<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 June 30, 1998
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 July 31, 1998, 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 July 31, 1998: 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 June 30, 1998 and December 31, 1997. . . . . . . . . . . . .1
Consolidated Statement of Earnings for the three and six
months ended June 30, 1998 and 1997 . . . . . . . . . . . . . .2
Consolidated Statement of Cash Flows for the six
months ended June 30, 1998 and 1997 . . . . . . . . . . . . . .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
June 30, December 31,
1998 1997
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 740,385 $ 792,471
Marketable securities. . . . . . . . . . . 112,167 127,847
Net investment in capital leases . . . . . 4,944,098 4,931,292
Equipment on operating leases, net . . . . 3,438,649 3,583,641
Working capital financing receivables. . . 2,309,644 3,249,310
Loans receivable . . . . . . . . . . . . . 2,448,987 2,381,261
Factored IBM receivables . . . . . . . . . 807,040 824,031
Investments and other assets . . . . . . . 915,713 682,263
___________ ___________
Total Assets $15,716,683 $16,572,116
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . . . . . $ 6,838,425 $ 7,452,668
Short-term debt, IBM . . . . . . . . . . . 769,678 1,139,113
Due to IBM and affiliates. . . . . . . . . 1,671,368 2,524,475
Interest and other accruals. . . . . . . . 349,601 423,243
Deferred income taxes. . . . . . . . . . . 952,857 887,180
Long-term debt . . . . . . . . . . . . . . 2,302,464 1,887,235
Long-term debt, IBM. . . . . . . . . . . . 1,041,046 589,253
___________ ___________
Total liabilities . . . . . . . . . . . 13,925,439 14,903,167
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1998 and 1997 . . . . . . . . 457,411 457,411
Retained earnings. . . . . . . . . . . . . 1,333,833 1,211,538
___________ ___________
Total stockholder's equity. . . . . . . 1,791,244 1,668,949
___________ ___________
Total Liabilities and Stockholder's Equity $15,716,683 $16,572,116
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-1-
<PAGE 4>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
________ ________ ________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . .$ 78,322 $ 69,189 $160,705 $146,524
Operating leases, net of
depreciation. . . . . . . . . 97,082 74,423 181,536 136,902
_________ ________ _________ ________
175,404 143,612 342,241 283,426
Income from working capital
financing. . . . . . . . . . . . 59,556 59,675 125,736 117,399
Income from loans . . . . . . . . 49,619 39,752 99,435 79,515
Equipment sales . . . . . . . . . 95,111 85,459 204,940 172,114
Income from factored IBM
receivables. . . . . . . . . . . 14,082 3,851 29,420 3,851
Other income. . . . . . . . . . . 27,345 30,761 51,716 72,696
________ ________ ________ _________
Total finance and other
income. . . . . . . . . . . . 421,117 363,110 853,488 729,001
________ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . . . . 155,175 126,824 311,336 239,790
Cost of equipment sales . . . . . 85,322 72,893 179,856 148,243
Selling, general, and
administrative . . . . . . . . . 53,093 51,243 102,750 103,195
Provision for receivable losses . 9,366 4,076 16,485 (981)
________ ________ ________ _________
Total cost and expenses. . . . 302,956 255,036 610,427 490,247
________ ________ ________ _________
EARNINGS BEFORE INCOME TAXES. . . . 118,161 108,074 243,061 238,754
Provision for income taxes. . . . . 46,556 39,491 95,766 90,988
________ ________ ________ _________
NET EARNINGS. . . . . . . . . . . .$ 71,605 $ 68,583 $147,295 $147,766
======== ======= ======== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-2-
<PAGE 5>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30:
(Dollars in thousands) 1998 1997
<CAPTION>
_________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . $ 147,295 $ 147,766
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . 930,691 668,184
Provision for receivable losses. . . . . . . . 16,485 (981)
Increase in deferred income taxes. . . . . . . 65,677 53,528
(Decrease) increase in interest
and other accruals . . . . . . . . . . . . . (73,643) 113,397
Gross profit on equipment sales. . . . . . . . (25,084) (23,871)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . . . . 204,940 172,114
Decrease in amounts due IBM and affiliates . (853,107) (550,253)
Other, net . . . . . . . . . . . . . . . . . 5,510 (4,018)
_________ _________
Cash provided by operating activities . . . . . . 418,764 575,866
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . . . . (1,190,121)(1,027,985)
Collections on capital leases, net of income
earned. . . . . . . . . . . . . . . . . . . . 1,073,794 774,856
Investment in equipment on operating leases. . (775,184) (960,915)
Investment in loans receivable . . . . . . . . (681,971) (611,617)
Collections on loans receivable, net of
interest earned . . . . . . . . . . . . . . . 622,246 469,682
Purchase of factored IBM receivables . . . . . (3,220,428) (646,301)
Collections on factored IBM receivables . . . . 3,237,419 234,090
Collections on (investment in) working
capital financing receivables, net. . . . . . 936,459 (76,918)
Purchases of marketable securities . . . . . . (76,965) (21,500)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . . . . 92,646 21,850
Cash payment for lease portfolio acquired. . . - (239,731)
Other, net . . . . . . . . . . . . . . . . . . (348,420) (112,324)
__________ ___________
Cash used in investing activities . . . . . . . . (330,525)(2,196,813)
__________ ___________
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-3-
<PAGE 6>
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30:
(Continued)
1998 1997
__________ _________
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . 1,497,879 736,246
Repayment of debt with original maturities
of one year or more . . . . . . . . . . . . . (282,635) (31,425)
(Repayment) issuance of debt with original
maturities within one year, net . . . . . .(1,330,569) 1,021,452
Cash dividends paid to IBM . . . . . . . . . . (25,000) (50,000)
__________ _________
Cash (used in) provided by financing activities . (140,325) 1,676,273
__________ _________
Change in cash and cash equivalents . . . . . . . (52,086) 55,326
Cash and cash equivalents, January 1. . . . . . . 792,471 632,834
__________ _________
Cash and cash equivalents, June 30. . . . . . . . $ 740,385 $ 688,160
========== =========
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 quarter of 1997 was
financed by the Company, in part, through credits of $16.8 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 six-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 1.78 and 2.01 for the six months
ended June 30, 1998, and 1997, respectively.
ACCOUNTING CHANGES:
The Company implemented Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income,"
effective January 1, 1998. This standard requires that the
total change in equity resulting from revenue, expenses, and
gains and losses, including those which do not affect
retained earnings, be reported. These amounts consist of
net earnings, foreign currency translation adjustments and
unrealized gains and losses on marketable securities. For
the three- and six-month periods ending June 30, 1998 and
1997, respectively, other than net earnings, there were no
items to report.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement 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. This statement is
effective for fiscal years beginning after June 15, 1999,
although early adoption is permitted. Management is in the
process of determining the impacts to the Company's
financial statements as a result of the adoption of this
standard.
-5-
<PAGE 8>
RELATED COMPANY TRANSACTIONS:
EQUIPMENT LEASING:
__________________
The Company provides equipment and loan 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 strategic
outsourcing environment. The Company originated $421.6
million and $508.9 million of such financings during the six
months ended June 30, 1998 and 1997, respectively. At June
30, 1998, and December 31, 1997, approximately $1,316.3
million and $1,255.0 million, respectively, of such
financings were included in the Company's lease and loan
portfolio. The operating lease income, net of depreciation,
and loan income earned from transactions with IBM and
affiliated companies, was approximately $83.7 million and
$75.2 million in the first half of 1998 and 1997,
respectively.
ACCOUNTS RECEIVABLE PURCHASES:
______________________________
IBM Credit International Factoring Corporation (ICIFC) and
IBM Credit EMEA Factoring Co., LTD. (ICEFC), subsidiaries of
the Company, have 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 second quarter of 1998, ICIFC and ICEFC acquired
IBM customer receivables having a nominal value of $1,683.8
million for approximately $1,664.0 million. The receivables
acquired are short-term in nature and are 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.
TRANSACTIONS WITH GENERAL ELECTRIC CAPITAL CORPORATION:
During 1997, the Company entered into an agreement to
purchase selected assets from the leasing portfolio of
General Electric Capital Technology Management Services
Corporation, a subsidiary of General Electric Capital
Corporation (GECC). The purchase price of approximately
$353.3 million was primarily financed by the Company through
short-term and long-term borrowings. The acquired capital
and operating lease and loan portfolio consists of both IBM
and non-IBM products.
Additionally, the Company entered into an alliance with
General Electric Capital Information Technology Solutions
Corporation (ITS), a GECC affiliate, wherein the Company
will serve as the preferred financing provider for customers
of ITS's products and services.
-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 June 30, 1998, were
$71.6 million. Net earnings for the six months ended June
30, 1998, were $147.3 million, yielding an annualized return
on average equity of 17.1 percent.
Effective May 1, 1998, the Company relocated its principal
executive offices to an IBM-owned facility in Armonk, New
York.
FINANCING ORIGINATED
For the three months ended June 30, 1998, the Company
originated capital equipment financing for end users of
$1,530.6 million, a 3 percent decrease from $1,574.2 million
for the same 1997 period. For the three months ended June
30, 1998, originations of working capital financing for
dealers and remarketers of information industry products
decreased by 16 percent to $3,065.1 million, from $3,665.0
million for the same 1997 period.
For the six months ended June 30, 1998, the Company
originated capital equipment financing for end users of
$2,876.7 million, a 1 percent decrease from $2,897.6 million
for the same 1997 period. For the six months ended June 30,
1998, originations of working capital financing for dealers
and remarketers of information industry products decreased
by 8 percent to $6,274.3 million, from $6,792.7 million for
the same 1997 period.
The decline in capital equipment financings for end users
was primarily attributable to a decrease in originations of
IBM advanced information processing products during the
first half of 1998, compared with the same 1997 period.
For the six months ended June 30, 1998, capital equipment
financings for end users included purchases of $1,615.8
million of advanced information processing products from
IBM, consisting of $1,058.6 million for capital leases and
$557.2 million for operating leases. In addition, capital
equipment financings for end users included the following:
(1) financing originated for installment receivables of
$76.3 million; (2) financing for IBM software and services
of $605.7 million; (3) installment and lease financing for
state and local government customers of $149.2 million for
the account of IBM; and (4) other financing of $429.7
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 advanced information processing products
with terms generally from three to five years. Operating
leases consist principally of IBM advanced information
processing products with terms generally ranging from two to
four years.
-7-
<PAGE 10>
FINANCING ORIGINATED (Continued)
The decline in working capital financing originations
throughout the first six months of 1998 reflects volume
decreases in IBM's workstation products and non-IBM products
for remarketers financed by the Company, compared with the
same 1997 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 ended June 30, 1998, remarketing activities
contributed $54.9 million to pretax earnings, an increase of
10 percent compared with $49.8 million for the same 1997
period. For the six months ended June 30, 1998, the
remarketing activities contributed $103.6 million to pretax
earnings, an increase of 4 percent compared with $99.7
million for the same 1997 period. Refer to Equipment Sales
in Management's Discussion and Analysis on page 12 for
additional details.
At June 30, 1998, the investment in remarketed equipment on
capital and operating leases totaled $251.9 million, a 12
percent decrease from the 1997 year-end investment of $285.5
million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $15.7 billion at June 30, 1998,
compared with $16.6 billion at December 31, 1997. This
decrease is primarily attributable to a decline in the
working capital financing receivables outstanding at June
30, 1998, from year-end 1997. This decline is primarily due
to cash collections exceeding originations of working
capital financing receivables.
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 June 30, 1998, marketable securities
included investments in corporate debt securities of $64.2
million and other marketable securities of $48.0 million.
At December 31, 1997, marketable securities included
corporate debt securities of $95.0 million and investments
in U.S. federal agency debt securities of $32.8 million.
-8-
<PAGE 11>
FINANCIAL CONDITION (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the business were financed with $10,951.6
million of debt at June 30, 1998. Total short-term and
long-term debt decreased by approximately $116.7 million,
from $11,068.3 million at December 31, 1997. The decline was
the result of decreases in commercial paper outstanding of
$1,024.4 million and short-term debt payable to IBM of
$369.4 million, offset by increases in long-term debt
payable of $415.2 million, long-term debt payable to IBM of
$451.8 million and medium-term notes of $410.1 million.
Included in short-term debt at June 30, 1998, was $519.6
million payable to IBM at market terms and conditions,
maturing in July 1998. Included in long-term debt at June
30, 1998, was $1,041.1 million payable to IBM at market
terms and conditions, with maturity dates ranging from April
27, 2000 to June 25, 2003.
At June 30, 1998, the Company had available $3.8 billion of
a shelf registration with the Securities and Exchange
Commission (SEC) for the issuance of debt securities. This
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 has the option, as approved by the Board of
Directors on November 1, 1997, to issue and sell up to $5.0
billion of debt securities in domestic and foreign financial
markets through December 31, 1998. 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 under a Euro Medium Term Note Programme (EMTN) in
an aggregate nominal amount of up to 4.0 billion in European
Currency Units (ECU), or its equivalent in any other
currency. At June 30, 1998, there was ECU 2.3 billion
available for the issuance of debt securities under this
EMTN Programme. The Company may issue debt securities over
the next six months under this program depending on
prevailing market conditions and its need for such funding.
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
the Company has available. The Company's decision to issue
any asset-backed securities over the next six months under
this shelf registration is dependent upon prevailing market
conditions and its need for such funding.
-9-
<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 under this agreement of $250.1
million and $600.2 million at June 30, 1998 and December 31,
1997, respectively. The Company and IBM have signed an
additional master loan agreement providing funding
flexibility. This agreement allows for long-term funding,
made available at market terms and conditions, upon the
request of the Company. These financing sources, along with
the Company's internally generated cash, 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 $853.1 million to
$1,671.4 million at June 30, 1998, from $2,524.5 million at
December 31, 1997. This decline was primarily attributable
to a $722.0 million decrease in the amount payable for
capital equipment purchases and working capital financing
receivables for dealers and remarketers during the first
half of 1998.
Total stockholder's equity at June 30, 1998, increased by
$122.3 million from year-end 1997. The increase in
stockholder's equity reflects net earnings of $147.3 million
for the first six months of 1998, offset by the payment of
$25.0 million in cash dividends to IBM during the first half
of 1998.
At June 30, 1998, the Company's debt to equity ratio was
6.1:1, compared with 6.6:1 at December 31, 1997, and 6.4:1
at June 30, 1997.
TOTAL CASH USED BEFORE DIVIDENDS
Total cash used before dividends was $27.1 million for the
six months ended June 30, 1998, compared with total cash
provided before dividends of $105.3 million for the same
1997 period. Total cash used before dividends reflects
$445.9 million of cash used in investing and financing
activities before dividends, offset by $418.8 million of
cash provided by operating activities for the first half of
1998.
-10-
<PAGE 13>
FINANCIAL CONDITION (Continued)
For the six months ended June 30, 1997, total cash provided
before dividends reflected $470.5 million of cash used in
investing and financing activities before dividends, offset
by $575.8 million of cash provided by operating activities.
Cash and cash equivalents at June 30, 1998, totaled $740.4
million, a decrease of $52.1 million, compared with the
balance at December 31, 1997.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 22 percent to $175.4 million
for the three months ended June 30, 1998, from $143.6
million for the same 1997 period; for the six months ended
June 30, 1998, income from leases increased 21 percent to
$342.2 million, from $283.4 million for the same 1997
period. The growth in capital equipment financings for end
users during 1997 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 $52.7 million and
$95.4 million for the three- and six-month periods ended
June 30, 1998, increases of 2 percent and 3 percent,
respectively, from the comparable 1997 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 $1,153.1 million residual value
portfolio at June 30, 1998, 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 $7.6
million reduction to income from leases during the second
quarter of 1998, for a total of $16.9 million during the
first half of 1998, compared with a $14.3 million reduction
to income from leases during the second quarter of 1997 for
a total of $16.7 million during the first half of 1997.
-11-
<PAGE 14>
RESULTS OF OPERATIONS (Continued)
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing was $59.6 million for
the three months ended June 30, 1998, which was relatively
flat compared with the same 1997 period. For the first half
of 1998, income from working capital financing increased 7
percent to $125.7 million compared with $117.4 million for
the same 1997 period. The increase in income from working
capital financing is primarily attributable to an increase
in fee income earned from IBM during the first half of 1998,
compared with the same 1997 period. The increase in income
from working capital financing also reflects increased
originations in the fourth quarter of 1997.
INCOME FROM LOANS
Income from loans increased 25 percent to $49.6 million for
the three months ended June 30, 1998; for the first six
months of 1998, income from loans increased 25 percent to
$99.4 million, compared with the respective 1997 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 1997 and the
first half of 1998.
EQUIPMENT SALES
Equipment sales amounted to $95.1 million for the three
months ended June 30, 1998, compared with $85.5 million for
the same 1997 period; for the first six months of 1998,
equipment sales amounted to $204.9 million, compared with
$172.1 million for the comparable 1997 period. Contributing
to this increase in equipment sales is the growth of
equipment remarketed as sales and sales-type leases, 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
June 30, 1998, was $9.8 million, a decrease of 22 percent,
compared with $12.6 million for the same 1997 period. For
the first half of 1998, the gross profit on equipment sales
increased 5 percent to $25.1 million, compared with $23.9
million for the same 1997 period. The gross profit margin
for the second quarter of 1998 decreased to 10.3 percent,
compared with 14.7 percent for the same 1997 period; for the
first six months of 1998, the gross profit margin decreased
to 12.2 percent, compared with 13.9 percent for the same
1997 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 $14.1 million for
the three months ended June 30, 1998, compared with $3.9
million for the same 1997 period; for the six months ended
June 30, 1998, income from factored IBM receivables was
$29.4 million, compared with $3.9 million for the same 1997
period. The growth in income from factored IBM receivables
was due to the fact that the Company entered into these
agreements with selected IBM subsidiaries beginning in June
1997. 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 11 percent to $27.3 million for the
three months ended June 30, 1998, compared with $30.8
million for the same 1997 period. For the first six months
of 1998, other income decreased 29 percent to $51.7 million,
compared with $72.7 million for the same 1997 period. The
overall decrease in other income is primarily due to the
sale of restricted securities during the first quarter of
1997, which did not occur during the same 1998 period. The
decrease in other income is also attributable 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 half of 1998, as
compared with the same 1997 period. The decline is
attributable to an overall decrease in the managed assets
and securitized assets portfolios during the first half of
1998.
INTEREST EXPENSE
As a result of the growth in capital equipment financings
originated in the prior year, the Company has experienced an
increase in the average outstanding debt balance. This
increase in the average outstanding debt balance resulted in
a 22 percent growth in interest expense to $155.2 million
for the three months ended June 30, 1998, and 30 percent to
$311.3 million for the first six months of 1998, compared
with the respective 1997 periods. The Company's
year-to-date average cost of debt through June 30, 1998 and
1997 was 5.7 percent.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $53.1
million for the three months ended June 30, 1998, compared
with $51.2 million for the same 1997 period. For the first
half of 1998, selling, general and administrative decreased
to $102.8 million, from $103.2 million for the same 1997
period. Selling, general, and administrative expenses for
the three- and six- month periods ended June 30, 1998, were
relatively flat, compared with the respective 1997 periods.
-13-
<PAGE 16>
RESULTS OF OPERATIONS (Continued)
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 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 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 June 30, 1998, and December 31, 1997, approximately 67
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 1997 or the first half of 1998, with
respect to such receivables. 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 $9.4
million for the quarter ended June 30, 1998, compared with
$4.1 million for the same 1997 period. For the six months
ended June 30, 1998, the provision for receivable losses
increased by $17.5 million, to $16.5 million. This increase
is primarily due to the reversal of reserves for specific
accounts during the three-and six-month periods ended June
30, 1997. These reserves were no longer necessary due to
additional collateral acquired for certain working capital
financing receivables. The Company continues to effectively
manage credit risk and contain losses.
INCOME TAXES
Income taxes increased 18 percent to $46.6 million for the
three months ended June 30, 1998, from $39.5 million for the
same period in 1997. For the first half of 1998, income
taxes increased 5 percent to $95.8 million, from $91.0
million for the same 1997 period. The increase in the
provision for income taxes is primarily due to an increase
in the Company's pretax earnings for the three- and six-
month periods ended June 30, 1998.
RETURN ON AVERAGE EQUITY
The results for the first half of 1998 yielded an annualized
return on average equity of 17.1 percent, compared with 20.0
percent for the first half 1997.
-14-
<PAGE 17>
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, to contribute to the growth and
stability of IBM earnings.
YEAR 2000
What is commonly known as 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 calculate dates beyond 1999,
which may cause errors in information or systems failures.
With respect to its internal systems, the Company is taking
appropriate steps to remediate the Year 2000 issues and does
not expect the cost of these efforts to be material.
However, 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.
The Company is also aware of the potential for claims
against it and other companies for damages from products and
services that were not Year 2000 ready. The Company
believes that any such claims against it will be without
merit. While the Company does not believe that the Year
2000 matters discussed above will have a material impact on
its business, financial condition or results of operations,
it is uncertain whether or to what extent the Company may be
affected by such matters.
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
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 of residual values; currency fluctuations on
the associated assets 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 (SEC) and in IBM's filings with the SEC.
-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 April 20, 1998, was filed with respect to the
Company's financial results for the period ended March 31, 1998.
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: August 13, 1998 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 SIX MONTHS ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 740,385
<SECURITIES> 112,167
<RECEIVABLES> 5,565,671
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,716,683
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,333,833
<TOTAL-LIABILITY-AND-EQUITY> 15,716,683
<SALES> 204,940
<TOTAL-REVENUES> 853,488
<CGS> 179,856
<TOTAL-COSTS> 179,856
<OTHER-EXPENSES> 102,750
<LOSS-PROVISION> 16,485
<INTEREST-EXPENSE> 311,336
<INCOME-PRETAX> 243,061
<INCOME-TAX> 95,766
<INCOME-CONTINUING> 147,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 147,295
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
