IBM announced its intent to acquire all of the outstanding shares of Red Hat, Inc. (Red Hat). The transaction is subject to customary closing conditions, including regulatory clearance and approval by the Red Hat shareholders. IBM will continue with a disciplined financial policy and is committed to maintaining strong investment grade credit ratings. As a result of the proposed transaction, Standard and Poor’s has lowered IBM and IBM Credit’s long-term debt rating to A from A+, with no change to the short-term debt rating of A-1 and Fitch Ratings has lowered IBM and IBM Credit’s long-term debt rating to A from A+, with no change to the short-term debt rating of F1. Additionally, Moody’s placed IBM and IBM Credit’s long-term debt rating of A1 on review for downgrade, with no change to the short-term debt rating of Prime-1. |
Basis of Presentation (Policies) |
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Basis of Presentation | The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to pages 41 through 43 of the company’s 2017 Form 10-K, filed with the Securities and Exchange Commission (SEC) on March 1, 2018, for a discussion of the company’s critical accounting estimates. During the second quarter of 2017, certain non-U.S. affiliates of IBM Credit became subsidiaries of the company, which are subsequently reported on a consolidated basis. All prior periods have been recast to reflect the consolidation of the financial statements and conform to the current year presentation as a result of changes to certain financial statement line items. These changes include other receivables from IBM and accounts payable, which are separately reported in the Consolidated Statement of Financial Position and were previously reported within other assets and other liabilities, respectively. Other receivables from IBM are separately reported in the Consolidated Statement of Cash Flows and were previously reported within other investing activities-net. The reporting for accounts payable within the Consolidated Statement of Cash Flows did not change. Member’s Interest in the Consolidated Statement of Financial Position represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Prior to the consolidation of the financial statements in the second quarter of 2017, net non-trade intercompany transactions between IBM Credit and IBM (for example, contributions from IBM and distributions to IBM), were reflected as net transfers (to)/from IBM in the financing activities section of the Statement of Cash Flows. Distributions by the company to IBM are considered first to be a return of profit as reflected in the balance of retained earnings in the Consolidated Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of the balance of member’s interest as reflected in the Consolidated Statement of Financial Position. Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company. On December 22, 2017, the U.S. Tax Cuts and Jobs Act (U.S. tax reform) was enacted, resulting in the company recording a provisional net benefit of $162 million to tax expense in the fourth-quarter and year-ended December 31, 2017. An additional provisional charge of $4 million was recorded in the first quarter as a result of Internal Revenue Service (IRS) guidance issued in January 2018 and a provisional benefit of $2 million was recorded in the second quarter as a result of IRS guidance issued in early April 2018. The final impact of U.S. tax reform may differ, possibly materially, due to factors such as changes in interpretations and assumptions that the company has made in its assessment. The company has not completed its assessment and the net tax benefit remains provisional as of September 30, 2018. Any changes to the net tax benefit will be finalized in the fourth quarter of 2018 which is within the 12 month time limit provided by the SEC. The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented. All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements. Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements included in the Form 10-K. Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable. |
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Accounting Changes | New Standards to be Implemented In August 2018, the Financial Accounting Standards Board (FASB) issued guidance which changes the disclosure requirements for fair value measurements. The guidance is effective on January 1, 2020, with early adoption of certain provisions permitted. As a result, the company has removed Level 1/Level 2 transfer disclosures in the third-quarter 2018 in accordance with the fair value guidance. The company is evaluating the adoption date for the remaining changes. As the guidance is a change to disclosures only, the company does not expect the guidance to have a material impact on the consolidated financial results. In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. A cross-functional team has been established which is evaluating the financial instruments portfolio and system, process and policy change requirements. The new guidance expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value. The guidance is effective January 1, 2020, with one-year early adoption permitted and the company is continuing to evaluate the impact of the new guidance and adoption date. The FASB issued guidance in February 2016, with amendments in 2018, which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes certain changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the sales-type lease test, initial direct cost capitalization, lease termination guidance and sale-leaseback accounting and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date and will apply the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. A cross-functional implementation team is evaluating the lease portfolio, system, process, control and policy change requirements. The company will elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The company is evaluating the other practical expedients available under the guidance. As a lessee, the recording of operating lease right-of-use assets and liabilities in the Consolidated Statement of Financial Position is not expected to have a material impact to the company’s consolidated financial results. IBM Credit’s global operations are primarily conducted in IBM leased or owned facilities, whereby IBM charges the company for occupancy expenses based on square footage space usage, with no fixed term commitment. For additional information, see Note 8, “Relationship with IBM and Related Party Transactions”. As a lessor, under the new capitalization requirements for initial direct costs, the company expects to capitalize lower lease origination expenses than under the previous guidance. However, this change is not expected to have a material impact to the company’s consolidated financial results. Due to changes to lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables, which remain outstanding relating to that equipment and still expected to be collected, will be reclassified to loan receivables. The amount of receivables that would have been reclassified from lease to loan in 2017 under the application of this new guidance would have been approximately $450 million. The company continues to assess the potential impacts of the guidance, including changes to the guidance expected to be issued by the FASB, normal and ongoing business dynamics or potential changes in contracting terms, and as a result, preliminary conclusions are subject to change. Standards Implemented In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist. This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption, $5 million was reclassified from AOCI to retained earnings. In August 2017, the FASB issued guidance to simplify the application of current hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results for the three and nine months ended September 30, 2018. The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires specific disclosures relating to revenue recognition. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified-retrospective transition method). The company adopted the guidance on January 1, 2018 using the modified-retrospective transition method. The company has concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results for the three and nine months ended September 30, 2018. The company concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there is no material change to disclosures as a result of the adoption of the guidance. |
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Financial Instruments and Fair Value Measurements | Fair Value Measurements Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
The guidance requires the use of observable market data if such data is available without undue cost and effort. When available the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument. In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above. Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities. Financial Assets and Liabilities Not Measured at Fair Value Short-Term Receivables and Payables Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2. Long-Term Receivables Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy. Long-Term Debt Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt, which includes debt payable to IBM, for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy. |
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Derivative Financial Instruments | The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives. Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements.
Interest Rate Risk Fixed and Variable Rate Borrowings The company issues debt in the capital markets to fund its operations. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges).
Foreign Exchange Risk Long-Term Investments in Foreign Subsidiaries (Net Investment) The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member’s interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. Foreign Currency Asset/Liability Management The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows. |
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Financing Receivables, Allowance for Credit Losses and Other Credit-Related Policies | The company utilizes certain of its financing receivables as collateral for non-recourse borrowings.
The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. The company considers any receivable with an individually evaluated reserve as an impaired receivable. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history. Past Due Financing Receivables The company considers a clients’ financing receivables past due when an installment is aged over 90 days.
Credit Quality Indicators The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, as well as other information, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.
Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All other credit quality indicators are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions. |
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Receivables Purchased/Participated from IBM | The company purchases interests in certain of IBM’s trade accounts receivable at a discount. These receivables are due within 30 days. These receivables are included within the Commercial Financing segment. The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.
Commercial financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. |
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Segments | The company’s operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The company’s reportable segments are business units that offer different financing solutions based upon clients’ needs.
The segment’s expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin. |
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Retirement-Related Benefits | IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations. Multiemployer Plans: For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the company’s Consolidated Statement of Earnings.
Charges from IBM to the company in relation to these plans (including non pension post retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM. Multiple-Employer Plans: For multiple-employer plans (mainly in Germany, Japan and Spain), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.
Costs related to multiple-employer plans are recorded in the company’s Consolidated Statement of Earnings. |
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Relationship with IBM and Related Party Transactions | IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client.
Support Agreement Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter (refer to page 34 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit. Operating Relationship In certain countries, the company provides loans to IBM, primarily in support of IBM’s Technology Services & Cloud Platforms segment’s acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. Interest income is included in financing revenue in the Consolidated Statement of Earnings.
The amount of other receivables from IBM primarily relate to the investment of a portion of the company's excess cash in short-term interest bearing accounts with IBM, which can be withdrawn upon demand. The investment of excess cash with IBM is presented in other receivables from IBM in the Consolidated Statement of Financial Position and the investing section of the Consolidated Statement of Cash Flows. The interest income is included in financing revenue in the Consolidated Statement of Earnings.
In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement. Borrowing Relationship The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense is included in financing cost in the Consolidated Statement of Earnings.
Services and Other Arrangements The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company.
The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM.
Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings.
The outstanding amount of accounts payable to IBM primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business. The company sells equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings. Tax Sharing Agreement The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return. |
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Borrowings | The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. |
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Contingencies | In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations. The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses. |
Financial Instruments (Tables) |
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Financial assets and financial liabilities measured at fair value on a recurring basis |
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Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position |
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Amounts related to cumulative basis adjustments for fair value hedges |
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Effect of Derivative Instruments in the Consolidated Statement of Earnings |
N/A - Not Applicable
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, “Accounting Changes,” for additional information. Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
N/A-Not Applicable
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, "Accounting Changes," for additional information. Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Member's Interest.
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Financing Receivables, Receivables Purchased/Participated from IBM (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financing Receivables, Receivables Purchased/Participated from IBM: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of financing receivables and receivables purchased/participated from IBM |
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Schedule of financing receivables by portfolio segment |
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Schedule of past due financing receivables |
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Schedule of net recorded investment by credit quality indicators |
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Segments (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reporting information by segment |
SEGMENT INFORMATION
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Equity Activity (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Activity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income |
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassifications and Taxes Related to Items of Other Comprehensive Income
Reclassifications and Taxes Related to Items of Other Comprehensive Income
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Accumulated Other Comprehensive Income/(Loss) (net of tax) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. ** Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, "Accounting Changes".
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. |
Borrowings (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-Term Debt |
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Long-Term Debt |
*The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt's carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. |
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Contractual obligations of long-term debt and long-term debt payable to IBM outstanding |
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Basis of Presentation (Details) - USD ($) $ in Millions |
3 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2018 |
Mar. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2017 |
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Basis of Presentation: | ||||
Provisional net benefit to tax expense resulting from U.S. tax reform | $ 162 | $ 162 | ||
Additional Provisional charge (benefit) resulting from IRS guidance related to U.S. tax reform | $ (2) | $ 4 |
Accounting Changes (Details) - USD ($) $ in Millions |
9 Months Ended | 12 Months Ended | ||||
---|---|---|---|---|---|---|
Jan. 01, 2018 |
Sep. 30, 2018 |
[1] | Dec. 31, 2017 |
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Accounting Standards Update 2016-02, Leases | ||||||
Accounting Changes | ||||||
Lease receivables that would have been reclassified under new guidance to loan receivables on lease termination | $ 450 | |||||
Accumulated Other Comprehensive Income/(Loss) | ||||||
Accounting Changes | ||||||
Reclassification from AOCI to retained earnings for stranded tax effects of U.S. tax reform | $ (5) | $ (5) | ||||
Retained Earnings | ||||||
Accounting Changes | ||||||
Reclassification from AOCI to retained earnings for stranded tax effects of U.S. tax reform | $ 5 | $ 5 | ||||
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Financial Instruments - Fair Value Measurements (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Derivative assets | $ 27 | $ 3 |
Derivative liabilities | 71 | 56 |
Recurring | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 1,314 | 1,888 |
Derivative assets | 27 | 3 |
Total assets | 1,341 | 1,891 |
Derivative liabilities | 71 | 56 |
Potential reduction in net position of total derivative assets | 21 | |
Potential reduction in net position of total derivative liabilities | 21 | |
Recurring | Time deposits and certificates of deposit | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 1,314 | 1,883 |
Recurring | Money market funds | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 5 | |
Recurring | Level 1 | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 5 | |
Total assets | 5 | |
Recurring | Level 1 | Money market funds | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 5 | |
Recurring | Level 2 | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | 1,314 | 1,883 |
Derivative assets | 27 | 3 |
Total assets | 1,341 | 1,886 |
Derivative liabilities | 71 | 56 |
Recurring | Level 2 | Time deposits and certificates of deposit | ||
Financial assets and financial liabilities measured at fair value on a recurring basis: | ||
Cash equivalents | $ 1,314 | $ 1,883 |
Financial Instruments - Not Measured at Fair Value (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Long-Term Debt | ||
Carrying amount of long-term debt | $ 15,389 | $ 13,750 |
Fair value of long-term debt | $ 15,351 | $ 13,695 |
Financial Instruments - Derivatives, Offsetting (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Derivative Financial Instruments | ||
Fair value of derivative assets | $ 27 | $ 3 |
Fair value of derivative liabilities | 71 | $ 56 |
IBM | ||
Derivative Financial Instruments | ||
Fair value of derivative assets | 27 | |
Fair value of derivative liabilities | 71 | |
Assets included in master netting arrangements | 21 | |
Liabilities included in master netting arrangements | $ 21 |
Financial Instruments - Derivatives, Other Information (Details) - USD ($) $ in Millions |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
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Fair value hedges | Interest rate swaps | IBM | ||
Derivative Financial Instruments | ||
Notional amount | $ 3,350 | $ 1,800 |
Average remaining maturity | 2 years 8 months 12 days | 2 years 10 months 24 days |
Cash flow hedges | Interest rate swaps | IBM | ||
Derivative Financial Instruments | ||
Notional amount | $ 0 | $ 0 |
Net investment hedges | Foreign exchange contracts | IBM | ||
Derivative Financial Instruments | ||
Notional amount | $ 2,066 | $ 2,331 |
Average remaining maturity | 2 months 12 days | 2 months 12 days |
Derivative instruments not designated as hedging instruments | Foreign exchange contracts | Maximum | ||
Derivative Financial Instruments | ||
Term of derivative contract | 1 year | |
Derivative instruments not designated as hedging instruments | Foreign exchange contracts | Third parties | ||
Derivative Financial Instruments | ||
Notional amount | $ 0 | $ 120 |
Financial Instruments - Derivatives, Fair Value (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | $ 27 | $ 3 |
Fair value of derivative liabilities | 71 | 56 |
Designated as hedging instruments | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | 27 | |
Fair value of derivative liabilities | 71 | 56 |
Derivative instruments not designated as hedging instruments | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | 3 | |
IBM | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | 27 | |
Fair value of derivative liabilities | 71 | |
Interest rate contracts | IBM | Designated as hedging instruments | Other liabilities | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative liabilities | 71 | 19 |
Foreign exchange contracts | IBM | Designated as hedging instruments | Other assets | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | $ 27 | |
Foreign exchange contracts | IBM | Designated as hedging instruments | Other liabilities | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative liabilities | 37 | |
Foreign exchange contracts | Third parties | Derivative instruments not designated as hedging instruments | Other assets | ||
Fair Values of Derivative Instruments | ||
Fair value of derivative assets | $ 3 |
Financial Instruments - Cumulative Basis Adjustment for Fair Value Hedges (Details) $ in Millions |
Sep. 30, 2018
USD ($)
|
---|---|
Financial Instruments: | |
Carrying Amount of the Hedged Item Assets/(Liabilities) | $ (3,273) |
Carrying Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Assets/(Liabilities) | $ 70 |
Financial Instruments - Effect of Hedge Activity on Income and Expense (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Loss (income) from continuing operations before income taxes | $ (184) | $ (165) | $ (522) | $ (488) |
Financing cost | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Loss (income) from continuing operations before income taxes | 135 | 362 | ||
Gains/(losses) of total hedge activity | 6 | 22 | ||
Other (income) and expense | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Loss (income) from continuing operations before income taxes | $ 5 | (11) | ||
Gains/(losses) of total hedge activity | $ 7 |
Financial Instruments - Derivatives, Gains and Losses (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives | $ (10) | $ (18) | $ (39) | $ (259) |
Gain/(Loss) Recognized in Earnings, Attributable to Risk Being Hedged | 7 | 14 | 43 | 14 |
Gains (losses) excluded from the assessment of hedge effectiveness for fair value hedges | ||||
Net investment hedges | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI | 23 | 20 | 84 | 20 |
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing | 8 | 0 | 24 | 0 |
Interest rate contracts | IBM | Fair value hedges | Financing cost | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives | (10) | (14) | (45) | (14) |
Gain/(Loss) Recognized in Earnings, Attributable to Risk Being Hedged | 7 | 14 | 43 | 14 |
Foreign exchange contracts | IBM | Net investment hedges | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Recognized in OCI | 23 | 20 | 84 | 20 |
Foreign exchange contracts | IBM | Net investment hedges | Financing cost | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain (Loss) Recognized in Earnings and Other Comprehensive Income - Amounts Excluded from Effectiveness Testing | $ 8 | 0 | 24 | 0 |
Foreign exchange contracts | Derivative instruments not designated as hedging instruments | IBM | Other (income) and expense | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives | (222) | |||
Foreign exchange contracts | Derivative instruments not designated as hedging instruments | Third parties | Other (income) and expense | ||||
The Effect of Derivative Instruments in the Consolidated Statement of Earnings | ||||
Gain/(Loss) Recognized in Earnings, Recognized on Derivatives | $ (4) | $ 7 | $ (22) |
Financing Receivables, Receivables Purchased/Participated from IBM - Net of Allowances (Details) - USD ($) $ in Millions |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
Financing receivables | |||
Financing receivables pledged as collateral for borrowings | $ 754 | $ 773 | |
Financing receivables held for sale | 0 | 0 | |
Financing Receivable Portfolio | |||
Financing receivables | |||
Financing receivables, gross | 23,024 | 26,402 | |
Unearned income | (841) | (919) | |
Deferred initial direct costs | 114 | 128 | |
Recorded investment | 22,298 | 25,611 | |
Allowance for credit losses | (189) | (173) | |
Unguaranteed residual value | 463 | 533 | |
Guaranteed residual value | 81 | 94 | |
Net financing receivables | $ 22,653 | 26,066 | |
Financing Receivable Portfolio | Maximum | |||
Financing receivables | |||
Financing receivable, payment terms | 7 years | ||
Lease receivables | |||
Financing receivables | |||
Financing receivables, gross | $ 5,086 | 5,462 | |
Unearned income | (392) | (411) | |
Deferred initial direct costs | 44 | 56 | |
Recorded investment | 4,738 | 5,107 | |
Allowance for credit losses | (71) | (62) | $ (95) |
Unguaranteed residual value | 463 | 533 | |
Guaranteed residual value | 81 | 94 | |
Net financing receivables | 5,212 | 5,672 | |
Commercial financing receivables | |||
Financing receivables | |||
Financing receivables, gross | 9,063 | 11,177 | |
Unearned income | (29) | (35) | |
Recorded investment | 9,034 | 11,142 | |
Allowance for credit losses | (10) | (15) | |
Net financing receivables | $ 9,023 | 11,127 | |
Commercial financing receivables | Minimum | |||
Financing receivables | |||
Financing receivable, payment terms | 30 days | ||
Commercial financing receivables | Maximum | |||
Financing receivables | |||
Financing receivable, payment terms | 90 days | ||
Loan receivables | |||
Financing receivables | |||
Financing receivables, gross | $ 8,875 | 9,762 | |
Unearned income | (419) | (473) | |
Deferred initial direct costs | 70 | 73 | |
Recorded investment | 8,526 | 9,362 | |
Allowance for credit losses | (108) | (96) | (125) |
Net financing receivables | 8,417 | 9,267 | |
Purchased and participated receivables from IBM | |||
Financing receivables | |||
Allowance for credit losses | (33) | (39) | |
Net financing receivables | $ 4,890 | 5,239 | |
Short-term purchased receivables from IBM | |||
Financing receivables | |||
Financing receivable, payment terms | 30 days | ||
Recorded investment | $ 1,182 | 1,466 | |
Allowance for credit losses | (22) | (25) | |
Net financing receivables | 1,160 | 1,441 | |
Long-term participated receivables from IBM | |||
Financing receivables | |||
Recorded investment | 3,741 | 3,812 | |
Allowance for credit losses | (11) | (14) | $ (13) |
Net financing receivables | $ 3,730 | $ 3,798 |
Financing Receivables, Receivables Purchased/Participated from IBM - By Portfolio Segment (Details) $ in Millions |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Sep. 30, 2018
USD ($)
|
Sep. 30, 2017
USD ($)
|
Sep. 30, 2018
USD ($)
item
|
Sep. 30, 2017
USD ($)
|
Dec. 31, 2017
USD ($)
|
|
Allowance for credit losses: | |||||
Interest income recognized on impaired leases and loans | |||||
Interest income recognized on a cash basis | |||||
Americas | |||||
Allowance for credit losses: | |||||
Average recorded investment of impaired leases and loans | $ 87 | $ 89 | |||
EMEA | |||||
Allowance for credit losses: | |||||
Average recorded investment of impaired leases and loans | 43 | 11 | |||
Asia Pacific | |||||
Allowance for credit losses: | |||||
Average recorded investment of impaired leases and loans | 20 | $ 33 | |||
Finance leases portfolio and loans receivable and participated loans | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Number of portfolio segments | item | 3 | ||||
Number of classes of financing receivable | item | 3 | ||||
Recorded investment | 17,005 | $ 17,005 | $ 18,282 | ||
Recorded investment collectively evaluated for impairment | 16,839 | 16,839 | 18,163 | ||
Recorded investment individually evaluated for impairment | 166 | 166 | 118 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 172 | 233 | 233 | ||
Write-offs | (6) | (77) | |||
Recoveries | 2 | 1 | |||
Provision | 29 | 14 | |||
Foreign currency translation adjustment | (8) | 8 | |||
Other | 2 | (8) | |||
Allowance for credit losses, ending balance | 190 | 190 | 172 | ||
Related allowance, collectively evaluated for impairment | 62 | 62 | 67 | ||
Related allowance, individually evaluated for impairment | 128 | 128 | 105 | ||
Finance leases portfolio and loans receivable and participated loans | Americas | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 9,489 | 9,489 | 10,447 | ||
Recorded investment collectively evaluated for impairment | 9,384 | 9,384 | 10,388 | ||
Recorded investment individually evaluated for impairment | 105 | 105 | 59 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 107 | 160 | 160 | ||
Write-offs | (3) | (42) | |||
Recoveries | 0 | 1 | |||
Provision | 12 | (7) | |||
Foreign currency translation adjustment | (5) | 0 | |||
Other | 0 | (4) | |||
Allowance for credit losses, ending balance | 112 | 112 | 107 | ||
Related allowance, collectively evaluated for impairment | 43 | 43 | 49 | ||
Related allowance, individually evaluated for impairment | 69 | 69 | 59 | ||
Average recorded investment of impaired leases and loans | 76 | 96 | |||
Finance leases portfolio and loans receivable and participated loans | EMEA | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 4,484 | 4,484 | 4,502 | ||
Recorded investment collectively evaluated for impairment | 4,441 | 4,441 | 4,463 | ||
Recorded investment individually evaluated for impairment | 42 | 42 | 39 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 43 | 16 | 16 | ||
Write-offs | (1) | (2) | |||
Recoveries | 0 | ||||
Provision | 14 | 27 | |||
Foreign currency translation adjustment | (2) | 4 | |||
Other | 1 | (2) | |||
Allowance for credit losses, ending balance | 55 | 55 | 43 | ||
Related allowance, collectively evaluated for impairment | 15 | 15 | 14 | ||
Related allowance, individually evaluated for impairment | 40 | 40 | 30 | ||
Average recorded investment of impaired leases and loans | 41 | 10 | |||
Finance leases portfolio and loans receivable and participated loans | Asia Pacific | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 3,032 | 3,032 | 3,332 | ||
Recorded investment collectively evaluated for impairment | 3,013 | 3,013 | 3,312 | ||
Recorded investment individually evaluated for impairment | 19 | 19 | 20 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 21 | 58 | 58 | ||
Write-offs | (2) | (33) | |||
Recoveries | 2 | 0 | |||
Provision | 3 | (6) | |||
Foreign currency translation adjustment | (1) | 4 | |||
Other | 1 | (3) | |||
Allowance for credit losses, ending balance | 23 | 23 | 21 | ||
Related allowance, collectively evaluated for impairment | 4 | 4 | 5 | ||
Related allowance, individually evaluated for impairment | 19 | 19 | 17 | ||
Average recorded investment of impaired leases and loans | 19 | 44 | |||
Lease receivables | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 4,738 | 4,738 | 5,107 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 62 | 95 | 95 | ||
Write-offs | (4) | (39) | |||
Provision | 2 | (2) | |||
Allowance for credit losses, ending balance | 71 | 71 | 62 | ||
Lease receivables | Americas | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 3,272 | 3,272 | 3,593 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 42 | 38 | 38 | ||
Allowance for credit losses, ending balance | 46 | 46 | 42 | ||
Lease receivables | EMEA | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 776 | 776 | 662 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 6 | 2 | 2 | ||
Allowance for credit losses, ending balance | 8 | 8 | 6 | ||
Lease receivables | Asia Pacific | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 690 | 690 | 852 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 15 | 55 | 55 | ||
Allowance for credit losses, ending balance | 17 | 17 | 15 | ||
Loan receivables | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 8,526 | 8,526 | 9,362 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 96 | 125 | 125 | ||
Write-offs | (2) | (37) | |||
Provision | 18 | 15 | |||
Allowance for credit losses, ending balance | 108 | 108 | 96 | ||
Loan receivables | Americas | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 5,549 | 5,549 | 6,110 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 57 | 113 | 113 | ||
Allowance for credit losses, ending balance | 63 | 63 | 57 | ||
Loan receivables | EMEA | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 2,077 | 2,077 | 2,315 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 34 | 11 | 11 | ||
Allowance for credit losses, ending balance | 41 | 41 | 34 | ||
Loan receivables | Asia Pacific | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 899 | 899 | 937 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 4 | 0 | 0 | ||
Allowance for credit losses, ending balance | 4 | 4 | 4 | ||
Long-term participated receivables from IBM | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 3,741 | 3,741 | 3,812 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 14 | 13 | 13 | ||
Provision | 9 | 1 | |||
Allowance for credit losses, ending balance | 11 | 11 | 14 | ||
Long-term participated receivables from IBM | Americas | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 668 | 668 | 744 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 9 | 8 | 8 | ||
Allowance for credit losses, ending balance | 3 | 3 | 9 | ||
Long-term participated receivables from IBM | EMEA | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 1,630 | 1,630 | 1,525 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 4 | 3 | 3 | ||
Allowance for credit losses, ending balance | 6 | 6 | 4 | ||
Long-term participated receivables from IBM | Asia Pacific | |||||
Financing receivables, receivables purchased/participated from IBM | |||||
Recorded investment | 1,443 | 1,443 | 1,543 | ||
Allowance for credit losses: | |||||
Allowance for credit losses, beginning balance | 2 | $ 2 | 2 | ||
Allowance for credit losses, ending balance | $ 2 | $ 2 | $ 2 |
Financing Receivables, Receivables Purchased/Participated from IBM - Past Due (Details) - USD ($) $ in Millions |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Finance leases portfolio and loans receivable and participated loans | ||
Past Due Financing Receivables | ||
Period after which financing receivables become past due | 90 days | |
Total Recorded Investment | $ 17,005 | $ 18,282 |
Recorded Investment > 90 Days and Accruing | 547 | 464 |
Billed Invoices > 90 Days and Accruing | 67 | 74 |
Recorded Investment Not Accruing | 212 | 166 |
Recorded investment, impaired financing receivables with related allowance | 166 | 118 |
Impaired financing receivables, related allowance | 128 | 105 |
Finance leases portfolio and loans receivable and participated loans | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 760 | 629 |
Finance leases portfolio and loans receivable and participated loans | Americas | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 9,489 | 10,447 |
Finance leases portfolio and loans receivable and participated loans | EMEA | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 4,484 | 4,502 |
Finance leases portfolio and loans receivable and participated loans | Asia Pacific | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 3,032 | 3,332 |
Lease receivables | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 4,738 | 5,107 |
Recorded Investment > 90 Days and Accruing | 220 | 194 |
Billed Invoices > 90 Days and Accruing | 27 | 31 |
Recorded Investment Not Accruing | 73 | 54 |
Lease receivables | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 294 | 245 |
Lease receivables | Americas | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 3,272 | 3,593 |
Recorded Investment > 90 Days and Accruing | 210 | 185 |
Billed Invoices > 90 Days and Accruing | 25 | 27 |
Recorded Investment Not Accruing | 41 | 20 |
Lease receivables | Americas | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 251 | 203 |
Lease receivables | EMEA | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 776 | 662 |
Recorded Investment > 90 Days and Accruing | 9 | 5 |
Billed Invoices > 90 Days and Accruing | 2 | 3 |
Recorded Investment Not Accruing | 15 | 16 |
Lease receivables | EMEA | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 24 | 21 |
Lease receivables | Asia Pacific | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 690 | 852 |
Recorded Investment > 90 Days and Accruing | 1 | 4 |
Billed Invoices > 90 Days and Accruing | 0 | 1 |
Recorded Investment Not Accruing | 17 | 18 |
Lease receivables | Asia Pacific | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 18 | 22 |
Loan receivables | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 8,526 | 9,362 |
Recorded Investment > 90 Days and Accruing | 298 | 258 |
Billed Invoices > 90 Days and Accruing | 32 | 39 |
Recorded Investment Not Accruing | 133 | 112 |
Loan receivables | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 431 | 372 |
Loan receivables | Americas | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 5,549 | 6,110 |
Recorded Investment > 90 Days and Accruing | 271 | 237 |
Billed Invoices > 90 Days and Accruing | 26 | 37 |
Recorded Investment Not Accruing | 65 | 41 |
Loan receivables | Americas | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 336 | 281 |
Loan receivables | EMEA | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 2,077 | 2,315 |
Recorded Investment > 90 Days and Accruing | 22 | 17 |
Billed Invoices > 90 Days and Accruing | 4 | 0 |
Recorded Investment Not Accruing | 65 | 66 |
Loan receivables | EMEA | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 87 | 82 |
Loan receivables | Asia Pacific | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 899 | 937 |
Recorded Investment > 90 Days and Accruing | 5 | 4 |
Billed Invoices > 90 Days and Accruing | 2 | 2 |
Recorded Investment Not Accruing | 3 | 5 |
Loan receivables | Asia Pacific | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 9 | 9 |
Long-term participated receivables from IBM | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 3,741 | 3,812 |
Recorded Investment > 90 Days and Accruing | 28 | 12 |
Billed Invoices > 90 Days and Accruing | 8 | 4 |
Recorded Investment Not Accruing | 6 | |
Long-term participated receivables from IBM | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 35 | 12 |
Long-term participated receivables from IBM | Americas | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 668 | 744 |
Recorded Investment > 90 Days and Accruing | 4 | 11 |
Billed Invoices > 90 Days and Accruing | 4 | 3 |
Long-term participated receivables from IBM | Americas | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 4 | 11 |
Long-term participated receivables from IBM | EMEA | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 1,630 | 1,525 |
Recorded Investment > 90 Days and Accruing | 2 | 1 |
Billed Invoices > 90 Days and Accruing | 1 | 1 |
Recorded Investment Not Accruing | 5 | |
Long-term participated receivables from IBM | EMEA | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | 7 | 1 |
Long-term participated receivables from IBM | Asia Pacific | ||
Past Due Financing Receivables | ||
Total Recorded Investment | 1,443 | 1,543 |
Recorded Investment > 90 Days and Accruing | 22 | 0 |
Billed Invoices > 90 Days and Accruing | 4 | 0 |
Recorded Investment Not Accruing | 1 | |
Long-term participated receivables from IBM | Asia Pacific | > 90 days | ||
Past Due Financing Receivables | ||
Recorded Investment, Past Due | $ 23 | $ 0 |
Financing Receivables, Receivables Purchased/Participated from IBM - Credit Quality Indicators (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Net recorded investment for each class of receivables, by credit quality indicator | ||
Troubled debt restructurings of financing receivables | ||
Lease receivables | Americas | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 3,226 | 3,551 |
Lease receivables | Americas | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 360 | 384 |
Lease receivables | Americas | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 692 | 786 |
Lease receivables | Americas | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 744 | 921 |
Lease receivables | Americas | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 703 | 681 |
Lease receivables | Americas | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 427 | 406 |
Lease receivables | Americas | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 270 | 326 |
Lease receivables | Americas | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 29 | 47 |
Lease receivables | EMEA | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 768 | 657 |
Lease receivables | EMEA | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 31 | 24 |
Lease receivables | EMEA | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 96 | 93 |
Lease receivables | EMEA | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 239 | 177 |
Lease receivables | EMEA | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 234 | 218 |
Lease receivables | EMEA | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 106 | 98 |
Lease receivables | EMEA | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 57 | 39 |
Lease receivables | EMEA | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 5 | 6 |
Lease receivables | Asia Pacific | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 674 | 837 |
Lease receivables | Asia Pacific | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 54 | 40 |
Lease receivables | Asia Pacific | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 269 | 367 |
Lease receivables | Asia Pacific | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 173 | 224 |
Lease receivables | Asia Pacific | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 103 | 115 |
Lease receivables | Asia Pacific | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 44 | 46 |
Lease receivables | Asia Pacific | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 27 | 36 |
Lease receivables | Asia Pacific | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 4 | 9 |
Loan receivables | Americas | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 5,486 | 6,054 |
Loan receivables | Americas | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 612 | 655 |
Loan receivables | Americas | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 1,178 | 1,340 |
Loan receivables | Americas | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 1,266 | 1,571 |
Loan receivables | Americas | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 1,196 | 1,160 |
Loan receivables | Americas | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 725 | 692 |
Loan receivables | Americas | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 460 | 555 |
Loan receivables | Americas | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 49 | 80 |
Loan receivables | EMEA | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 2,036 | 2,280 |
Loan receivables | EMEA | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 81 | 85 |
Loan receivables | EMEA | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 256 | 324 |
Loan receivables | EMEA | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 635 | 616 |
Loan receivables | EMEA | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 619 | 756 |
Loan receivables | EMEA | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 281 | 341 |
Loan receivables | EMEA | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 150 | 135 |
Loan receivables | EMEA | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 14 | 23 |
Loan receivables | Asia Pacific | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 895 | 933 |
Loan receivables | Asia Pacific | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 72 | 45 |
Loan receivables | Asia Pacific | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 358 | 409 |
Loan receivables | Asia Pacific | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 230 | 250 |
Loan receivables | Asia Pacific | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 136 | 129 |
Loan receivables | Asia Pacific | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 58 | 51 |
Loan receivables | Asia Pacific | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 36 | 40 |
Loan receivables | Asia Pacific | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 6 | 10 |
Long-term participated receivables from IBM | Americas | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 666 | 735 |
Long-term participated receivables from IBM | Americas | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 74 | 80 |
Long-term participated receivables from IBM | Americas | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 143 | 163 |
Long-term participated receivables from IBM | Americas | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 154 | 191 |
Long-term participated receivables from IBM | Americas | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 145 | 141 |
Long-term participated receivables from IBM | Americas | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 88 | 84 |
Long-term participated receivables from IBM | Americas | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 56 | 67 |
Long-term participated receivables from IBM | Americas | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 6 | 10 |
Long-term participated receivables from IBM | EMEA | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 1,624 | 1,522 |
Long-term participated receivables from IBM | EMEA | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 65 | 57 |
Long-term participated receivables from IBM | EMEA | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 204 | 217 |
Long-term participated receivables from IBM | EMEA | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 506 | 411 |
Long-term participated receivables from IBM | EMEA | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 494 | 505 |
Long-term participated receivables from IBM | EMEA | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 224 | 228 |
Long-term participated receivables from IBM | EMEA | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 120 | 90 |
Long-term participated receivables from IBM | EMEA | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 11 | 15 |
Long-term participated receivables from IBM | Asia Pacific | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 1,440 | 1,541 |
Long-term participated receivables from IBM | Asia Pacific | Aaa - Aa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 115 | 74 |
Long-term participated receivables from IBM | Asia Pacific | A1 - A3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 575 | 676 |
Long-term participated receivables from IBM | Asia Pacific | Baa1 - Baa3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 370 | 413 |
Long-term participated receivables from IBM | Asia Pacific | Ba1 - Ba2 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 219 | 213 |
Long-term participated receivables from IBM | Asia Pacific | Ba3 - B1 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 93 | 84 |
Long-term participated receivables from IBM | Asia Pacific | B2 - B3 | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | 58 | 66 |
Long-term participated receivables from IBM | Asia Pacific | Caa - D | ||
Net recorded investment for each class of receivables, by credit quality indicator | ||
Financing receivables, net recorded investment | $ 9 | $ 16 |
Segments - Business Segments (Details) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018
USD ($)
|
Sep. 30, 2017
USD ($)
|
Sep. 30, 2018
USD ($)
segment
|
Sep. 30, 2017
USD ($)
|
|
Segment Information | ||||
Number of reportable segments | segment | 2 | |||
Segments, Income statement information | ||||
Total revenue | $ 452 | $ 418 | $ 1,334 | $ 1,274 |
Pre-tax income | 184 | 165 | 522 | 488 |
Depreciation of equipment under operating lease | 50 | 59 | 146 | 178 |
Financing cost (interest expense) | 135 | 95 | 362 | 267 |
Provision for/(benefit from) credit losses | (10) | 2 | 24 | 11 |
Client Financing | ||||
Segments, Income statement information | ||||
Total revenue | 307 | 309 | 913 | 945 |
Pre-tax income | 124 | 123 | 354 | 363 |
Depreciation of equipment under operating lease | 50 | 59 | 146 | 178 |
Financing cost (interest expense) | 91 | 66 | 242 | 184 |
Provision for/(benefit from) credit losses | (6) | 2 | 29 | 13 |
Commercial Financing | ||||
Segments, Income statement information | ||||
Total revenue | 145 | 109 | 421 | 330 |
Pre-tax income | 59 | 42 | 168 | 125 |
Financing cost (interest expense) | 44 | 29 | 119 | 83 |
Provision for/(benefit from) credit losses | $ (4) | $ 0 | $ (5) | $ (2) |
Equity Activity - Reclassifications and Taxes (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Unrealized gains (losses) on cash flow hedges | $ 0 | $ 0 | ||
Gains (losses) on available-for-sale-debt securities | ||||
Other comprehensive income/(loss), Before Tax Amount | $ (20) | $ 151 | (117) | 370 |
Other comprehensive income/(loss), Tax (Expense)/Benefit | (6) | (8) | (22) | (8) |
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 |
Accumulated Other Comprehensive Income/(Loss) | ||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Other comprehensive income/(loss), arising during the period, Net of Tax Amount | (140) | 361 | ||
Reclassification/amortization, Net of Tax Amount | 0 | 0 | ||
Other comprehensive income/(loss), Before Tax Amount | (20) | 151 | (117) | 370 |
Other comprehensive income/(loss), Tax (Expense)/Benefit | (6) | (8) | (22) | (8) |
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 |
Foreign Currency Translation Adjustments | ||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Other comprehensive income/(loss), arising during the period, Net of Tax Amount | (140) | 360 | ||
Other comprehensive income/(loss), Before Tax Amount | (20) | 151 | (119) | 368 |
Other comprehensive income/(loss), Tax (Expense)/Benefit | (6) | (8) | (22) | (8) |
Other comprehensive income/(loss), net of tax | (26) | 143 | (140) | 360 |
Net Change Retirement-Related Benefit Plans | ||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Other comprehensive income/(loss), arising during the period, Net of Tax Amount | 0 | 1 | ||
Reclassification/amortization, Net of Tax Amount | 0 | 0 | ||
Other comprehensive income/(loss), Before Tax Amount | 0 | 0 | 1 | 2 |
Other comprehensive income/(loss), Tax (Expense)/Benefit | 0 | 0 | 0 | 0 |
Other comprehensive income/(loss), net of tax | 0 | 0 | 1 | 1 |
Retirement-Related Benefit Plans, Prior Service Costs/(Credits) | ||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Reclassification/amortization, Before Tax Amount | 0 | 0 | (1) | (1) |
Reclassification/amortization, Tax (Expense)/Benefit | 0 | 0 | 0 | 0 |
Reclassification/amortization, Net of Tax Amount | 0 | 0 | 0 | (1) |
Retirement-Related Benefit Plans, Net Gains/(Losses) | ||||
Reclassifications and Taxes Related to Items of Other Comprehensive Income | ||||
Other comprehensive income/(loss), arising during the period, Before Tax Amount | 1 | 1 | ||
Other comprehensive income/(loss), arising during the period, Tax (Expense)/Benefit | 0 | 0 | 0 | |
Other comprehensive income/(loss), arising during the period, Net of Tax Amount | 0 | 0 | 1 | |
Reclassification/amortization, Before Tax Amount | 0 | 0 | 1 | 1 |
Reclassification/amortization, Tax (Expense)/Benefit | $ 0 | 0 | 0 | 0 |
Reclassification/amortization, Net of Tax Amount | $ 0 | $ 1 | $ 1 |
Equity Activity - AOCI Rollforward (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|
Jan. 01, 2018 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
||||
Accumulated Other Comprehensive Income/(Loss) (net of tax) | ||||||||
Balance at the beginning of the period | $ 3,562 | $ 3,562 | $ 3,703 | |||||
Other comprehensive income/(loss), net of tax | $ (26) | $ 143 | (139) | 361 | ||||
Balance at the end of the period | 3,360 | 3,220 | 3,360 | 3,220 | ||||
Accumulated Other Comprehensive Income/(Loss) | ||||||||
Accumulated Other Comprehensive Income/(Loss) (net of tax) | ||||||||
Balance at the beginning of the period | 158 | 158 | (209) | |||||
Cumulative effect of change in accounting principle | (5) | (5) | [1] | |||||
Other comprehensive income before reclassification | (140) | 361 | ||||||
Amount reclassified from accumulated other comprehensive income | 0 | 0 | ||||||
Other comprehensive income/(loss), net of tax | (26) | 143 | (139) | 361 | ||||
Balance at the end of the period | 13 | 152 | 13 | 152 | ||||
Foreign Currency Translation Adjustments | ||||||||
Accumulated Other Comprehensive Income/(Loss) (net of tax) | ||||||||
Balance at the beginning of the period | 165 | 165 | (200) | |||||
Cumulative effect of change in accounting principle | (5) | |||||||
Other comprehensive income before reclassification | (140) | 360 | ||||||
Other comprehensive income/(loss), net of tax | (26) | 143 | (140) | 360 | ||||
Balance at the end of the period | 20 | 161 | 20 | 161 | ||||
Net Change Retirement-Related Benefit Plans | ||||||||
Accumulated Other Comprehensive Income/(Loss) (net of tax) | ||||||||
Balance at the beginning of the period | $ (7) | (7) | (9) | |||||
Other comprehensive income before reclassification | 0 | 1 | ||||||
Amount reclassified from accumulated other comprehensive income | 0 | 0 | ||||||
Other comprehensive income/(loss), net of tax | 0 | 0 | 1 | 1 | ||||
Balance at the end of the period | $ (6) | $ (8) | $ (6) | $ (8) | ||||
|
Relationship with IBM and Related Party Transactions - Support Agreement (Details) $ in Millions |
Sep. 30, 2018
USD ($)
|
---|---|
IBM Credit LLC | IBM | |
Related party transactions | |
Minimum beneficial ownership of equity voting interest (as a percent) | 51.00% |
IBM | Support Agreement | |
Related party transactions | |
Minimum consolidated tangible net worth to be supported by parent company | $ 50 |
Maximum debt to equity ratio to be supported by parent company | 11 |
Relationship with IBM and Related Party Transactions - Operating Relationship (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Dec. 31, 2017 |
|
Disclosures | |||||
Other receivables from IBM | $ 2,549 | $ 2,549 | $ 1,024 | ||
Financing revenue | |||||
Disclosures | |||||
Fee income from related party related to financing incentives to third party | 39 | 119 | |||
Change in fee income | 4 | 13 | |||
Financing receivables from IBM | |||||
Disclosures | |||||
Net financing receivables | 3,779 | 3,779 | 3,743 | ||
Long-term participated receivables from IBM | |||||
Disclosures | |||||
Net financing receivables | 3,730 | 3,730 | 3,798 | ||
Short-term purchased receivables from IBM | |||||
Disclosures | |||||
Net financing receivables | 1,160 | 1,160 | 1,441 | ||
IBM | |||||
Disclosures | |||||
Other receivables from IBM | 2,549 | 2,549 | 1,024 | ||
IBM | Excess cash in short-term interest-bearing accounts with parent | |||||
Disclosures | |||||
Other receivables from IBM | 2,538 | 2,538 | 911 | ||
IBM | Financing revenue | Excess cash in short-term interest-bearing accounts with parent | |||||
Disclosures | |||||
Interest income from a related party | 17 | $ 9 | 38 | $ 28 | |
IBM | Financing receivables from IBM | |||||
Disclosures | |||||
Net financing receivables | 3,779 | 3,779 | $ 3,743 | ||
IBM | Financing receivables from IBM | Financing revenue | |||||
Disclosures | |||||
Interest income from a related party | 45 | 128 | |||
Increase (decrease) in interest income over the prior year | 8 | 27 | |||
IBM | Long-term participated receivables from IBM | Financing revenue | |||||
Disclosures | |||||
Interest income from a related party | 47 | 144 | |||
Increase (decrease) in financial services revenue over the prior year | 4 | 25 | |||
IBM | Short-term purchased receivables from IBM | Financing revenue | |||||
Disclosures | |||||
Financing revenue | 10 | 32 | |||
Increase (decrease) in financial services revenue over the prior year | $ 2 | $ 5 |
Relationship with IBM and Related Party Transactions - Other (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Dec. 31, 2017 |
|
Related party transactions | |||||
Interest expense incurred on related party borrowings | $ 81 | $ 66 | $ 215 | $ 201 | |
Accounts payable to related party | 1,142 | 1,142 | $ 2,903 | ||
IBM | |||||
Related party transactions | |||||
Selling, general and administrative expense with related party | 53 | 54 | 163 | 173 | |
Accounts payable to related party | 1,142 | 1,142 | $ 2,903 | ||
IBM | Financing cost | Debt payable to IBM | |||||
Related party transactions | |||||
Interest expense incurred on related party borrowings | 81 | 66 | 215 | 201 | |
IBM | Sales of returned equipment | Other (income) and expense | |||||
Related party transactions | |||||
Net profit on transaction with related party | $ 8 | $ 12 | $ 35 | $ 40 |
Borrowings - Short-Term Debt (Details) - USD ($) $ in Millions |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Short-Term Debt | ||
Short-term debt | $ 14,485 | $ 16,727 |
Short-term financing receivables pledged as collateral for short-term secured borrowings | 3 | 12 |
Debt | ||
Short-Term Debt | ||
Short-term debt | 2,031 | 1,568 |
Commercial paper | ||
Short-Term Debt | ||
Short-term debt | 1,996 | $ 1,496 |
Maximum aggregate amount permitted to be outstanding at any one time | $ 5,000 | |
Weighted-average interest rates for short-term loans (as a percent) | 2.20% | 1.50% |
Commercial paper | Maximum | ||
Short-Term Debt | ||
Term of debt instrument | 364 days | |
Short-term loans | ||
Short-Term Debt | ||
Short-term debt | $ 31 | $ 60 |
Weighted-average interest rates for short-term loans (as a percent) | 4.10% | 2.40% |
Secured borrowings | ||
Short-Term Debt | ||
Short-term debt | $ 3 | $ 12 |
Weighted-average interest rates for short-term loans (as a percent) | 5.30% | 4.70% |
Debt payable to IBM | ||
Short-Term Debt | ||
Short-term debt | $ 12,454 | $ 15,159 |
Weighted-average interest rates for short-term loans (as a percent) | 1.70% | 1.10% |
Borrowings - Long-Term Debt, Components (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|---|
Borrowings | |||
Long-term debt - gross | $ 15,469 | ||
Long-term debt - net | 15,389 | $ 13,750 | |
Long-term financing receivables pledged as collateral for long-term secured borrowings | $ 751 | 762 | |
Maximum percent of lien over the net tangible assets | 15.00% | ||
Debt | |||
Borrowings | |||
Long-term debt - gross | $ 5,977 | 4,248 | |
Less: net unamortized discount | 2 | 1 | |
Less: net unamortized debt issuance costs | 8 | 9 | |
Less: fair value adjustment | 70 | 26 | |
Long-term debt - net | 5,898 | 4,211 | |
Long-term notes | |||
Borrowings | |||
Long-term debt - gross | $ 5,000 | 3,000 | |
Long-term notes maturing in 2019 | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 2.00% | ||
Long-term debt - gross | $ 1,400 | 1,400 | |
Long-term notes maturing in 2021 | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 2.40% | ||
Long-term debt - gross | $ 2,350 | 1,100 | |
Long-term notes maturing in 2022 | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 2.20% | ||
Long-term debt - gross | $ 500 | 500 | |
Long-term notes maturing in 2023 | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 3.00% | ||
Long-term debt - gross | $ 750 | ||
Long-term loans | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 6.30% | ||
Long-term debt - gross | $ 226 | 486 | |
Secured borrowings | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 4.90% | ||
Long-term debt - gross | $ 751 | 762 | |
Debt securities issued during first quarter of 2018 | |||
Borrowings | |||
Debt securities, aggregate amount issued | $ 2,000 | ||
Debt payable to IBM | |||
Borrowings | |||
Debt instrument, average interest rate percentage (as a percent) | 1.20% | ||
Long-term debt - gross | $ 9,491 | ||
Long-term debt - net | $ 9,491 | $ 9,539 |
Borrowings - Contractual Maturities (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Contractual maturities of long-term debt | ||
2018 (Q4) | $ 1,566 | |
2019 | 5,272 | |
2020 | 2,801 | |
2021 | 3,580 | |
2022 | 1,404 | |
2023 and beyond | 846 | |
Total | 15,469 | |
Debt | ||
Contractual maturities of long-term debt | ||
2018 (Q4) | 121 | |
2019 | 1,818 | |
2020 | 260 | |
2021 | 2,474 | |
2022 | 551 | |
2023 and beyond | 753 | |
Total | 5,977 | $ 4,248 |
Debt payable to IBM | ||
Contractual maturities of long-term debt | ||
2018 (Q4) | 1,444 | |
2019 | 3,454 | |
2020 | 2,542 | |
2021 | 1,106 | |
2022 | 853 | |
2023 and beyond | 93 | |
Total | $ 9,491 |
Borrowings - Interest on Debt (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Interest on Debt | ||||
Interest expense | $ 135 | $ 95 | $ 362 | $ 267 |
Interest expense on debt payable to IBM | $ 81 | $ 66 | $ 215 | $ 201 |
Borrowings - Lines of Credit (Details) - Lines of Credit $ in Millions |
9 Months Ended | ||
---|---|---|---|
Jul. 19, 2018
USD ($)
|
Jul. 18, 2018
USD ($)
|
Sep. 30, 2018
USD ($)
|
|
New Credit Agreements | |||
Lines of Credit | |||
Revolving line of credit, amount | $ 5,000 | ||
Revolving line of credit, borrowings outstanding | $ 0 | ||
Covenants | |||
Limit based on net tangible assets | 10.00% | ||
Period for calculation of net interest expense ratio | 1 year | ||
Minimum net interest expense ratio | 2.20 | ||
Financial covenant - minimum tangible net worth | $ 50 | ||
Financial covenant - maximum leverage ratio | 11 | ||
Default provision on credit facility | $ 500 | ||
364-Day Credit Agreement, 2018 | |||
Lines of Credit | |||
Revolving line of credit, amount | $ 2,500 | ||
Revolving line of credit, term | 364 days | ||
364-Day Credit Agreement, 2017 | |||
Lines of Credit | |||
Revolving line of credit, amount | $ 2,500 | ||
Revolving line of credit, term | 364 days | ||
Three-Year Credit Agreement | |||
Lines of Credit | |||
Revolving line of credit, amount | $ 2,500 | ||
Revolving line of credit, term | 3 years | ||
Revolving line of credit, term extension | 1 year |
Commitments (Details) - USD ($) $ in Millions |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Extended lines of credit | ||
Commitments | ||
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients | $ 8,211 | $ 7,755 |
Financing for client purchase agreements | ||
Commitments | ||
Unused amounts in lines of credit to third-party entities and commitments for future financing to clients | $ 550 | $ 749 |
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