-----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, SyZUkjEmucn+VJHKFQ1wcJLEg8ogk5gMc0JXXPTICHLRM5V8XKeUuOKPOMUeqE2J 3LVVPZgmMp1jWqQldMGVQw== 0000353524-00-000012.txt : 20000515 0000353524-00-000012.hdr.sgml : 20000515 ACCESSION NUMBER: 0000353524-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: 627788 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 March 31, 2000 Commission file number 1-8175 ________________________________________ IBM CREDIT CORPORATION ___________________________________________________________ (Exact name of registrant as specified in its charter) DELAWARE 22-2351962 ____________________________ _____________________________ (State of incorporation) (IRS employer identification number) North Castle Drive, MS NCA-306 Armonk, New York 10504-1785 _______________________________________________________ _______________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 914-765-1900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of April 30, 2000, 936 shares of capital stock, par value $1.00 per share, were held by International Business Machines Corporation. Aggregate market value of the voting stock held by nonaffiliates of the registrant at April 30, 2000: NONE. The registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. 2 INDEX Part I - Financial Information: Page _____ Item 1. Financial Statements: Consolidated Statement of Financial Position at March 31, 2000 and December 31, 1999 . . . . . . 1 Consolidated Statement of Earnings for the Three Months ended March 31, 2000 and 1999. . . . . . . . 2 Consolidated Statement of Cash Flows for the Three Months ended March 31, 2000 and 1999. . . . . . . . 3 Notes to Consolidated Financial Statements. . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . 9 Part II - Other Information. . . . . . . . . . . . . . . . 17 -1- 3 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Dollars in thousands)
At At March 31, December 31, 2000 1999 _____________ ____________ ASSETS: Cash and cash equivalents. . . . . $ 485,574 $ 600,111 Net investment in capital leases . 5,248,945 5,337,200 Equipment on operating leases, net 3,087,253 3,386,686 Loans receivable . . . . . . . . . 3,419,989 3,535,498 Working capital financing receivables. . . . . . . . . . . 2,186,251 2,963,583 Investments and other assets . . . 470,416 521,627 __________ ___________ Total Assets $14,898,428 $16,344,705 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY: Liabilities: Short-term debt. . . . . . . . . . $ 4,504,819 $ 5,491,441 Short-term debt, IBM . . . . . . . 3,035,383 1,641,447 Due to IBM and affiliates. . . . . 824,272 1,976,167 Interest and other accruals. . . . 349,348 454,261 Deferred income taxes. . . . . . . 890,909 877,916 Long-term debt . . . . . . . . . . 2,026,771 2,279,437 Long-term debt, IBM. . . . . . . . 937,904 1,391,702 ___________ ___________ Total liabilities . . . . . . . 12,569,406 14,112,371 ___________ ___________ Stockholder's equity: Capital stock, par value $1.00 per share Shares authorized: 10,000 Shares issued and outstanding: 936 in 2000 and 1999 . . . . 457,411 457,411 Retained earnings. . . . . . . . . 1,871,611 1,774,923 ___________ ___________ Total stockholder's equity. . . 2,329,022 2,232,334 ___________ ___________ Total Liabilities and Stockholder's Equity . . . . . . . . . . . . . . $14,898,428 $16,344,705 =========== =========== The accompanying notes are an integral part of this statement.
-2- 4 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in thousands)
Three Months Ended March 31, 2000 1999 ________ ________ FINANCE AND OTHER INCOME: Income from leases: Capital leases . . . . . . . . . . . . . $ 94,955 $ 88,015 Operating leases, net of depreciation. . 122,805 107,004 _________ ________ 217,760 195,019 Income from working capital financing . . 68,296 52,545 Income from loans . . . . . . . . . . . . 68,592 60,499 Equipment sales . . . . . . . . . . . . . 120,481 97,623 Other income . . . . . . . . . . . . . . 21,883 28,830 _________ ________ Total finance and other income . . . . 497,012 434,516 _________ ________ COST AND EXPENSES: Interest. . . . . . . . . . . . . . . . . 149,878 138,730 Cost of equipment sales . . . . . . . . . 116,972 90,000 Selling, general, and administrative. . . 65,411 49,603 Provision for receivable losses . . . . . 5,230 5,564 _________ ________ Total cost and expenses . . . . . . . 337,491 283,897 __________ ________ EARNINGS BEFORE INCOME TAXES . . . . . . . 159,521 150,619 Provision for income taxes . . . . . . . . 62,833 59,342 __________ ________ NET EARNINGS . . . . . . . . . . . . . . . $ 96,688 $ 91,277 ========== ======== The accompanying notes are an integral part of this statement.
-3- 5 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, 2000 1999 _________ ___________ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . .$ 96,688 $ 91,277 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization. . . . . . 500,636 480,873 Provision for receivable losses. . . . . 5,230 5,564 Increase in deferred income taxes. . . . 12,993 67,712 Decrease in interest and other accruals (104,913) (140,341) Gross profit on equipment sales. . . . . (3,509) (7,623) Other items that provided (used) cash: Proceeds from equipment sales. . . . . 120,481 97,623 Decrease in amounts due IBM and affiliates . . . . . . . . . . . . .(1,151,895)(1,032,561) Other, net . . . . . . . . . . . . . . - 453 _________ __________ Cash used in operating activities . . . . . (524,289) (437,023) _________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in capital leases . . . . . . (497,831) (512,412) Collections on capital leases, net of income earned . . . . . . . . . . . . . 530,158 497,796 Investment in equipment on operating leases. . . . . . . . . . . . . . . . . (186,848) (297,274) Investment in loans receivable . . . . . (230,825) (371,607) Collections on loans receivable, net of interest earned. . . . . . . . . . . 387,964 428,941 Purchase of factored IBM receivables . . - (120,900) Collections on factored IBM receivables. - 138,862 Collections on working capital financing receivables, net. . . 757,400 477,910 Investment in participation loans, net . (30,928) (33,160) Purchases of marketable securities . . . - (24,390) Proceeds from redemption of marketable securities. . . . . . . . . . . . . . . - 56,562 __________ __________ Total carried forward $ 729,090 $ 240,328 __________ __________ The accompanying notes are an integral part of this statement.
-4- -5- 6 IBM CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Three Months Ended March 31, 2000 1999 ___________ __________ CASH FLOWS FROM INVESTING ACTIVITIES (Continued): Total brought forward $ 729,090 $ 240,328 Proceeds from the sale of the net assets of IBM Credit International Factoring Corporation . . . . . . . . . . . . . . - 273,759 Other, net . . . . . . . . . . . . . . . . (22,617) (109,339) __________ __________ Cash provided by investing activities. . . . 706,473 404,748 __________ __________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . 200,000 849,861 Repayment of debt with original maturities of one year or more . . . . . (306,000) (137,776) Repayment of debt with original maturities within one year, net. . . . . (190,721) (538,949) Cash dividends paid to IBM. . . . . . . . - (75,000) __________ _________ Cash (used in) provided by financing activities. . . . . . . . . . . . . . . . (296,721) 98,136 __________ _________ Change in cash and cash equivalents. . . . . (114,537) 65,861 Cash and cash equivalents, January 1 . . . . 600,111 822,844 __________ __________ Cash and cash equivalents, March 31. . . . .$ 485,574 $ 888,705 ========== ========== The accompanying notes are an integral part of this statement.
-6- 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-month periods are reflected in the unaudited interim financial statements presented. These adjustments are of a normal recurring nature. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges calculated in accordance with applicable Securities and Exchange Commission requirements was 1.74 and 2.09 for the three months ended March 31, 2000, and 1999, respectively. ACCOUNTING CHANGES: 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. 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: 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 $128.8 million and $150.0 million of such financings during the three months ended March 31, 2000, and 1999, respectively. At March 31, 2000, and December 31, 1999, $1,267.9 million and $1,437.1 million, respectively, of such financings were included in the Company's lease and loan portfolio. The operating lease income, net of depreciation, and income from loans earned from transactions with IBM and affiliated companies, was approximately $52.8 million and $42.2 million for the first three months of 2000, and 1999, respectively. -7- 8 RELATED COMPANY TRANSACTIONS (Continued): The Company provides working capital financing, at market rates, to certain remarketers of IBM products. IBM pays the Company a fee to provide an interest-free financing period to its remarketers. Included in income from working capital financing is $20.5 million and $25.9 million of fee income earned from divisions of IBM for the three months ended March 31, 2000, and 1999, respectively. The Company sells used equipment to IBM at the conclusion of IBM's lease or from the Company's inventory. For the three months ended March 31, 2000, and 1999, the Company's sales of equipment to IBM amounted to $25.2 million and $22.5 million, respectively. In the first quarter of 2000, the Company and IBM amended their operating agreement to allow IBM to charge the Company with an allocation for shared expenses at the corporate and geographic levels. Where practical, shared expenses are allocated based upon measurable drivers of expense. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the Company's management system. Management believes that these methods are reasonable. Total allocated expenses for the three months ended March 31, 2000, amounted to $23.8 million. 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. -8- 9 SEGMENT REPORTING (Continued): The following schedules represent disaggregated income and expense information for both segments. There are no intersegment transactions. (in thousands) For the Three Months Ended March 31: Customer Commercial 2000 Financing Financing Total ______________________ _____________ ____________ ___________ Revenues............... $ 409,944 $ 72,143 $ 482,087 Interest expense....... $ 118,952 $ 22,791 $ 141,743 Earnings before income taxes................ $ 126,345 $ 26,386 $ 152,731 1999 ______________________ Revenues............... $ 365,316 $ 53,182 $ 418,498 Interest expense....... $ 118,071 $ 12,399 $ 130,470 Earnings before income taxes................ $ 112,866 $ 29,929 $ 142,795 At March 31, 2000: Assets................. $ 11,742,479 $ 2,386,582 $14,129,061 At December 31, 1999: Assets................. $ 12,537,711 $ 2,993,245 $15,530,956 A reconciliation of total segment revenues, total segment interest expense, total segment earnings before income taxes and total segment assets to the Company's consolidated amounts is as follows: Three Months Ended March 31, 2000 1999 (in thousands) _________ _________ Revenues: Total revenues for reportable segments..... $ 482,087 $ 418,498 Other revenues............................. 14,925 16,018 _________ _________ Total consolidated revenues................ $ 497,012 $ 434,516 ========= ========= Interest Expense: Total interest expense for reportable segments.................................. $ 141,743 $ 130,470 Other interest expense..................... 8,135 8,260 _________ _________ Total consolidated interest expense........ $ 149,878 $ 138,730 ========= ========= -9- 10 SEGMENT REPORTING (Continued): Three Months Ended March 31, 2000 1999 _________ _________ (in thousands) Earnings Before Income Taxes: Total earnings before income taxes for reportable segments...................... $ 152,731 $ 142,795 Other earnings before income taxes........ 6,790 7,824 _________ _________ Total consolidated earnings before income taxes.................................... $ 159,521 $ 150,619 ========= ========= At At March 31, December 31, 2000 1999 _____________ ______________ Assets: Total assets for reportable segments.................... $ 14,129,061 $ 15,530,956 Other assets.................. 769,367 813,749 _____________ _____________ Total consolidated assets..... $ 14,898,428 $ 16,344,705 ============= ============= For the three months ended March 31, 2000, and 1999, one customer, IBM, accounted for approximately $107.7 million and $109.6 million, respectively, of the Company's consolidated revenues. The Company's business is conducted principally in the United States; foreign operations are not material. The Company continues to evaluate its organizational structure which could lead to changes in future reportable segments. -10- 11 IBM CREDIT CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net earnings for the three months ended March 31, 2000, were $96.7 million, yielding a return on average equity of 16.9 percent. Net earnings for the three months ended March 31, 1999, were $91.3 million, yielding a return on average equity of 18.3 percent. FINANCING ORIGINATED For the three months ended March 31, 2000, the Company originated customer equipment financing for end users of $1,014.4 million, a 24 percent decrease from $1,337.1 million for the same period of 1999. The decline in customer equipment financing originated is related to a decrease in demand for IBM's advanced information processing products caused by the lingering effects of the Year 2000 computer issue. Customer financing originations for end users included purchases of $595.0 million of information handling systems from IBM, consisting of $436.8 million for capital leases and $158.2 million for operating leases. In addition, customer financing originations for end users included the following: (1) financing for IBM software and services of $185.3 million; (2) financing of $155.1 million for IBM equipment, as well as related non-IBM equipment, software and services to meet IBM customers' total solution requirements; (3) financing originated for installment receivables of $45.6 million; and (4) installment and lease financing for state and local government customers of $33.4 million for the account of IBM. The Company's capital lease portfolio primarily includes direct financing leases. Both direct financing leases and operating leases consist principally of IBM advanced information processing products with terms generally from two to three years. For the three months ended March 31, 2000, originations of working capital financing for dealers and remarketers of information industry products decreased by 15 percent to $2,829.9 million, from $3,329.1 million for 1999. The decline in working capital financing originations reflects volume decreases in IBM's workstation products and non-IBM products for remarketers financed by the Company during the first quarter of 2000. Working capital financing receivables arise primarily from secured inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory secured financing generally range from 30 days to 75 days. Payment terms for accounts receivable secured financing generally range from 30 days to 90 days. -11- 12 REMARKETING ACTIVITIES In addition to originating new financing, the Company remarkets used IBM and non-IBM equipment. This equipment is primarily sourced from the conclusion of lease transactions and is 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 March 31, 2000, the remarketing activities contributed $63.6 million to pretax earnings, an increase of 11 percent compared with $57.1 million for 1999, primarily due to lease continuation income. At March 31, 2000, the investment in remarketed equipment on capital and operating leases totaled $294.8 million, compared with 1999 year-end investment of $281.5 million. FINANCIAL CONDITION ASSETS Total assets decreased to $14.9 billion at March 31, 2000, compared with $16.3 billion at December 31, 1999. This decrease is primarily attributable to a decline in all asset categories due to the decline in volumes caused by the lingering effects of the Year 2000 computer issue and the traditional seasonality of IBM's volumes. LIABILITIES AND STOCKHOLDER'S EQUITY The assets of the Company were financed with $10,504.9 million of debt at March 31, 2000, a decrease of $299.1 million, from $10,804.0 million at December 31, 1999. This decrease was the result of decreases in commercial paper outstanding of $1,127.7 million, long-term debt payable to IBM of $453.8 million, and long-term debt of $252.7 million, offset by an increase in short-term debt of $141.2 million and short-term debt payable to IBM of $1,393.9 million. Included in long-term debt at December 31, 1999, was $937.9 million payable to IBM at market terms and conditions, with maturity dates ranging from April 27, 2001 to May 13, 2004. Interest expense of $37.6 million and $28.9 million was incurred on loans from IBM and affiliates during the three months ended March 31, 2000, and March 31, 1999, respectively. At March 31, 2000, the Company had available $9.8 billion of a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of debt securities. The Company may issue debt securities under this shelf registration as the need arises. This allows the Company rapid access to domestic financial markets. The Company has no firm commitments for the purchase of debt securities that it may issue from the unused portion of this shelf registration. -12- 13 FINANCIAL CONDITION (Continued) 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. At March 31, 2000, there was Euro 815.0 million available for the issuance of debt securities under this program. The Company may issue debt securities over the next twelve months under this program, dependent on prevailing market conditions and its need for such funding. The Company is an authorized borrower of up to $3.0 billion under a $10.0 billion IBM committed global credit facility, and has a liquidity agreement with IBM for $500.0 million. The Company has no borrowings outstanding under the committed global credit facility or the liquidity agreement. The Company and IBM have signed master loan agreements providing additional funding flexibility to each other. These agreements allow for short-term (up to 270-day) funding, made available at market terms and conditions, upon the request of either the Company or IBM. At March 31, 2000, the Company had $790.1 million of borrowings outstanding under this agreement. At December 31, 1999, the Company had no borrowings outstanding under this agreement. The Company and IBM have also signed an additional master loan agreement which allows for longer-term funding, made available at market terms and conditions, upon the request of the Company. At March 31, 2000, and December 31, 1999, the Company had $2,500.0 million and $2,350.0 million, respectively, of borrowings outstanding under this agreement. The Company and IBM have decided it would be more efficient to fund its operations predominately through the use of intercompany debt. This is primarily due to the new accounting and reporting requirements of SFAS 133, _Accounting for Derivatives and Hedging Activities_. See Accounting Changes in the Notes to the Consolidated Financial Statements on page 5. 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 amounts due for services received from IBM under the intercompany operating agreement, as well as income taxes currently payable under the intercompany tax allocation agreement. Amounts due to IBM and affiliates decreased by approximately $1,151.9 million to $824.3 million at March 31, 2000, from $1,976.2 million at December 31, 1999. The decrease was primarily attributable to a $754.1 million decrease in the amount payable for capital equipment purchases during 2000 due to the lingering effects -13- 14 FINANCIAL CONDITION (Continued) of the Year 2000 computer issue and the traditional seasonality of IBM's volumes and a decrease of $240.3 million for a fourth quarter of 1999 income tax payment. At March 31, 2000, the Company's debt to equity ratio was 4.5:1, compared with 4.8:1 at December 31, 1999. TOTAL CASH USED BEFORE DIVIDENDS Total cash used before dividends was $114.5 million for the first three months of 2000, compared with total cash provided before dividends of $140.9 million for the same period of 1999. For the first three months of 2000, total cash used before dividends reflects $409.8 million of cash provided by investing and financing activities before dividends, offset by $524.3 million of cash used in operating activities. For the first three months of 1999, total cash provided before dividends reflects $577.9 million of cash provided by investing and financing activities before dividends, offset by $437.0 million of cash used in operating activities. Cash and cash equivalents at March 31, 2000, totaled $485.6 million, a decrease of $114.5 million, compared with the balance at December 31, 1999. RESULTS OF OPERATIONS INCOME FROM LEASES Income from leases increased 12 percent to $217.8 million for the quarter ended March 31, 2000, from $195.0 million for the same period in 1999 due primarily to improved average lease yields. Income from leases includes lease income resulting from remarketing transactions. Lease income from remarketing transactions was $65.9 million for the first quarter of 2000, an increase of 30 percent from $50.5 million for the first quarter of 1999 primarily due to increased lease continuation income. On a periodic basis, the Company reassesses the future residual values of its portfolio of leases. In accordance with generally accepted accounting principles, anticipated increases in specific future residual values are not recognized before realization and are thus a source of potential future profits. Anticipated decreases in specific future residual values that are considered to be other than temporary are recognized currently. A review of the Company's $1,155.9 million residual value portfolio at March 31, 2000 indicated that the overall estimated future value of the portfolio continues to be greater than the value currently recorded, which is the lower of the Company's cost or net realizable value. However, the Company did record a $3.8 million reduction to income from leases during the first quarter of 2000 to recognize decreases in the expected future residual value of specific leased equipment, compared with $1.0 million during the same period in 1999. -14- 15 INCOME FROM WORKING CAPITAL FINANCING Income from working capital financing increased 30 percent to $68.3 million for the first three months of 2000, compared with $52.5 million for the same period of 1999. This increase was primarily due to additional income from participation loans. Participation loans are loans in which the Company has purchased a fixed percentage of a specific customer's loan facility from a bank or other lending institution. The Company will then receive its fixed percentage of interest and loan fees less administrative fees charged by the agent bank. Income from participation loans increased to $9.8 million for the first quarter of 2000, compared with $2.2 million for the same period of 1999. Additionally, an increase in income from dealer interest due to higher yields and higher average outstanding receivable balances contributed to the increase in income from working capital financing receivables for the first quarter of 2000, compared with the same period of 1999. INCOME FROM LOANS Income from loans increased 13 percent to $68.6 million for the first quarter of 2000, compared with $60.5 million for the first quarter of 1999. This increase was due to higher average loan balances for the first quarter of 2000, compared with the same period of 1999. EQUIPMENT SALES Equipment sales amounted to $120.5 million for the first quarter of 2000, compared with $97.6 million for the first quarter of 1999. Gross profit on equipment sales for the first quarter of 2000 was $3.5 million, a decrease of 54 percent, compared with $7.6 million for the first quarter of 1999. The gross profit margin for the first three months of 2000 decreased to 2.9 percent, compared with 7.8 percent for the first three months of 1999. These decreases are primarily due to write-downs of certain equipment in inventory to its net realizable value. Additionally, the mix of products available for sale and changing market conditions for certain used equipment during the first three months of 2000 contributed to the decrease in gross profit and gross profit margins compared with the first three months of 1999. OTHER INCOME Other income decreased 24 percent to $21.9 million for the first three months of 2000, compared with $28.8 million for the first three months of 1999. The decrease in other income is primarily attributable to a decline in the fees for the servicing of IBM's federal, state and local lease and loan portfolio and factoring income. INTEREST EXPENSE Interest expense increased 8 percent to $149.9 million for the first quarter 2000, compared with $138.7 million for the first quarter of 1999 primarily due to higher interest rates. The Company's year-to-date average cost of debt for the first three months of 2000 increased to 5.8 percent from 5.3 percent for the same period in 1999. -15- 16 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Selling, general, and administrative expenses were $65.4 million for the first quarter of 2000, an increase of 32 percent compared with $49.6 million for the same period in 1999. This is primarily attributable to the increase in the amount IBM charged the Company for services received. In the first quarter of 2000, the Company renegotiated its operating agreement with IBM at IBM's request. Refer to Related Company Transactions in the Notes to Consolidated Financial Statements on page 5. PROVISION FOR RECEIVABLE LOSSES The Company's portfolio of capital equipment leases and loans is predominantly with investment grade customers. The Company generally retains ownership or takes a security interest in any underlying equipment financed. The Company provides for receivable losses at the time financings are originated and, from time to time, for capital equipment as conditions warrant. The portfolio is diversified by region, industry and individual unaffiliated customer. The Company provides for working capital financing receivable losses on the basis of actual collection experience and estimated collectibility of the related financing receivables. With the continued trend toward consolidation in this industry, the concentration of such financings for certain large dealers and remarketers of information industry products, while coninuously declining, remains significant. At March 31, 2000, and December 31, 1999, approximately 43 percent and 55 percent, respectively, of the working capital financing receivables outstanding were concentrated in ten working capital accounts. The Company's working capital financing business is predominantly with non-investment grade customers. Such financing receivables are typically collateralized by the inventory and accounts receivable of the dealers and remarketers. The Company did not experience material losses in 1999 or in the first quarter of 2000. The overall provision for receivable losses decreased 7 percent to $5.2 million for the first quarter of 2000, compared with $5.6 million for the same period in 1999. The decline in the provision for receivable losses was primarily attributable lower asset balances, lower reserve requirements, based upon the Company's historical loss experience, assessment of collectibility of specific receivables and its ability to effectively manage credit risk and contain losses contributed to the decline in the provision for receivable losses. INCOME TAXES Income taxes increased 6 percent to $62.8 million for the quarter ended March 31, 2000, from $59.3 million for the same period in 1999. This increase is primarily attributable to the increase in pretax earnings for the first quarter of 2000, compared with the first quarter of 1999. -16- 17 RETURN ON AVERAGE EQUITY The results for the first three months of 2000 yielded an annualized return on average equity of 16.9 percent, compared with 18.3 percent for the first three months of 1999. CLOSING DISCUSSION The Company's resources continue to be sufficient to enable it to carry out its mission of offering customers competitive leasing and financing and providing information technology remarketers with inventory and accounts receivable financing, which contributes to the growth and stability of IBM earnings. -17- 18 FORWARD LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Quarterly Report on Form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the Company's level of equipment financing originations; the propensity for customers to finance their acquisition of IBM products and services with the Company; the competitive environment in which the Company operates; the success of the Company in developing strategies to manage debt levels; the ultimate impact of the various Year 2000 issues on the Company's business, financial condition or results of operations; non-performance by a customer of contractual requirements; the concentration of credit risk and creditworthiness of the customers; the Company's associated collection and asset management efforts; the Company's determination and subsequent recoverabiltiy of recorded residual values; currency fluctuations on the associated debt and liabilities; change in interest rates; non-performance by the counterparty in derivative transactions; the Company's ability to attract and retain key personnel; the Company's ability to manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors inherent in the Company's business and otherwise discussed in this Form 10-Q and in the Company's other filings with the SEC and in IBM's filings with the SEC. -18- 19 Part II - Other Information Item 1. Legal Proceedings None material. Item 6(b). Reports on Form 8-K A Form 8-K dated January 19, 2000, was filed with respect to the Company's financial results for the period ended December 31, 1999. -19- 20 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: May 11, 2000 By: /s/ Paula L. Summa (Paula L. Summa) Vice President, Finance and Chief Financial Officer -20- 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 THREE MONTHS ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 485,574 0 5,606,240 0 0 0 0 0 14,898,428 0 0 457,411 0 0 1,871,611 14,898,428 120,481 497,012 116,972 116,972 65,411 5,230 149,878 159,521 62,833 96,688 0 0 0 96,688 0 0
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