-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVRbxvAL2pXi4yk/osBYCDGTQA0S9y/XrOj+77LxkQgVI2xWRp5d0qKoy5tBV7cN wGgCtT63SoZJ1wC2U4DEdA== 0000353524-99-000065.txt : 19991117 0000353524-99-000065.hdr.sgml : 19991117 ACCESSION NUMBER: 0000353524-99-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBM CREDIT CORP CENTRAL INDEX KEY: 0000353524 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 222351962 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08175 FILM NUMBER: 99751329 BUSINESS ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: ROOM 3C2108 CITY: ARMONK STATE: NY ZIP: 10504-1785 BUSINESS PHONE: 9146423000 MAIL ADDRESS: STREET 1: NORTH CASTLE DR MS NCA-306 STREET 2: PO BOX 10399 CITY: ARMONK STATE: NY ZIP: 10504-1785 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 Commission file number 1-8175 __________________________________ IBM CREDIT CORPORATION ___________________________________________________________ (Exact name of registrant as specified in its charter) DELAWARE 22-2351962 ____________________________ _____________________________ (State of incorporation) (IRS employer identification number) North Castle Drive, MS NCA-306 Armonk, New York 10504-1785 _______________________________________________________ _______________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 914-765-1900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 31, 1999, 936 shares of capital stock, par value $1.00 per share, were held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at October 31, 1999: NONE. The registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. 2 INDEX Part I - Financial Information: Page Item 1. Financial Statements: Consolidated Statement of Financial Position at September 30, 1999 and December 31, 1998................... 1 Consolidated Statement of Earnings for the three and nine months ended September 30, 1999 and 1998...................... 2 Consolidated Statement of Cash Flows for the nine months ended September 30, 1999 and 1998............................. 3 Notes to Consolidated Financial Statements...................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 11 Part II - Other Information..................................... 22 -1- 3 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Dollars in thousands)
At At September 30, December 31, 1999 1998 _____________ ____________ ASSETS: Cash and cash equivalents. . . . . $ 754,433 $ 822,844 Marketable securities. . . . . . . - 68,838 Net investment in capital leases . 5,473,401 5,265,941 Equipment on operating leases, net 3,413,010 3,619,585 Loans receivable . . . . . . . . . 3,257,845 3,041,222 Working capital financing receivables. . . . . . . . . . . 2,836,613 2,861,780 Factored IBM receivables . . . . . - 292,310 Investments and other assets . . . 486,077 424,839 __________ ___________ Total Assets $16,221,379 $16,397,359 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . $ 5,703,438 $ 6,618,695 Short-term debt, IBM . . . . . . . 1,941,727 158,527 Due to IBM and affiliates. . . . . 1,284,125 2,354,650 Interest and other accruals. . . . 487,831 440,248 Deferred income taxes. . . . . . . 1,022,598 973,686 Long-term debt . . . . . . . . . . 1,891,280 1,903,188 Long-term debt, IBM. . . . . . . . 1,791,702 2,070,651 ___________ ___________ Total liabilities . . . . . . . 14,122,701 14,519,645 ___________ ___________ Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 1999 and 1998 . . . . 457,411 457,411 Retained earnings. . . . . . . . . 1,641,267 1,420,303 ___________ ___________ Total stockholder's equity. . . 2,098,678 1,877,714 ___________ ___________ Total Liabilities and Stockholder's Equity . . . . . . . . . . . . . . $16,221,379 $16,397,359 =========== =========== -2- The accompanying notes are an integral part of this statement.
-3- 4 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in thousands)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ________ ________ ________ ________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . .$ 99,887 $ 85,924 $285,419 $246,628 Operating leases, net of depreciation. . . . . . 114,796 93,255 335,671 274,791 _________ ________ _________ ________ 214,683 179,179 621,090 521,419 Income from working capital financing. . . . . . . . . 63,755 56,686 171,179 182,422 Income from loans . . . . . 63,009 52,974 183,495 152,409 Equipment sales . . . . . . 75,303 103,971 356,012 308,912 Income from factored IBM receivables. . . . . . . . - 11,722 3,138 41,142 Other income. . . . . . . . 21,821 28,061 68,578 79,777 ________ ________ ________ _________ Total finance and other income. . . . . . . . . 438,571 432,593 1,403,492 1,286,081 ________ ________ _________ _________ COST AND EXPENSES: Interest. . . . . . . . . . 141,255 148,420 419,945 459,756 Cost of equipment sales . . 68,462 93,365 314,444 273,221 Selling, general, and administrative . . . . . . 52,087 49,491 157,705 152,241 Provision for receivable losses . . . . . . . . . . 8,003 9,388 23,008 25,873 _______ ________ ________ _________ Total cost and expenses. 269,807 300,664 915,102 911,091 _______ ________ ________ _________ EARNINGS BEFORE INCOME TAXES. 168,764 131,929 488,390 374,990 Provision for income taxes. . 66,493 51,980 192,426 147,746 ________ ________ ________ _________ NET EARNINGS. . . . . . . . .$102,271 $ 79,949 $295,964 $227,244 ========= ======= ======== ======== The accompanying notes are an integral part of this statement. -4-
-5- 5 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30: (Dollars in thousands)
1999 1998 _________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . $ 295,964 $ 227,244 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . . . . . 1,549,007 1,420,189 Provision for receivable losses. . . . . 23,008 25,873 Increase in deferred income taxes. . . . 48,912 62,912 Decrease in interest and other accruals (147,228) (144,114) Gross profit on equipment sales. . . . . (41,568) (35,691) Other items that provided (used) cash: Proceeds from equipment sales. . . . . 356,012 308,912 Decrease in amounts due IBM and affiliates . . . . . . . . . . . . . (1,070,525) (847,302) Other, net . . . . . . . . . . . . . . 12,260 4,447 _________ __________ Cash provided by operating activities . . . 1,025,842 1,022,470 _________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in capital leases . . . . . . (1,674,686)(1,748,030) Collections on capital leases, net of income earned . . . . . . . . . . . . . 1,649,213 1,541,615 Investment in equipment on operating leases. . . . . . . . . . . . . . . . . (1,389,299)(1,260,845) Investment in loans receivable . . . . . (1,314,468)(1,087,441) Collections on loans receivable, net of interest earned . . . . . . . . . . . 1,234,121 912,486 Purchase of factored IBM receivables . . (120,900)(4,820,766) Collections on factored IBM receivables. 138,862 4,839,278 Collections on working capital financing receivables, net. . . 289,481 785,858 Investment in participation loans. . . . (482,712) - Collections on participation loans . . . 72,751 61,960 Purchases of marketable securities . . . (24,390) (82,165) Proceeds from redemption of marketable securities. . . . . . . . . . . . . . . 93,203 127,105 ___________ __________ Total carried forward $(1,528,824) $(730,945) ___________ __________ -6- The accompanying notes are an integral part of this statement.
-7- 6 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30: (Continued) 1999 1998 ___________ __________ CASH FLOWS FROM INVESTING ACTIVITIES (Continued): Total brought forward $(1,528,824)$ (730,945) Proceeds from the sale of the net assets of IBM Credit International Factoring Corporation . . . . . . . . . . . . . . 273,759 - Cash payment for lease portfolio acquired. . . . . . . . . . . . . . . . (176,613) - Other, net . . . . . . . . . . . . . . . . (63,455) (90,348) __________ __________ Cash used in investing activities . . . (1,495,133) (821,293) __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . $1,674,288 $2,456,215 Repayment of debt with original maturities of one year or more . . . (700,543) (932,552) Repayment of debt with original maturities within one year, net. . . (497,865)(1,719,215) Cash dividends paid to IBM. . . . . . (75,000) (25,000) __________ _________ Cash provided by (used in) financing activities. . . . . . . . . . . . . . 400,880 (220,552) __________ _________ Change in cash and cash equivalents. . . (68,411) (19,375) Cash and cash equivalents, January 1 . . 822,844 792,471 __________ __________ Cash and cash equivalents, September 30. $ 754,433 $ 773,096 ========== ========== The accompanying notes are an integral part of this statement. -8-
-9- 7 IBM CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION: In the opinion of management of IBM Credit Corporation (the Company), all adjustments necessary for a fair statement of the results for the three- and nine-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. The Consolidated Statement of Financial Position at December 31, 1998, and the Statement of Cash Flows for the period ended September 30, 1998, have been restated to conform to current year presentation. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 2.16 and 1.82 for the nine months ended September 30, 1999, and 1998, respectively. ACCOUNTING CHANGES: In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130 _Reporting Comprehensive Income,_ which established standards for displaying comprehensive income and components. For the three- and nine-month periods ending September 30, 1999, and 1998, respectively, other than net earnings, there were no items to report. Effective December 31, 1998, the Company adopted SFAS No. 131, _Disclosures About Segments of an Enterprise and Related Information,_ which establishes standards for reporting operating segments and disclosures about products and services, geographic areas and major customers. Refer to Segment Reporting in the Notes to Consolidated Financial Statements on page 7. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, _Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133._ This statement defers the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to fiscal years beginning after June 15, 2000, although early adoption is permitted. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. -10- 8 ACCOUNTING CHANGES (Continued): It requires an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholder's equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. Management does not expect the adoption to have a material effect on the Company's results of operations, however, the effect on the Company's financial position depends on the fair values of the Company's derivatives and related financial instruments at the date of adoption. RELATED COMPANY TRANSACTIONS: EQUIPMENT LEASING: The Company provides equipment, software and services financing at market rates to IBM and affiliated companies for both IBM and non-IBM products. The Company originated $690.1 million and $661.4 million of such financings during the nine months ended September 30, 1999, and 1998, respectively. At September 30, 1999, and December 31, 1998, $1,412.0 million and $1,421.3 million, respectively, of such financings were included in the Company's lease and loan portfolio. The operating lease income, net of depreciation, and income from loans earned from transactions with IBM and affiliated companies, was approximately $137.3 million and $128.6 million for the first nine months of 1999, and 1998, respectively. In addition, as part of IBM's sale of its global network to AT&T, the Company sold $76.3 million in leased assets to IBM with a cost of $56.5 million resulting in a gross profit of $19.8 million. The above revenue and cost figures have been adjusted from the second quarter balances to reflect final actual amounts. WORKING CAPITAL FINANCING: The Company provides working capital financing, at market rates, to certain remarketers of IBM products. IBM pays the Company a fee to provide a preset free financing period to its remarketers. Included in income from working capital financing is $74.9 million and $82.7 million of fee income earned from divisions of IBM for the nine months ended September 30, 1999, and 1998, respectively. -11- 9 ACCOUNTS RECEIVABLE PURCHASES: In 1997, IBM Credit International Factoring Corporation (ICIFC) and IBM Credit EMEA Factoring Co., LTD. (ICEFC), subsidiaries of the Company, entered into factoring agreements with selected IBM subsidiaries. Under these agreements, ICIFC and ICEFC periodically purchased, without recourse, all the rights, title and interest to certain outstanding IBM customer receivables. In December 1998 and February 1999, respectively, ICEFC and ICIFC sold to a subsidiary of IBM, IBM International Holdings Finance Company, Ltd. (IIHFC), all of their factoring assets and substantially all of their related liabilities. During the nine months ended September 30, 1999, and 1998, ICIFC and ICEFC acquired IBM customer receivables having a nominal value of $122.0 million and $4,881.5 million, respectively, for $120.9 million and $4,820.8 million, respectively. The receivables acquired were short-term in nature and were denominated in non-U.S. currencies. The purchases were financed by the Company through the issuance of short-term debt. Transactions related to these receivables are fully integrated in the Company's consolidated financial statements. SEGMENT REPORTING: The Company is organized on the basis of its finance offerings. The Company's reportable segments are strategic business units that offer different financing solutions based upon the customers' needs. The Company's operations are conducted primarily through its two operating segments: Customer Financing and Commercial Financing. The Customer Financing segment provides lease and loan financing of IBM and non-IBM advanced information processing products and services to end users. The Commercial Financing segment provides primarily secured inventory and accounts receivable financing (_working capital financing_) for dealers and remarketers of information industry products. The accounting policies of the segments are the same as those followed by the Company. Segment data includes an allocation of interest expense and all corporate headquarters costs to each of its operating segments. Interest expense is allocated primarily on the basis of a planned leverage ratio using an average interest rate. Corporate headquarters expenses are allocated on the basis of headcount, an annual survey of the corporate staff to determine the time spent on each business segment, and asset utilization depending on the type of expense. The Company evaluates the performance of its segments and allocates resources to them based upon their earnings before taxes. The following schedules represent disaggregated income and expense information for both segments. There are no intersegment transactions. -12- SEGMENT REPORTING (Continued): (in thousands) For the Three Months Ending September 30: Customer Commercial 1999 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 361,518 $ 64,252 $ 425,770 Interest expense....... $ 116,413 $ 16,427 $ 132,840 Earnings before income taxes................ $ 129,732 $ 34,722 $ 164,454 1998 ______________________ Revenues............... $ 346,710 $ 57,153 $ 403,863 Interest expense....... $ 117,050 $ 11,688 $ 128,738 Earnings before income taxes................ $ 90,785 $ 32,722 $ 123,507 For the Nine Months Ending September 30: Customer Commercial 1999 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 1,187,654 $ 172,866 $ 1,360,520 Interest expense....... $ 353,566 $ 40,564 $ 394,130 Earnings before income taxes................ $ 377,702 $ 93,611 $ 471,313 1998 ______________________ Revenues............... $ 1,015,891 $ 184,402 $ 1,200,293 Interest expense....... $ 351,489 $ 49,515 $ 401,004 Earnings before income taxes................ $ 251,952 $ 97,441 $ 349,393 At September 30, 1999: Assets................. $ 12,269,745 $ 2,955,156 $15,224,901 At December 31, 1998: Assets................. $ 12,164,432 $ 2,859,027 $15,023,459 -13- 11 SEGMENT REPORTING (Continued): A reconciliation of total segment revenues, total segment interest expense, total segment earnings before income taxes and total segment assets to the Company's consolidated amounts are as follows: Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 _________ _________ ________ __________ (in thousands) Revenues: Total revenues for reportable segments.. $ 425,770 $403,863 $1,360,520 $1,200,293 Other revenues........ 12,801 28,730 42,972 85,788 __________ ________ _________ __________ Total consolidated revenues............. $ 438,571 $432,593 $1,403,492 $1,286,081 ========== ======== ========= ========== Interest Expense: Total interest expense for reportable segments............. $ 132,840 $128,738 $ 394,130 $ 401,004 Other interest expense 8,415 19,682 25,815 58,752 __________ ________ _________ __________ Total consolidated interest expense..... $ 141,255 $148,420 $ 419,945 $ 459,756 ========== ======== ========= ========== Earnings Before Income Taxes: Total earnings before income taxes for reportable segments.. $ 164,454 $123,507 $ 471,313 $ 349,393 Other earnings before income taxes......... 4,310 8,422 17,077 25,597 __________ ________ _________ __________ Total consolidated earnings before income taxes......... $ 168,764 $131,929 $ 488,390 $ 374,990 ========== ======== ========== ========== At At September, 30 December 31, 1999 1998 _____________ ______________ Assets: Total assets for reportable segments....................$ 15,224,901 $ 15,023,459 Other assets.................. 996,478 1,373,900 _____________ _____________ Total consolidated assets.....$ 16,221,379 $ 16,397,359 ============= ============= -14- 12 SEGMENT REPORTING (Continued): For the three months ended September 30, 1999, and 1998, one customer, IBM, accounted for approximately $85.0 million and $112.0 million, respectively, of the Company's consolidated revenues of both the customer financing and commercial financing segments. For the nine months ended September 30, 1999, and 1998, IBM accounted for approximately $385.9 million and $330.3 million, respectively, of the Company's consolidated revenues of both the customer financing and commercial financing segments. The Company continues to evaluate its organizational structure which could lead to changes in future reportable segments. -15- 13 IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended September 30, 1999, were $102.3 million. Net earnings for the nine months ended September 30, 1999, were $296.0 million yielding an annualized return on average equity of 20.1 percent. Net earnings for the three and nine months ended September 30, 1998, were $79.9 million and $227.2 million, respectively. FINANCING ORIGINATED For the three months ended September 30, 1999, the Company originated capital equipment financing for end users of $1,486.5 million, a 7 percent decrease from $1,603.7 million for the same 1998 period. For the nine months ended September 30, 1999, the Company originated capital equipment financing for end users of $4,817.2 million, an 8 percent increase from $4,480.4 million for the same 1998 period. The decrease in capital equipment financing originated for the three months ended September 30, 1999, is related to a decline in placements by IBM of its information handling equipment in the United States. For the nine months ended September 30, 1999, the decrease in placements in the third quarter of 1999 was offset by increases in placements during the half of 1999. For the nine months ended September 30, 1999, capital equipment financings for end users included purchases of $2,662.3 million of information handling systems from IBM, consisting of $1,558.1 million for capital leases and $1,104.2 million for operating leases. In addition, capital equipment financings for end users included the following: (1) financing originated for installment receivables of $232.3 million; (2) financing for IBM software and services of $1,082.2 million; (3) installment and lease financing for state and local government customers of $291.5 million for the account of IBM; and (4) other financing of $548.9 million for IBM equipment, as well as related non-IBM equipment to meet IBM customers' total solution requirements. The Company's capital lease portfolio primarily includes direct financing leases. Direct financing leases consist principally of IBM information handling equipment with terms generally from three to four years. Operating leases consist principally of IBM information handling equipment with terms generally from two to four years. -16- 14 FINANCING ORIGINATED (Continued): For the three months ended September 30, 1999, originations of working capital financing for dealers and remarketers of information industry products increased by 1 percent to $3,766.4 million, from $3,717.7 million for the same 1998 period. For the nine months ended September 30, 1999, originations of working capital financing for dealers and remarketers of information industry products increased by 7 percent to $10,644.5 million, from $9,992.0 million for the same 1998 period. The growth in working capital financing originations reflects volume increases in IBM's workstation products for remarketers financed by the Company during the nine months ended September 30, 1999. Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory secured financing generally range from 30 days to 75 days. Payment terms for accounts receivable secured financing generally range from 30 days to 90 days. REMARKETING ACTIVITIES In addition to originating new financing, the Company remarkets used IBM equipment. This equipment is primarily sourced from customers at the conclusion of lease transactions and is typically remarketed in cooperation with the IBM sales force. The equipment is generally leased or sold to end users. These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities comprise income from follow-on capital and operating leases and gross profit on equipment sales, net of write-downs in residual values of certain leased equipment. For the three months ended September 30, 1999, remarketing activities contributed $62.3 million to pretax earnings, an increase of 8 percent compared with $57.7 million for the same 1998 period. For the nine months ended September 30, 1999, remarketing activities contributed $198.6 million to pretax earnings, an increase of 23 percent compared with $161.3 million for the same 1998 period. Refer to Equipment Sales in Management's Discussion and Analysis on page 16 for additional details. At September 30, 1999, the investment in remarketed equipment on capital and operating leases totaled $246.4 million, a 5 percent decrease from the 1998 year-end investment of $259.7 million. -17- 15 FINANCIAL CONDITION ASSETS Total assets decreased to $16.2 billion at September 30, 1999, compared with $16.4 billion at December 31, 1998. This decrease is primarily attributable to the sale of $274.3 million of factored IBM receivables during the first quarter of 1999. The assets were sold at book value, which approximated market value, and therefore no gain or loss was recognized on the transaction. This decrease was partially offset by increases in the Company's lease and loan portfolios. At September 30, 1999, there were no marketable securities on hand. At December 31, 1998, marketable securities included corporate debt securities of $20.8 million and certificates of deposit of $48.0 million. The carrying amount of marketable securities, as reported in the Consolidated Statement of Financial Position, approximates market value. These marketable securities were available-for-sale. LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the business were financed with $11,328.1 million of debt at September 30, 1999. Total short-term and long-term debt increased by $577.0 million, from $10,751.1 million at December 31, 1998. This increase was the result of increases in long-term debt payable to IBM of $612.5 million, long-term debt payable of $853.2 million, short-term debt payable to IBM of $891.7 million and commercial paper of $516.6 million, offset by a decline in short-term notes of $2,297.0 million. Included in long-term debt, IBM, at September 30, 1999, was $1,791.7 million, payable at market terms and conditions, with maturity dates ranging from October 6, 2000 to May 13, 2004. The Company has the option, as approved by the Board of Directors on December 31, 1998, to issue and sell debt securities in domestic and foreign markets based upon its need for such funding. At September 30, 1999, the Company had available $898.2 million of a shelf registration with the Securities and Exchange Commission for the issuance of debt securities. Additionally, on September 6, 1999, with an effective date of October 6, 1999, the Company filed an additional shelf registration statement with the Securities and Exchange Commission for $10.0 billion, which incorporates the remaining balance on the prior shelf registration. The Company intends to issue debt securities under this shelf registration as the need arises. This allows the Company rapid access to domestic financial markets. The Company has no firm commitments for the purchase of debt securities that it may issue from the unused portion of this shelf registration. The Company has the option, together with IBM and IBM International Finance, N.V., to issue and sell debt securities under a Euro Medium Term Note Programme (EMTN) in an aggregate nominal amount of up to Euro 4.0 billion, or its equivalent in any other currency. -18- 16 FINANCIAL CONDITION (Continued) At September 30, 1999, there was Euro 1.8 billion available for the issuance of debt securities under this program. The Company's issuance of debt securities over the next twelve months under this program is dependent on prevailing market conditions and its need for such funding. The Company has the option, as approved by the Board of Directors on November 1, 1996, to sell, assign, pledge or transfer up to $3.0 billion of assets to third parties through December 31, 1999. Included within this $3.0 billion authorization is $450.0 million of a separate shelf registration for issuance of asset-backed securities, which the Company has available. The Company's issuance of any asset-backed securities over the next three months under this shelf registration is dependent upon prevailing market conditions and its need for such funding. The Company is an authorized borrower of up to $3.0 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. The Company had $600.3 million and $58.2 million, of borrowings outstanding under this agreement at September 30, 1999, and December 31, 1998, respectively. The Company and IBM have also signed an additional master loan agreement which allows for longer-term funding, made available at market terms and conditions, upon the request of the Company. As of September 30, 1999, and December 31, 1998, the Company had $2,450.0 million and $1,481.7 million, respectively, outstanding under this agreement. These financing sources, along with the Company's internally generated cash and medium-term note and commercial paper programs, provide flexibility to the Company to grow its lease, working capital financing and loan portfolios, to fund working capital requirements and to service debt. Amounts due to IBM and affiliates include trade payables arising from purchases of equipment for term leases and installment receivables, working capital financing receivables for dealers and remarketers, and software license fees. Also included in amounts due to IBM and affiliates are income taxes currently payable under the intercompany tax allocation agreement. Amounts due to IBM and affiliates decreased by approximately $1,070.6 million to $1,284.1 million at September 30, 1999, from $2,354.7 million at December 31, 1998. This decline was primarily attributable to a $1,024.1 million decrease in the amount payable for capital equipment purchases and for working capital financings during the first nine months of 1999, due to the seasonality of the business. -19- 17 FINANCIAL CONDITION (Continued) Total stockholder's equity at September 30, 1999, was $2,098.7 million, up $221.0 million from year-end 1998. The increase in stockholder's equity reflects net earnings of $296.0 million for the first nine months of 1999, offset by the payment of $75.0 million in cash dividends to IBM during the first quarter of 1999. At September 30, 1999, there Company's debt to equity ratio was 5.4:1, compared with 5.7:1 at December 31, 1998. TOTAL CASH PROVIDED BEFORE DIVIDENDS Total cash provided before dividends was $6.6 million for the nine months ended September 30, 1999, compared with total cash provided before dividends of $5.6 million for the same 1998 period. Total cash provided before dividends reflects $1,019.2 million of cash used by investing and financing activities before dividends, offset by $1,025.8 million of cash provided by operating activities for the first nine months of 1999. For the nine months ended September 30, 1998, total cash provided before dividends reflected $1,016.8 million of cash used by investing and financing activities before dividends, offset by $1,022.5 million of cash provided by operating activities. Cash and cash equivalents at September 30, 1999, totaled $754.4 million, a decrease of $68.4 million, compared with the balance at December 31, 1998. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 20 percent to $214.7 million for the three months ended September 30, 1999, from $179.2 million for the same 1998 period; for the nine months ended September 30, 1999, income from leases increased 19 percent to $621.1 million, from $521.4 for the same 1998 period. Improved average lease yields and reduced residual value writedowns contributed to the overall increase in income from leases for the three- and nine-month periods ending September 30, 1999. Additionally, growth in the lease portfolio during the nine months ended September 30, 1999, contributed to the increase in lease income. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions was $57.5 million and $165.1 million for the three- and nine-month periods ended September 30, 1999, increases of 7 percent and 11 percent, respectively, from the comparable 1998 periods. On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization and are thus a source of potential future profits. -20- 18 INCOME FROM LEASES (Continued) Anticipated decreases in specific future residual values, considered to be other than temporary, are recognized currently. A review of the Company's $1,259.8 million residual value portfolio at September 30, 1999, indicated the overall estimated future value of the portfolio continues to be greater than the value currently recorded, which is the lower of the Company's cost or net realizable value. To recognize decreases in the expected future residual value of specific leased equipment, the Company recorded a $2.0 million reduction to income from leases during the third quarter of 1999, for a total of $8.1 million during the first nine months of 1999, compared with a $6.3 million reduction to income from leases during the third quarter of 1998 for a total of $23.2 million during the first nine months of 1998. INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing increased 13 percent to $63.8 million for the three months ended September 30, 1999, compared with the same 1998 period. For the first nine months of 1999, income from working capital financing decreased 6 percent to $172.1 million, as compared with $182.4 million for the first nine months of 1998. This decrease is primarily due to a decrease in income from dealer interest caused by lower outstanding receivable balances and a decline in fee income from IBM due to shorter payment terms, partially offset by increased income from interest and loan fees due to the increase in participation loans during the second and third quarters of 1999. INCOME FROM LOANS Income from loans increased 19 percent to $63.0 million for the three months ended September 30, 1999, as compared with the same period of 1998. For the first nine months of 1999, income from loans increased 20 percent to $183.5 million, as compared to the first nine months of 1998. These increases resulted from higher asset balances, which were due to the continued growth of financing originated for software and services. EQUIPMENT SALES Equipment sales amounted to $75.3 million for the three months ended September 30, 1999, compared with $104.0 million for the same 1998 period. For the first nine months of 1999, equipment sales amounted to $356.0 million, compared with $308.9 million for the comparable 1998 period. Gross profit on equipment sales for the three months ended September 30, 1999 was $6.8 million, compared with $10.6 million for the same 1998 period. For the first nine months of 1999, gross profit on equipment sales increased to $41.6 million compared with $35.7 million for the first nine months of 1998. -21- 19 EQUIPMENT SALES (Continued) The gross profit margin for the third quarter of 1999 decreased to 9.1 percent, compared with 10.2 percent for the same 1998 period. For the first nine months of 1999, the gross profit margin increased to 11.7 percent, compared with 11.6 percent for the first nine months of 1998. The decrease in sales, gross profit and gross profit margin for the three months ended September 30, 1999, was attributable to the mix of products available for sale and changing market conditions for certain used equipment. For the nine months ended September 30, 1999, these factors were partially offset by the increase in sales and gross profit from the sale of leased assets to IBM relating to the sale of IBM's global network to AT&T. INCOME FROM FACTORED IBM RECEIVABLES: Income from factored IBM receivables was $3.1 million for the nine months ended September 30, 1999, compared with $41.1 million for the first nine months of 1998. This decline is attributable to the sale of the net assets of ICEFC and ICIFC to IIHFC. Refer to Accounts Receivable purchases in the Notes to Consolidated Financial Statements on page 7. OTHER INCOME Other income decreased 22 percent to $21.8 million for the three months ended September 30, 1999, compared with $28.1 million for the same 1998 period. Other income decreased 14 percent to $68.6 million for the nine months ended September 30, 1999, compared with $79.8 million for the same 1998 period. The overall decrease in other income is primarily due to a decline in fees for managing IBM's state and local government installment and lease financing receivables portfolio and a decline in interest income on cash. INTEREST EXPENSE As a result of a decrease in the Company's average outstanding debt balance and a decline in interest rates, interest expense decreased 5 percent to $141.3 million for the three months ended September 30, 1999, compared with the three months ended September 30, 1998. For the nine months ended September 30, 1999, interest expense decreased 9 percent to $419.9 million, compared with the same period in 1998. Due to lower interest rates, the Company's year-to-date average cost of debt through September 30, 1999, decreased to 5.4 percent, from 5.7 percent for the same 1998 period. A lower average cost of debt and lower average debt balances evenly contributed to the decline in interest expense for both the three- and nine-month periods ended September 30, 1999, compared with the same periods of 1998. -22- 20 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses were $52.1 million for the three months ended September 30, 1999, compared with $49.5 million for the same 1998 period. For the first nine months of 1999, selling, general, and administrative expenses increased to $157.7 million, compared with $152.2 million for the comparable period of 1998. This increase is primarily due to increased spending on internal information technology systems. PROVISION FOR RECEIVABLE LOSSES The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally retains ownership or takes a security interest in any underlying equipment financed. The Company provides for receivable losses at the time financings are originated and from time to time for capital equipment as conditions warrant. The portfolio is diversified by geography, industry, and individual unaffiliated customers. The Company provides for working capital financing receivable losses on the basis of actual collection experience and estimated collectibility of the related financing receivables. With the continued trend toward consolidation in this industry, the concentration of such financings for certain large dealers and remarketers of information industry products is significant. At September 30, 1999, and December 31, 1998, approximately 58 percent and 56 percent, respectively, of working capital financing receivables outstanding were concentrated in ten working capital accounts. The Company's working capital financing business is predominantly with non-investment grade customers. Such financing receivables are typically collateralized by the inventory and accounts receivable of the dealers and remarketers. The Company did not experience material losses in 1998 or in the first nine months of 1999. The Company does not believe that there is a risk of loss in this area that would have a material impact on its financial position or results of operations. For the three months ended September 30, 1999, the provision for receivable losses decreased 15 percent to $8.0 million from $9.4 million for the same period of 1998. For the nine months ended September 30, 1999, the provision for receivable losses decreased by 11 percent to $23.0 million, compared with $25.9 million for the first nine months of 1998. The decrease in the provision for receivable losses for the three- and nine-month periods ended September 30, 1999, was attributable to lower reserve requirements, based upon the Company's historical experience and its ability to effectively manage credit risk and contain losses. -23- 21 INCOME TAXES The provision for income taxes increased to $66.5 million for the three months ended September 30, 1999, from $52.0 million for the same period in 1998. For the nine months ended September 30, 1999, the provision for income taxes increased to $192.4 million, from $147.7 million for the same period in 1998. The increase in the provision for income taxes is attributable to the increase in the Company's pretax earnings for the three- and nine-month periods ended September 30, 1999, compared with the same periods in 1998. RETURN ON AVERAGE EQUITY The results for the first nine months of 1999 yielded an annualized return on average equity of 20.1 percent, compared with 17.2 percent for the first nine months of 1998. CLOSING DISCUSSION The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing and providing information technology remarketers with inventory and accounts receivable financing, which contribute to the growth and stability of IBM earnings. -24- 22 YEAR 2000 The _Year 2000 issue_ arises because many computer hardware and software systems use only two digits to represent the year. As a result, these systems and programs may not process dates beyond 1999, which may cause errors in information or systems failures. Given the uncertainty inherent in any assessment of the potential Year 2000 issues, the Company recognizes the need to remain vigilant and is continuing its analysis, assessment, conversion and contingency planning for the various Year 2000 issues, across its business. With respect to its internal systems, the potential Year 2000 impacts extend beyond the Company's information technology systems to its physical facilities and the manufacturing systems it applies to returned equipment after the expiration of leases. The Company is addressing these issues as part of its own efforts and in coordination with its parent company, IBM, with respect to the Company's physical facilities and certain applications related to human resources, finance, accounts receivable and invoicing, among others. Most conversion efforts have been completed, with extended system integration planning and contingency planning projects scheduled throughout 1999. Although the Company believes such efforts will be successful and does not expect the total costs of such efforts to exceed $11.0 million over a multi-year period, any failure or delay could result in a disruption of business and in the Company incurring substantial additional expense. To minimize any such potential impact, the Company has initiated a contingency planning effort. The Year 2000 readiness of the Company's customers and the hardware and software offerings from the Company's suppliers, subcontractors and business partners may vary. Further, some commentators believe that a significant amount of litigation will arise from Year 2000 issues. The Company continues to believe that it has good defenses to any such claims brought against it. The Year 2000 issue also presents a number of other risks and uncertainties that could affect the Company, including utilities and telecommunications failures, the lack of personnel skilled in the resolution of Year 2000 issues, and the nature of government responses to the issues, among others. While the Company continues to believe that the Year 2000 matters discussed above will not have a material impact on its business, financial condition or results of operations, it remains uncertain whether or to what extent the Company may be affected. The Year 2000 statements set forth above are designated _Year 2000 Readiness Disclosures_ pursuant to the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271). -25- 23 FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Report on Form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the Company's level of equipment financing originations; the propensity for customers to finance their acquisition of IBM products and services with the Company; the competitive environment in which the Company operates; the success of the Company in developing strategies to manage debt levels; the ultimate impact of the various Year 2000 issues on the Company's business, financial condition or results of operation; non-performance by a customer of contractual requirements; the concentration of credit risk and creditworthiness of the customers; the Company's associated collection and asset management efforts; the Company's determination and subsequent recoverability of recorded residual values; currency fluctuations on the associated debt and liabilities; changes in interest rates; non-performance by the counterparty in derivative transactions; the Company's ability to attract and retain key personnel; the Company's ability to manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors inherent in the Company's business and otherwise discussed in this Form 10-Q and in the Company's other filings with the Securities and Exchange Commission and in IBM's filings with the SEC. -26- 24 Part II - Other Information Item 1. Legal Proceedings None material. Item 6(b). Reports on Form 8-K A Form 8-K dated July 19, 1999, was filed with respect to the Company's financial results for the period ended June 30, 1999. -27- 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBM CREDIT CORPORATION _______________________________ (Registrant) Date: November 11, 1999 By: /s/ Paula Summa_________ (Paula Summa) Vice President, Finance and Chief Financial Officer -28- EX-27 2 ITEM 601-27
5 EXHIBIT V FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IBM CREDIT CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1999 754,433 0 6,094,458 0 0 0 0 0 16,221,379 0 0 457,411 0 0 1,641,267 16,221,379 356,012 1,403,492 314,444 314,444 157,705 23,008 419,945 488,390 192,426 295,964 0 0 0 295,964 0 0
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