<PAGE 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, 1997
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)
1133 Westchester Avenue
White Plains, New York 10604-3505
________________________________________ ____________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 914-642-3000
____________
- -
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, 1997, 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, 1997: 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.
<PAGE 2>
INDEX
_____
Part I - Financial Information: Page
____
Item 1. Financial Statements:
Consolidated Statement of Financial Position
at September 30, 1997 and December 31, 1996 . . . . . . . . . .1
Consolidated Statement of Earnings for the three and nine
months ended September 30, 1997 and 1996. . . . . . . . . . . .2
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1997 and 1996. . . . . . . . . . . .3
Notes to Consolidated Financial Statements. . . . . . . . . . .5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . .7
Part II - Other Information . . . . . . . . . . . . . . . . . . . . .16
<PAGE 3>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION>
At At
September 30, December 31,
1997 1996
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 619,481 $ 632,834
Marketable securities. . . . . . . . . . . 148,844 159,348
Net investment in capital leases . . . . . 4,683,177 4,214,822
Equipment on operating leases, net . . . . 3,203,029 2,551,382
Working capital financing receivables. . . 3,226,814 2,898,688
Loans receivable . . . . . . . . . . . . . 2,141,237 1,846,947
Factored IBM receivables . . . . . . . . . 664,021 -
Investments and other assets . . . . . . . 590,333 642,118
___________ ___________
Total Assets $15,276,936 $12,946,139
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . . . . . $ 6,810,727 $ 6,441,400
Short-term debt, IBM . . . . . . . . . . . 1,401,802 125,000
Due to IBM and affiliates. . . . . . . . . 1,841,728 2,288,968
Interest and other accruals. . . . . . . . 391,973 378,284
Deferred income taxes. . . . . . . . . . . 884,703 761,494
Long-term debt . . . . . . . . . . . . . . 1,753,830 1,515,937
Long-term debt, IBM. . . . . . . . . . . . 596,912 -
___________ ___________
Total liabilities . . . . . . . . . . . 13,681,675 11,511,083
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1997 and 1996 . . . . . . . . 457,411 457,411
Retained earnings. . . . . . . . . . . . . 1,137,850 977,645
___________ ___________
Total stockholder's equity. . . . . . . 1,595,261 1,435,056
___________ ___________
Total Liabilities and Stockholder's Equity $15,276,936 $12,946,139
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-1-
<PAGE 4>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . .$ 66,027 $ 82,487 $212,551 $226,677
Operating leases, net of
depreciation. . . . . . . . . 75,639 60,144 212,541 166,225
________ ________ _________ ________
141,666 142,631 425,092 392,902
Income from working capital
financing. . . . . . . . . . . . 68,305 66,579 185,704 200,783
Income from loans . . . . . . . . 43,957 36,875 123,472 112,205
Equipment sales . . . . . . . . . 128,961 76,367 301,075 284,287
Income from factored IBM
receivables. . . . . . . . . . . 9,807 - 13,658 -
Other income. . . . . . . . . . . 28,894 37,196 101,590 111,764
_______ ________ ________ _________
Total finance and other
income. . . . . . . . . . . . 421,590 359,648 1,150,591 1,101,941
_______ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . . . . 143,749 110,362 383,539 323,573
Cost of equipment sales . . . . . 110,618 68,697 258,861 240,302
Selling, general, and
administrative . . . . . . . . . 53,495 53,389 156,690 144,415
Provision for receivable losses . 18,944 9,032 17,963 31,276
_______ ________ ________ _________
Total cost and expenses. . . . 326,806 241,480 817,053 739,566
_______ ________ ________ _________
EARNINGS BEFORE INCOME TAXES. . . . 94,784 118,168 333,538 362,375
Provision for income taxes. . . . . 32,345 46,558 123,333 142,762
_______ ________ ________ _________
NET EARNINGS. . . . . . . . . . . .$ 62,439 $ 71,610 $210,205 $219,613
======= ======= ======== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE 5>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30:
(Dollars in thousands) 1997 1996
<CAPTION>
_________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . $ 210,205 $ 219,613
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . 1,066,767 731,620
Provision for receivable losses. . . . . . . . 17,963 31,276
Increase in deferred income taxes. . . . . . . 123,209 54,993
Increase (decrease) in interest
and other accruals . . . . . . . . . . . . . 13,689 (43,328)
Gross profit on equipment sales. . . . . . . . (42,214) (43,985)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . . . . 301,075 284,287
Decrease in amounts due IBM and affiliates . (447,240) (322,642)
Other, net . . . . . . . . . . . . . . . . . 2,273 24,435
_________ _________
Cash provided by operating activities . . . . . . 1,245,727 936,269
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . . . . (1,661,649)(1,397,174)
Collection of capital leases, net of income
earned. . . . . . . . . . . . . . . . . . . . 1,195,693 1,070,099
Investment in equipment on operating leases. . (1,557,439)(1,136,606)
Investment in loans receivable . . . . . . . . (944,087) (729,969)
Collection of loans receivable, net of
interest earned . . . . . . . . . . . . . . . 689,072 602,844
Purchase of factored IBM receivables . . . . . (2,255,780) -
Collection of factored IBM receivables . . . . 1,591,759 -
(Investment in) collection of working
capital financing receivables, net. . . . . . (332,292) 284,870
Purchases of marketable securities . . . . . . (21,500) (36,480)
Maturities of marketable securities. . . . . . 32,004 -
Cash payment for lease portfolio acquired. . . (334,909) -
Other, net . . . . . . . . . . . . . . . . . . (89,901) 65,434
__________ ___________
Cash used in investing activities . . . . . . . . (3,689,029)(1,276,982)
__________ ___________
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE 6>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30:
(Continued)
1997 1996
__________ _________
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . 1,976,146 665,541
Repayment of debt with original maturities
of one year or more . . . . . . . . . . . . . (117,800) (485,655)
Issuance of debt with original maturities
within one year, net. . . . . . . . . . . . . 621,603 607,809
Cash dividends paid to IBM . . . . . . . . . . (50,000) (45,000)
__________ _________
Cash provided by financing activities . . . . . . 2,429,949 742,695
__________ _________
Change in cash and cash equivalents . . . . . . . (13,353) 401,982
Cash and cash equivalents, January 1. . . . . . . 632,834 336,839
__________ _________
Cash and cash equivalents, September 30 . . . . . $ 619,481 $ 738,821
========== =========
Supplemental schedule of noncash investing and financing activities:
The purchase price for the acquisition of selected assets from the
leasing portfolio of General Electric Capital Technology Management
Services Corporation during the second and third quarters of 1997 was
financed by the Company, in part, through credits of $18.4 million that
were applied against certain existing obligations to the Company.
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-4-
<PAGE 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 to a fair statement of
the results for the three- and nine-month periods are
reflected in the unaudited interim financial statements
presented. These adjustments are of a normal recurring
nature.
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in
accordance with applicable Securities and Exchange
Commission requirements was 1.87 and 2.12 for the nine
months ended September 30, 1997, and 1996, respectively.
SIGNIFICANT ACCOUNTING POLICIES:
Financial Instruments: The Company uses agreements related
to currencies and interest rates to lower costs of funding
its business, to diversify sources of funding, or to manage
interest rate and currency exposures arising from mismatches
between assets and liabilities. The Company enters into
such financial instruments solely for hedging purposes. The
Company does not enter into such financial instrument
transactions for trading or other speculative purposes.
Debt obligations denominated in foreign currencies and
subject to foreign currency swap agreements are included in
the Consolidated Statement of Financial Position at the
contractual rate of exchange in the respective foreign
currency swap agreement. Gains and losses on forward
contracts and purchased options, designated as hedges, are
deferred and included in the settlement of the related
transaction. The Company routinely evaluates existing and
potential counterparty credit exposures associated with such
financial instrument transactions to ensure that these
exposures remain within credit guidelines.
Under interest rate swaps, the Company agrees with other
parties to exchange, at specified intervals, the difference
between interest amounts calculated by reference to a
floating index or a fixed rate on an agreed upon notional
principal amount. Swap contracts are primarily between one
and five years in duration. The Company enters into
interest rate cap and floor agreements to reduce the
potential impact of changes in interest rates on floating
rate debt supporting fixed rate assets. Interest rate
agreements generally involve the exchange of
-5-
<PAGE 8> SIGNIFICANT ACCOUNTING POLICIES: (Continued)
interest payments without the exchange of the underlying
notional amount on which the interest payments are
calculated. The Company enters into currency exchange
agreements to hedge debt denominated in foreign currencies.
The term of the currency derivatives is generally less than
five years. The purpose of the Company's foreign currency
hedging activities is to protect itself from the risk that
the eventual dollar net cash outflows will be affected by
changes in exchange rates. The Company does not anticipate
any material adverse effect on its financial position or
results of operations resulting from its use of these
instruments, nor does it anticipate nonperformance by any of
its counterparties.
RELATED COMPANY TRANSACTIONS:
EQUIPMENT LEASING:
__________________
The Company provides equipment financing at market rates,
substantially through operating leases, to International
Business Machines Corporation (IBM) and affiliated companies
for both IBM and non-IBM products that IBM uses internally
or in support of its managed operations environment. The
Company originated $757.1 million and $431.7 million of such
financings during the nine months ended September 30, 1997
and 1996, respectively. At September 30, 1997, and December
31, 1996, approximately $1,117.1 million and $828.0 million,
respectively, of such financings were included in the
Company's lease and loan portfolio. The operating lease
income, net of depreciation, earned from transactions with
IBM and affiliated companies, was approximately $100.5
million and $78.9 million in the first nine months of 1997
and 1996, respectively.
ACCOUNTS RECEIVABLE PURCHASES:
______________________________
During the third quarter of 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 will periodically
purchase, without recourse, all the rights, title and
interest to certain outstanding IBM customer receivables.
During the third quarter of 1997, ICIFC and ICEFC acquired
IBM customer receivables having a nominal value of $1,632.0
million for approximately $1,609.5 million. The receivables
acquired are short-term in nature and are denominated in
non-U.S. currencies. The purchase was 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.
-6-
<PAGE 9>
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, 1997,
were $62.4 million. Net earnings for the nine months ended
September 30, 1997, were $210.2 million, yielding an
annualized return on average equity of 18.7 percent.
FINANCING ORIGINATED
For the three months ended September 30, 1997, the Company
originated capital equipment financing for end users of
$1,742.8 million, a 46 percent increase from $1,189.9
million for the same 1996 period. For the three months
ended September 30, 1997, originations of working capital
financing for dealers and remarketers of information
industry products increased by 7 percent to $3,868.5
million, from $3,602.4 million for the same 1996 period.
For the nine months ended September 30, 1997, the Company
originated capital equipment financing for end users of
$4,640.4 million, a 26 percent increase from $3,691.1
million for the same 1996 period. For the nine months ended
September 30, 1997, originations of working capital
financing for dealers and remarketers of information
industry products increased by 15 percent to $10,661.2
million, from $9,290.0 million for the same 1996 period.
The growth in capital equipment financing originations is
related to IBM's increase in placements of its products and
services in the United States and an increase in the
propensity for customers to finance their acquisitions with
the Company, during the first nine months of 1997, compared
with the same period in 1996.
Capital equipment financings for end users included
purchases of $2,649.5 million of information handling
systems from IBM, consisting of $1,480.7 million for capital
leases and $1,168.8 million for operating leases. In
addition, capital equipment financings for end users
included the following: (1) financing originated for
installment receivables of $175.4 million; (2) financing for
IBM software and services of $777.3 million; (3) installment
and lease financing for state and local government customers
of $253.6 million for the account of IBM; and (4) other
financing of $784.6 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 five years. Operating leases
consist principally of IBM information handling equipment
with terms generally from two to four years.
-7-
<PAGE 10>
FINANCING ORIGINATED (Continued)
The growth in working capital financing originations
throughout the first nine months of 1997 reflects volume
increases in IBM's workstation products and non-IBM products
for remarketers financed by the Company, compared with the
same 1996 period. 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 45 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 are fully integrated in the Company's
financial statements. Remarketing activities are comprised
of 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 months ended September 30, 1997, remarketing
activities contributed $45.0 million to pretax earnings, an
increase of 6 percent compared with $42.3 million for the
same 1996 period. For the nine months ended September 30,
1997, the remarketing activities contributed $144.7 million
to pretax earnings, an increase of 11 percent compared with
$130.0 million for the same 1996 period.
At September 30, 1997, the investment in remarketed
equipment on capital and operating leases totaled $305.5
million, which was essentially flat from the 1996 year-end
investment of $305.3 million.
FINANCIAL CONDITION
ASSETS
Total assets increased to $15.3 billion at September 30,
1997, compared with $12.9 billion at December 31, 1996.
This increase is primarily the result of a growth in end
user and working capital financings originated during the
first nine months of 1997. Also contributing to the
increase in total assets were factored receivables acquired
from IBM which totaled $664.0 million at September 30, 1997,
and the lease portfolio purchased from General Electric
Capital Technology Management Services Corporation
(GECTMSC), a subsidiary of General Electric Capital
Corporation (GECC).
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. At September 30, 1997, and December 31,
1996, marketable securities included investments in U.S.
federal agency debt securities of $43.2 million and $34.2
million, respectively, and corporate debt securities of
$105.6 million and $125.1 million, respectively.
-8-
<PAGE 11>
FINANCIAL CONDITION (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the business were financed with $10,563.3
million of debt at September 30, 1997. Total short-term and
long-term debt increased by approximately $2,481.0 million,
from $8,082.3 million at December 31, 1996. This increase
was the result of increases in short-term notes of $1,349.9
million, short-term debt payable to IBM of $1,276.8 million,
long-term debt of $237.9 million and payable to IBM of
$596.9 million, offset by a decrease in commercial paper
outstanding of $980.5 million. Included in the increase in
total debt, is short-term borrowings associated with
accounts receivable purchases from selected IBM subsidiaries
during the third quarter of 1997. Included in short-term
debt at September 30, 1997, and December 31, 1996, was
$125.0 million payable to IBM at market terms and
conditions, maturing on November 1, 1997. Also included in
short-term debt at September 30, 1997, was $472.6 million
payable to IBM at market terms and conditions, maturing in
October 1997. Included in long-term debt at September 30,
1997, were $417.2 million and $179.7 million payable to IBM
at market terms and conditions, maturing on August 21, 2000,
and February 26, 2001, respectively.
The Company has the option, as approved by the Board of
Directors on November 1, 1996, to issue and sell up to $5.0
billion of debt securities in domestic and foreign financial
markets through December 31, 1997. Included within this
$5.0 billion authorization is the option, together with IBM
and IBM International Finance, N.V., to issue and sell debt
securities in an aggregate nominal amount of up to 3.0
billion in European Currency Units (ECU), or its equivalent
in any other currency. At September 30, 1997, there was 1.8
billion in ECU available for the issuance of debt securities
under this authorization. The Company's decision to
continue to issue debt securities over the remaining
authorized period under this program is dependent on
prevailing market conditions and its need for such funding.
The Company has no firm commitments for the purchase of debt
securities that it may issue from the unused portion
available under this program.
At September 30, 1997, the Company had available $1.9
billion of a shelf registration with the Securities and
Exchange Commission (SEC) for the issuance of debt
securities. This shelf registration allows the Company
rapid access to domestic financial markets, and the Company
intends to continue to issue debt securities under this
shelf registration. 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 also 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
a subsidiary of the Company has available. The subsidiary's
decision to issue any asset-backed securities over the
remaining authorized period under this shelf registration is
dependent on prevailing market conditions and its need for
such funding.
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<PAGE 12>
FINANCIAL CONDITION (Continued)
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 also 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
borrowings outstanding of $800.5 million under this
agreement at September 30, 1997. There were no borrowings
outstanding under this agreement at December 31, 1996.
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 and loan portfolio, 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 $447.3 million to
$1,841.7 million at September 30, 1997, from $2,289.0
million at December 31, 1996. This decline was primarily
attributable to a $447.6 million decrease in the amount
payable for capital equipment purchases during the first
nine months of 1997.
Total stockholder's equity at September 30, 1997, was
$1,595.3 million, up $160.2 million from year-end 1996. The
increase in stockholder's equity reflects net earnings of
$210.2 million for the first nine months of 1997, offset by
the payment of $50.0 million in cash dividends to IBM during
the first nine months of 1997.
At September 30, 1997, the Company's debt to equity ratio
was 6.6:1, compared with 5.6:1 at December 31, 1996, and
6.1:1 at September 30, 1996.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $36.6 million for
the nine months ended September 30, 1997, compared with
total cash provided before dividends of $447.0 million for
the same 1996 period. Total cash provided before dividends
reflects $1,209.1 million of cash used by investing and
financing activities before dividends, offset by $1,245.7
million of cash provided by operating activities for the
first nine months of 1997.
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<PAGE 13>
FINANCIAL CONDITION (Continued)
For the nine months ended September 30, 1996, total cash
provided before dividends reflected $489.3 million of cash
used in investing and financing activities before dividends,
offset by $936.3 million of cash provided by operating
activities. Cash and cash equivalents at September 30,
1997, totaled $619.5 million, a decrease of $13.3 million,
compared with the balance at December 31, 1996.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases decreased to $141.7 million for the three
months ended September 30, 1997, from $142.6 million for the
same 1996 period. The decline was attributable to a more
competitive environment for end user financing, which was
partially offset by an increase in prior year capital
equipment financing originations. For the nine months ended
September 30, 1997, income from leases increased 8 percent
to $425.1 million, from $392.9 million for the same 1996
period. The growth in capital equipment financings for end
users during 1996 contributed to the overall increase in
income from leases. Income from leases includes lease
income resulting from remarketing transactions. Lease
income from remarketing transactions was $32.9 million and
$125.4 million for the three- and nine-month periods ended
September 30, 1997, a decrease of 17 percent and an increase
of 15 percent, respectively, from the comparable 1996
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 may not be
recognized before realization and are thus a source of
potential future profits. Anticipated decreases in specific
future residual values, considered to be other than
temporary, must be recognized currently.
A review of the Company's $943.8 million residual value
portfolio at September 30, 1997, 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. To
recognize decreases in the expected future residual value of
specific leased equipment, the Company recorded a $6.2
million reduction to income from leases during the third
quarter of 1997, for a total of $22.9 million during the
first nine months of 1997, compared with a $5.0 million
reduction to income from leases during the third quarter of
1996 for a total of $23.1 million during the first nine
months of 1996.
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<PAGE 14>
RESULTS OF OPERATIONS (Continued)
INCOME FROM LOANS
Income from loans increased 19 percent to $44.0 million for
the three months ended September 30, 1997; for the first
nine months of 1997, income from loans increased 10 percent
to $123.5 million, compared with the respective 1996 period.
This increase resulted from higher asset balances, which in
turn were primarily due to an increase in financing
originated for software and services during 1996 and the
first nine months of 1997.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 3 percent to
$68.3 million for the three months ended September 30, 1997,
compared with the same 1996 period. This increase is
primarily a result of a growth in working capital financing
originated during the third quarter of 1997, compared with
the same 1996 period. For the first nine months of 1997,
income from working capital financing decreased 8 percent to
$185.7 million compared with the respective 1996 period.
This decrease was primarily due to declines in the average
working capital financing receivables outstanding during the
1997 periods, compared with the 1996 periods. The
year-to-year decline in the average working capital
financing receivables outstanding was due to an increase in
cash collected prior to normal payment terms, resulting in a
decrease in the amount of dealer interest earned.
EQUIPMENT SALES
Equipment sales amounted to $129.0 million for the three
months ended September 30, 1997, compared with $76.4 million
for the same 1996 period; for the first nine months of 1997,
equipment sales amounted to $301.1 million, compared with
$284.3 million for the comparable 1996 period. Contributing
to this increase in equipment sales is the growth of
equipment remarketed as sales, rather than as operating
leases. The revenue associated with outright sales and
sales-type leases is included in equipment sales.
Company-owned equipment may be sold or released to existing
lessees or, when equipment is returned, to new users of that
equipment.
Gross profit on equipment sales for the three months ended
September 30, 1997, was $18.3 million, compared with $7.7
million for the same 1996 period. For the first nine months
of 1997, the gross profit on equipment sales decreased 4
percent to $42.2 million, compared with $44.0 million for
the same 1996 period. The gross profit margin for the third
quarter of 1997 increased to 14.2 percent, compared with
10.0 percent for the same 1996 period; for the first nine
months of 1997, the gross profit margin decreased to 14.0
percent, compared with 15.5 percent for the same 1996
period. The mix of products available for sale and changing
market conditions for certain used equipment during the
applicable periods are factors contributing to the changes
in gross profit margin.
-12-
<PAGE 15>
RESULTS OF OPERATIONS (Continued)
INCOME FROM FACTORED IBM RECEIVABLES:
Income from factored IBM receivables was $9.8 million for
the three months ended September 30, 1997. For the nine
months ended September 30, 1997, income from factored IBM
receivables was $13.7 million. Refer to Accounts Receivable
Purchases within Related Company Transactions in the Notes
to Consolidated Financial Statements on page 6 for
additional details.
OTHER INCOME
Other income decreased 22 percent to $28.9 million for the
three months ended September 30, 1997, compared with $37.2
million for the same 1996 period. For the first nine months
of 1997, other income decreased 9 percent to $101.6 million,
compared with $111.8 million for the same 1996 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, as well as a decrease in the fees for the
servicing of IBM financing receivables sold for the first
nine months of 1997, as compared with the same 1996 period.
The decline is attributable to an overall decrease in the
managed assets and securitized assets portfolios during the
first nine months of 1997.
INTEREST EXPENSE
As a result of the growth in end user and working capital
financings originated, the Company has experienced an
increase in the average outstanding debt balance. This
increase in the average outstanding debt balance resulted in
a 30 percent growth in interest expense to $143.7 million
for the three months ended September 30, 1997, and 19
percent to $383.5 million for the first nine months of 1997,
compared with the respective 1996 periods. The Company's
year-to-date average cost of debt through September 30,
1997, increased to 5.9 percent, from 5.7 percent for the
same 1996 period.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $53.5
million for the three months ended September 30, 1997,
compared with $53.4 million for the same 1996 period. For
the first nine months of 1997, selling, general and
administrative expenses increased 9 percent to $156.7
million, from $144.4 million for the same 1996 period. This
increase is mainly due to planned growth in the Company's
resources during 1996 and the first nine months of 1997,
resulting in an increase in compensation related expenses.
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
-13-
<PAGE 16>
RESULTS OF OPERATIONS (Continued)
equipment financed. The Company provides for receivable
losses at the time financings are originated and from time
to time as conditions warrant for capital equipment. The
portfolio is diversified by geography, 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 growth of the
Company's working capital financing business in 1996 and the
first nine months of 1997, and with the continuation of the
trend toward consolidation in this industry segment, the
concentration of such financings for certain large dealers
and remarketers of information industry products is
significant.
At September 30, 1997, and December 31, 1996, approximately
71 percent and 62 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 1996 or the first nine months of 1997.
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.
The provision for receivable losses increased to $18.9
million for the quarter ended September 30, 1997, compared
with $9.0 million for the same 1996 period. The Company's
timely recognition of probable receivable losses and its
revised estimate of the recoverability of certain specific
working capital financing receivables have contributed to
the increase in the provision for receivable losses for the
three months ended September 30, 1997. For the nine months
ended September 30, 1997, the provision for receivable
losses decreased to $18.0 million, compared with $31.3
million for the same 1996 period. The decrease in the
provision for receivable losses was attributable to lower
general reserve requirements, based upon the Company's
historical experience and its ability to effectively manage
credit risk and contain losses.
INCOME TAXES
Income taxes decreased 31 percent to $32.3 million for the three
months ended September 30, 1997, from $46.6 million for the same
period in 1996. For the first nine months of 1997, income taxes
decreased 14 percent to $123.3 million, from $142.8 million for the
same 1996 period. This decline was attributable to a decrease in the
Company's taxable income and effective tax rate. The decrease in the
effective tax rate was affected by adjustments made in the current
period to prior years' tax liabilities.
-14-
<PAGE 17>
RETURN ON AVERAGE EQUITY
The results for the first nine months of 1997 yielded an
annualized return on average equity of 18.7 percent,
compared with 22.9 percent for the first nine months of
1996.
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.
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;
non-performance by a customer of contractual requirements;
the concentration of credit risk and creditworthiness of the
customer; the Company's associated collection and asset
management efforts; the Company's determination of 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.
-15-
<PAGE 18>
Part II - Other Information
___________________________
Item 1. Legal Proceedings
__________________________
None material.
Item 6(b). Reports on Form 8-K
_______________________________
A Form 8-K dated July 21, 1997, was filed with respect to the
Company's financial results for the periods ended June 30, 1997.
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 12, 1997 By: /s/ Kimberly A. Kispert
_________________ ___________________________
(Kimberly A. Kispert)
Vice President, Finance
and Chief Financial Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT V
_________
FINANCIAL DATA SCHEDULE
_______________________
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM IBM CREDIT CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS AT AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 619,481
<SECURITIES> 148,844
<RECEIVABLES> 6,032,072
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,276,936
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,137,850
<TOTAL-LIABILITY-AND-EQUITY> 15,276,936
<SALES> 301,075
<TOTAL-REVENUES> 1,150,591
<CGS> 258,861
<TOTAL-COSTS> 258,861
<OTHER-EXPENSES> 156,690
<LOSS-PROVISION> 17,963
<INTEREST-EXPENSE> 383,539
<INCOME-PRETAX> 333,538
<INCOME-TAX> 123,333
<INCOME-CONTINUING> 210,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210,205
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
