<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, 1999
Commission file number 1-8175
__________________________________
IBM CREDIT CORPORATION
___________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 22-2351962
____________________________ _____________________________
(State of incorporation) (IRS employer identification
number)
North Castle Drive, MS NCA-306
Armonk, New York 10504-1785
_______________________________________________________
_______________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 914-765-1900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
As of July 31, 1999, 936 shares of capital stock, par value $1.00
per share, were held by International Business Machines
Corporation. Aggregate market value of the voting stock held by
nonaffiliates of the registrant at July 31, 1999: NONE.
The registrant meets the conditions set forth in General
Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing
this Form with the reduced disclosure format.
<PAGE> 2
INDEX
Part I - Financial Information:
Page
Item 1. Financial Statements:
Consolidated Statement of Financial Position
at June 30, 1999 and December 31, 1998...................
1
Consolidated Statement of Earnings for the three and six
months ended June 30, 1999 and 1998......................
2
Consolidated Statement of Cash Flows for the six months
ended June 30, 1999 and 1998.............................
3
Notes to Consolidated Financial Statements.................
5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.........
11
Part II - Other Information.....................................
21
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<PAGE> 3
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION>
At At
June 30, December 31,
1999 1998
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $ 849,363 $ 822,844
Marketable securities. . . . . . . 36,641 68,838
Net investment in capital leases . 5,605,849 5,265,941
Equipment on operating leases, net 3,479,621 3,619,585
Loans receivable . . . . . . . . . 3,206,069 3,041,222
Working capital financing
receivables. . . . . . . . . . . 2,332,587 2,789,029
Factored IBM receivables . . . . . - 292,310
Investments and other assets . . . 691,028 497,590
__________ ___________
Total Assets $16,201,158 $16,397,359
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . $ 5,951,517 $ 6,618,695
Short-term debt, IBM . . . . . . . 599,950 158,527
Due to IBM and affiliates. . . . . 1,726,411 2,354,650
Interest and other accruals. . . . 464,528 440,248
Deferred income taxes. . . . . . . 1,028,026 973,686
Long-term debt . . . . . . . . . . 1,901,169 1,903,188
Long-term debt, IBM. . . . . . . . 2,533,150 2,070,651
___________ ___________
Total liabilities . . . . . . . 14,204,751 14,519,645
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1999 and 1998 . . . . 457,411 457,411
Retained earnings. . . . . . . . . 1,538,996 1,420,303
___________ ___________
Total stockholder's equity. . . 1,996,407 1,877,714
___________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $16,201,158 $16,397,359
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
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</FN>
</TABLE>
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<PAGE> 4
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
________ ________ ________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . .$ 97,517 $ 78,322 $185,532 $160,705
Operating leases, net of
depreciation. . . . . . 113,870 97,082 220,875 181,536
_________ ________ _________ ________
211,387 175,404 406,407 342,241
Income from working capital
financing. . . . . . . . . 54,880 59,556 107,424 125,736
Income from loans . . . . . 59,988 49,619 120,486 99,435
Equipment sales . . . . . . 183,086 95,111 280,709 204,940
Income from factored IBM
receivables. . . . . . . . - 14,082 3,138 29,420
Other income. . . . . . . . 21,064 27,345 46,757 51,716
________ ________ ________ _________
Total finance and other
income. . . . . . . . . 530,405 421,117 964,921 853,488
________ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . 139,961 155,175 278,690 311,336
Cost of equipment sales . . 155,982 85,322 245,982 179,856
Selling, general, and
administrative . . . . . . 56,015 53,093 105,618 102,750
Provision for receivable
losses . . . . . . . . . . 9,440 9,366 15,005 16,485
_______ ________ ________ _________
Total cost and expenses. 361,398 302,956 645,295 610,427
_______ ________ ________ _________
EARNINGS BEFORE INCOME TAXES. 169,007 118,161 319,626 243,061
Provision for income taxes. . 66,591 46,556 125,933 95,766
________ ________ ________ _________
NET EARNINGS. . . . . . . . .$102,416 $ 71,605 $193,693 $147,295
========= ======= ======== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
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</TABLE>
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<PAGE> 5
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30:
(Dollars in thousands)
<CAPTION>
1999 1998*
_________ __________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . $ 193,693 $ 147,295
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . 1,011,537 930,691
Provision for receivable losses. . . . . 15,005 16,485
Increase in deferred income taxes. . . . 54,340 65,677
Decrease in interest and other accruals (170,531) (73,643)
Gross profit on equipment sales. . . . . (34,727) (25,084)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . 280,709 204,940
Decrease in amounts due IBM and
affiliates . . . . . . . . . . . . . (628,239) (853,107)
Other, net . . . . . . . . . . . . . . 12,601 5,510
_________ _________
Cash provided by operating activities . . . 734,388 418,764
_________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . (1,185,040)(1,190,121)
Collections on capital leases, net of
income earned . . . . . . . . . . . . . 1,069,257 1,073,794
Investment in equipment on operating
leases. . . . . . . . . . . . . . . . . (881,181) (775,184)
Investment in loans receivable . . . . . (977,538) (681,971)
Collections on loans receivable, net
of interest earned . . . . . . . . . . . 808,498 622,246
Purchase of factored IBM receivables . . (120,900)(3,220,428)
Collections on factored IBM receivables. 138,862 3,237,419
Collections on working capital financing
receivables, net. . . 455,415 936,459
Purchases of marketable securities . . . (24,390) (76,965)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . 56,562 92,646
Proceeds from the sale of the net assets
of IBM Credit International Factoring
Corporation . . . . . . . . . . . . . . 273,759 -
_________ _________
Total carried forward $(386,696) $(17,895)
_________ _________
<FN>
* Reclassified to conform to current year presentation.
-6-
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-7-
<PAGE> 6
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30:
(Continued)
1999 1998
__________ __________
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Total brought forward $ (386,696) $ (17,895)
Cash payment for lease portfolio
acquired . . . . . . . . . . . . . (176,613) -
Collections on (investment in)
participation loans, net . . . . . (182,962) 52,752
Other, net . . . . . . . . . . . . . ( 20,033) (401,172)
__________ __________
Cash used in investing activities . . . (766,304) (330,525)
__________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . $1,174,984 $1,497,879
Repayment of debt with original
maturities of one year or more . . . (455,544) (282,635)
Repayment of debt with original
maturities within one year, net. . . (586,005) (1,330,569)
Cash dividends paid to IBM. . . . . . (75,000) (25,000)
__________ _________
Cash provided by (used in) financing
activities. . . . . . . . . . . . . . 58,435 (140,325)
__________ _________
Change in cash and cash equivalents. . . 26,519 (52,086)
Cash and cash equivalents, January 1 . . 822,844 792,471
__________ _________
Cash and cash equivalents, June 30 . . . $ 849,363 $ 740,385
========== =========
Supplemental schedule of noncash investing and financing
activities:
In May 1999, the Company purchased selected assets from the leasing
portfolio of Comdisco, Inc. The purchase price was financed, in
part, through the assumption of debt of $102.0 million and through
the issuance of a credit on account of $195.4 million.
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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-9-
<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 for 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
2.15 and 1.78 for the six months ended June 30, 1999, and 1998,
respectively.
ACCOUNTING CHANGES:
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130 _Reporting
Comprehensive Income,_ which established standards for displaying
comprehensive income and components. For the three- and six-month
periods ending June 30, 1999, and 1998, respectively, other than
net earnings, there were no items to report.
Effective December 31, 1998, the Company adopted SFAS No. 131,
_Disclosures About Segments of an Enterprise and Related
Information,_ which establishes standards for reporting operating
segments and disclosures about products and services, geographic
areas and major customers. Refer to Segment Reporting in the Notes
to Consolidated Financial Statements on page 7.
In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, _Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No.
133._ This statement defers the effective date of SFAS No. 133 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.
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<PAGE> 8
RELATED COMPANY TRANSACTIONS:
EQUIPMENT LEASING:
The Company provides equipment, software and services financing at
market rates to IBM and affiliated companies for both IBM and
non-IBM products. The Company originated $432.9 million and $421.6
million of such financings during the six months ended June 30,
1999, and 1998, respectively. At June 30, 1999, and December 31,
1998, approximately $1,383.5 million and $1,421.3 million,
respectively, of such financings were included in the Company's
lease and loan portfolio. The operating lease income, net of
depreciation, and income from loans earned from transactions with
IBM and affiliated companies, was approximately $88.4 million and
$83.7 million in the first half of 1999, and 1998, respectively.
In addition, as part of IBM's sale of its global network to AT&T,
the Company sold approximately $87.3 million in leased assets to
IBM with a cost of $66.5 million resulting in a gross profit of
$20.8 million.
WORKING CAPITAL FINANCING:
The Company provides working capital financing, at market rates, to
certain remarketers of IBM products. IBM pays the Company a fee to
provide a preset free financing period to its remarketers.
Included in income from working capital financing is $49.4 million
and $56.6 million of fee income earned from divisions of IBM for
the six months ended June 30, 1999, and 1998, respectively.
ACCOUNTS RECEIVABLE PURCHASES:
In 1997, IBM Credit International Factoring Corporation (ICIFC) and
IBM Credit EMEA Factoring Co., LTD. (ICEFC), subsidiaries of the
Company, entered into factoring agreements with selected IBM
subsidiaries. Under these agreements, ICIFC and ICEFC periodically
purchased, without recourse, all the rights, title and interest to
certain outstanding IBM customer receivables. In December 1998 and
February 1999, respectively, ICEFC and ICIFC sold to a subsidiary
of IBM, IBM International Holdings Finance Company, Ltd. (IIHFC),
all of their factoring assets and substantially all of their
related liabilities.
During the six months ended June 30, 1999, and 1998, ICIFC and
ICEFC acquired IBM customer receivables having a nominal value of
$122.0 million and $3,262.0 million, respectively, for $120.9
million and $3,220.5 million, respectively. The receivables
acquired were short-term in nature and were denominated in non-U.S.
currencies. The purchases were financed by the Company through the
issuance of short-term debt. Transactions related to these
receivables are fully integrated in the Company's consolidated
financial statements.
-11-
<PAGE> 9
SEGMENT REPORTING:
The Company is organized on the basis of its finance offerings.
The Company's reportable segments are strategic business units that
offer different financing solutions based upon the customers'
needs.
The Company's operations are conducted primarily through its two
operating segments: Customer Financing and Commercial Financing.
The Customer Financing segment provides lease and loan financing of
IBM and non-IBM advanced information processing products and
services to end users. The Commercial Financing segment provides
primarily secured inventory and accounts receivable financing
(_working capital financing_) for dealers and remarketers of
information industry products.
The accounting policies of the segments are the same as those
followed by the Company. Segment data includes an allocation of
interest expense and all corporate headquarters costs to each of
its operating segments. Interest expense is allocated primarily on
the basis of a planned leverage ratio using an average interest
rate. Corporate headquarters expenses are allocated on the basis
of headcount, an annual survey of the corporate staff to determine
the time spent on each business segment, and asset utilization
depending on the type of expense. The Company evaluates the
performance of its segments and allocates resources to them based
upon their earnings before taxes.
The following schedules represent disaggregated income and expense
information for both segments. There are no intersegment
transactions.
-12-
<PAGE> 10
SEGMENT REPORTING (Continued):
(in thousands)
For the Three Months Ending June 30:
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 460,820 $ 55,432 $ 516,252
Interest expense....... $ 119,082 $ 11,738 $ 130,820
Earnings before income
taxes................ $ 135,103 $ 28,960 $ 164,063
1998
______________________
Revenues............... $ 329,750 $ 60,343 $ 390,093
Interest expense....... $ 117,480 $ 17,336 $ 134,816
Earnings before income
taxes................ $ 76,370 $ 31,488 $ 107,858
For the Six Months Ending June 30:
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 826,136 $ 108,614 $ 934,750
Interest expense....... $ 237,153 $ 24,137 $ 261,290
Earnings before income
taxes................ $ 247,966 $ 58,888 $ 306,854
1998
______________________
Revenues............... $ 669,180 $ 127,249 $ 796,429
Interest expense....... $ 234,439 $ 37,827 $ 272,266
Earnings before income
taxes................ $ 161,166 $ 64,719 $ 225,885
At June 30, 1999:
Assets................. $ 12,484,616 $ 2,595,605 $15,080,221
At December 31, 1998:
Assets................. $ 12,164,432 $ 2,859,027 $15,023,459
A reconciliation of total segment revenues, total segment interest
expense, total segment earnings before income taxes and total
segment assets to the Company's consolidated amounts are as
follows:
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<PAGE> 11
SEGMENT REPORTING (Continued):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
_________ _________ ________ ________
(in thousands)
Revenues:
Total revenues for
reportable segments.. $ 516,252 $ 390,093 $ 934,750 $ 796,429
Other revenues........ 14,153 31,024 30,171 57,059
__________ _________ _________ _________
Total consolidated
revenues............. $ 530,405 $ 421,117 $ 964,921 $ 853,488
========== ========= ========= =========
Interest Expense:
Total interest expense
for reportable
segments............. $ 130,820 $ 134,816 $ 261,290 $ 272,266
Other interest expense 9,141 20,359 17,400 39,070
__________ _________ _________ _________
Total consolidated
interest expense..... $ 139,961 $ 155,175 $ 278,690 $ 311,336
========== ========= ========= =========
Earnings Before Income Taxes:
Total earnings before
income taxes for
reportable segments.. $ 164,063 $ 107,858 $ 306,854 $ 225,885
Other earnings before
income taxes......... 4,944 10,303 12,772 17,176
__________ _________ _________ _________
Total consolidated
earnings before
income taxes......... $ 169,007 $ 118,161 $ 319,626 $ 243,061
========== ========= ========= =========
At At
June, 30 December 31,
1999 1998
_____________ ______________
Assets:
Total assets for reportable
segments....................$ 15,080,221 $ 15,023,459
Other assets.................. 1,120,937 1,373,900
_____________ _____________
Total consolidated assets.....$ 16,201,158 $ 16,397,359
============= =============
For the three months ended June 30, 1999, Customer Financing
revenue increased 40 percent to $460.8 million from $329.8 million
for the three months ended June 30, 1998. For the six months ended
June 30, 1999, Customer Financing revenue increased 23 percent to
$826.1 million from $669.2 million for the six months ended June
30, 1998. These increases are due to the $87.3 million in revenue
from the sale of leased assets to IBM in relation to IBM's sale of
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<PAGE> 12
SEGMENT REPORTING (Continued):
its global network to AT&T, the growth in customer financing lease
and loan portfolios during the first half of 1999 and improvement
in the average yield of the Company's lease and loan portfolio.
For the three months ended June 30, 1999, earnings before income
taxes for Customer Financing increased to $135.1 million from $76.4
million for the three months ended June 30, 1998. Earnings before
income taxes for Customer Financing increased 54 percent to $248.0
million for the first six months of 1999, compared with $161.2
million for the first six months of 1998. These increases are
primarily due to the increase in gross profit from the sale of
leased assets to IBM relating to the sale of IBM's global network
to AT&T, an improvement in the average spread on the Company's
lease and loan portfolio and the reduction in residual value
writedowns during the first half of 1999, as compared with the same
1998 period.
For the three months ended June 30, 1999, Commercial Financing
revenue decreased to $55.4 million, from $60.3 million for the same
period of 1998. For the six months ended June 30, 1999, Commercial
Financing revenue decreased 15 percent to $108.6 million, compared
with the same 1998 period. These decreases are due to a decrease
in income from dealer interest due to lower average receivable
balances outstanding and a decline in fee income from IBM due to
shorter payment terms during the first six months of 1999, compared
with the same 1998 period.
Earnings before income taxes for Commercial Financing decreased 8
percent to $29.0 million for the three months ended June 30, 1999,
compared with the same period of 1998. For the six months ended
June 30, 1999, earnings before income taxes for Commercial
Financing decreased 9 percent to $58.9 million, from $64.7 million
for the six months ended June 30, 1998. These decreases are
primarily attributable to the decrease in income from dealer
interest and fees from IBM discussed above and in the Related
Company Transactions in the Notes to Consolidated Financial
Statements on page 6.
The Company's business is conducted principally in the United
States; foreign operations are not material.
For the three months ended June 30, 1999, and 1998, one customer,
IBM, accounted for approximately $191.0 million and $107.4 million,
respectively, of the Company's consolidated revenues of both the
customer financing and commercial financing segments. For the six
months ended June 30, 1999, and 1998, IBM accounted for
approximately $300.9 million and $218.3 million, respectively, of
the Company's consolidated revenues of both the customer financing
and commercial financing segments.
The Company continues to evaluate its organizational structure
which could lead to changes in future reportable segments.
-15-
<PAGE> 13
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, 1999, were $102.4
million. Net earnings for the six months ended June 30, 1999, were
$193.7 million yielding an annualized return on average equity of
20.2 percent. Net earnings for the three and six months ended June
30, 1998, were $71.6 million and $147.3 million, respectively.
FINANCING ORIGINATED
For the three months ended June 30, 1999, the Company originated
capital equipment financing for end users of $1,993.6 million, a 30
percent increase from $1,530.6 million for the same 1998 period.
For the three months ended June 30, 1999, originations of working
capital financing for dealers and remarketers of information
industry products increased by 16 percent to $3,549.0 million, from
$3,065.1 million for the same 1998 period.
For the six months ended June 30, 1999, the Company originated
capital equipment financing for end users of $3,330.7 million, a 16
percent increase from $2,876.7 million for the same 1998 period.
For the six months ended June 30, 1999, originations of working
capital financing for dealers and remarketers of information
industry products increased by 10 percent to $6,878.1 million, from
$6,274.3 million for the same 1998 period.
The growth in capital equipment financing originated is related to
IBM's increase in placements of its products and services in the
United States.
For the six months ended June 30, 1999, capital equipment
financings for end users included purchases of $1,804.5 million of
information handling systems from IBM, consisting of $1,100.1
million for capital leases and $704.4 million for operating leases.
In addition, capital equipment financings for end users included
the following: (1) financing originated for installment
receivables of $179.5 million; (2) financing for IBM software and
services of $798.0 million; (3) installment and lease financing for
state and local government customers of $187.9 million for the
account of IBM; and (4) other financing of $360.8 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
-16-
<PAGE> 14
FINANCING ORIGINATED (Continued):
to four years. Operating leases consist principally of IBM
information handling equipment with terms generally from two to
four years.
The growth in working capital financing originations reflects
volume increases in IBM's workstation products for remarketers
financed by the Company during the six months ended June 30, 1999.
Working capital financing receivables arise primarily from secured
inventory and accounts receivable financing for dealers and
remarketers of IBM and non-IBM products. Payment terms for
inventory secured financing generally range from 30 days to 75
days. Payment terms for accounts receivable secured financing
generally range from 30 days to 90 days.
REMARKETING ACTIVITIES
In addition to originating new financing, the Company remarkets
used IBM equipment. This equipment is primarily sourced from
customers at the conclusion of lease transactions and is typically
remarketed in cooperation with the IBM sales force. The equipment
is generally leased or sold to end users. These transactions may be
with existing lessees or, when equipment is returned, with new
customers.
Remarketing activities comprise income from follow-on capital and
operating leases and gross profit on equipment sales, net of
write-downs in residual values of certain leased equipment. For the
three months ended June 30, 1999, remarketing activities
contributed $79.2 million to pretax earnings, an increase of 44
percent compared with $54.9 million for the same 1998 period. For
the six months ended June 30, 1999, remarketing activities
contributed $136.3 million to pretax earnings, an increase of 32
percent compared with $103.6 million for the same 1998 period.
Refer to Equipment Sales in Management's Discussion and Analysis on
page 16 for additional details.
At June 30, 1999, the investment in remarketed equipment on capital
and operating leases totaled $255.3 million, a 2 percent decrease
from the 1998 year-end investment of $259.7 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $16.2 billion at June 30, 1999, compared
with $16.4 billion at December 31, 1998. This decrease is due to
collections exceeding new investments in working capital financings
originated during the first six months of 1999. The decrease in
total assets is also attributable to the sale of $274.3 million of
factored IBM receivables during the first half of 1999. The assets
were sold at book value, which approximated market value, and
therefore no gain or loss was recognized on the transaction. These
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<PAGE> 15
ASSETS (Continued):
decreases were partially offset by increases in the Company's lease
and loan portfolios.
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, 1999, marketable securities included investments in corporate
debt securities of $12.2 million and other marketable securities of
$24.4 million. At December 31, 1998, marketable securities
included corporate debt securities of $20.8 million and
certificates of deposit of $48.0 million.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the business were financed with $10,985.8 million of
debt at June 30, 1999. Total short-term and long-term debt
increased by approximately $234.7 million, from $10,751.1 million
at December 31, 1998. This increase was the result of increases in
long-term debt payable to IBM of $612.5 million, long-term debt
payable of $353.9 million, short-term debt payable to IBM of $291.4
million and commercial paper of $238.8 million, offset by a decline
in short-term notes of $1,261.9 million. Included in long-term
debt, IBM, at June 30, 1999, was $2,553.2 million, payable at
market terms and conditions, with maturity dates ranging from July
7, 2000 to May 13, 2004.
The Company has the option, as approved by the Board of Directors
on December 31, 1998, to issue and sell debt securities in domestic
and foreign markets based upon its need for such funding.
At June 30, 1999, the Company had available $1.6 billion of a shelf
registration with the Securities and Exchange Commission for the
issuance of debt securities. This allows the Company rapid access
to domestic financial markets. 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, 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 June 30, 1999, there was Euro 2.0 billion available for the
issuance of debt securities under this program. The Company's
issuance of debt securities over the next twelve months under this
program is dependent on prevailing market conditions and its need
for such funding.
The Company has the option, as approved by the Board of Directors
on November 1, 1996, to sell, assign, pledge or transfer up to $3.0
billion of assets to third parties through December 31, 1999.
Included within this $3.0 billion authorization is $450.0 million
of a separate shelf registration for issuance of asset-backed
-18-
<PAGE> 16
FINANCIAL CONDITION (Continued)
securities, which the Company has available. The Company's issuance
of any asset-backed securities over the next twelve months under
this shelf registration is dependent upon prevailing market
conditions and its need for such funding.
The Company is an authorized borrower of up to $3.0 billion under a
$10.0 billion IBM committed global credit facility, and has a
liquidity agreement with IBM for $500.0 million. The Company has
no borrowings outstanding under the committed global credit
facility or the liquidity agreement.
The Company and IBM have signed master loan agreements providing
additional funding flexibility to each other. These agreements
allow for short-term (up to 270-day) funding, made available at
market terms and conditions, upon the request of either the Company
or IBM. As of June 30, 1999, the Company had no borrowings
outstanding under this agreement. As of December 31, 1998, the
Company had $58.2 million of 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. As of June 30, 1999, and December 31, 1998, the Company
had $2,450.0 million and $1,481.7 million, respectively,
outstanding under this agreement.
These financing sources, along with the Company's internally
generated cash and medium-term note and commercial paper programs,
provide flexibility to the Company to grow its lease, working
capital financing and loan portfolios, to fund working capital
requirements and to service debt.
Amounts due to IBM and affiliates include trade payables arising
from purchases of equipment for term leases and installment
receivables, working capital financing receivables for dealers and
remarketers, and software license fees. Also included in amounts
due to IBM and affiliates are income taxes currently payable under
the intercompany tax allocation agreement. Amounts due to IBM and
affiliates decreased by approximately $628.3 million to $1,726.4
million at June 30, 1999, from $2,354.7 million at December 31,
1998. This decline was primarily attributable to a $728.1 million
decrease in the amount payable for capital equipment purchases and
for working capital financings during the first half of 1999.
Total stockholder's equity at June 30, 1999, was $1,996.4 million,
up $118.7 million from year-end 1998. The increase in
stockholder's equity reflects net earnings of $193.7 million for
the first six months of 1999, offset by the payment of $75.0
million in cash dividends to IBM during the first half of 1999.
At June 30, 1999, the Company's debt to equity ratio was 5.5:1,
compared with 5.7:1 at December 31, 1998.
-19-
<PAGE> 17
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $101.5 million for the six
months ended June 30, 1999, compared with total cash used before
dividends of $27.1 million for the same 1998 period. Total cash
provided before dividends reflects $632.9 million of cash used by
investing and financing activities before dividends, offset by
$734.4 million of cash provided by operating activities for the
first six months of 1999. For the six months ended June 30, 1998,
total cash used before dividends reflected $445.9 million of cash
used by investing and financing activities before dividends, offset
by $418.8 million of cash provided by operating activities. Cash
and cash equivalents at June 30, 1999, totaled $849.4 million, an
increase of $26.6 million, compared with the balance at December
31, 1998.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased to $211.4 million for the three months
ended June 30, 1999, from $175.4 million for the same 1998 period;
for the six months ended June 30, 1999, income from leases
increased 19 percent to $406.4 million, from $342.2 for the same
1998 period. Growth in the lease portfolio, improved average lease
yields and reduced residual value writedowns contributed to the
overall increase in income from leases for the three- and six-month
periods ending June 30, 1999. Income from leases includes lease
income resulting from remarketing transactions. Lease income from
remarketing transactions was $57.1 million and $107.6 million for
the three- and six-month periods ended June 30, 1999, increases of
8 percent and 13 percent, respectively, from the comparable 1998
periods.
On a periodic basis, the Company reassesses the future residual
values of its portfolio of leases. In accordance with generally
accepted accounting principles, anticipated increases in specific
future residual values are not recognized before realization and
are thus a source of potential future profits. Anticipated
decreases in specific future residual values, considered to be
other than temporary, are recognized currently. A review of the
Company's $1,272.5 million residual value portfolio at June 30,
1999, 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
$5.1 million reduction to income from leases during the second
quarter of 1999, for a total of $6.1 million during the first half
of 1999, compared with 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.
-20-
<PAGE> 18
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing decreased 8 percent to $54.9
million for the three months ended June 30, 1999, compared with the
same 1998 period. For the first half of 1999, income from working
capital financing decreased 15 percent to $107.4 million, as
compared to $125.7 million for the first half of 1998. This
decrease is primarily due to a decrease in income from dealer
interest caused by lower outstanding receivable balances and a
decline in fee income from IBM due to shorter payment terms.
INCOME FROM LOANS
Income from loans increased 21 percent to $60.0 million for the
three months ended June 30, 1999, as compared to the same period of
1998. For the first six months of 1999, income from loans increased
21 percent to $120.5 million, as compared to the six months ended
June 30, 1998. This increase resulted from higher asset balances,
which were due to the continued growth of financing originated for
software and services over the past few years.
EQUIPMENT SALES
Equipment sales amounted to $183.1 million for the three months
ended June 30, 1999, compared with $95.1 million for the same 1998
period; for the first six months of 1999, equipment sales amounted
to $280.7 million, compared with $204.9 million for the comparable
1998 period. This increase in equipment sales is primarily
attributable to the sale of $87.3 million of leased equipment to
IBM in relation to IBM's sale of its global network business to
AT&T.
Gross profit on equipment sales for the three months ended June 30,
1999 was $27.1 million, compared with $9.8 million for the same
1998 period. For the first half of 1999, gross profit on equipment
sales increased to $34.7 million compared with $25.1 for the first
half of 1998. The gross profit margin for the second quarter of
1999 increased to 14.8 percent, compared with 10.3 percent for the
same 1998 period. For the first half of 1999, the gross profit
margin increased to 12.4 percent, compared with 12.2 percent for
the first half of 1998. The increase in gross profit and gross
profit margins for the three- and six-month periods is due to the
profitability of the mid-lease buyout of equipment included in
IBM's sale of its global network to AT&T.
INCOME FROM FACTORED IBM RECEIVABLES:
Income from factored IBM receivables was $3.1 million for the six
months ended June 30, 1999, compared with $29.4 million for the
first half of 1998. This decline is attributable to the sale of
the net assets of ICEFC and ICIFC to IIHFC. Refer to Accounts
Receivable purchases in the Notes to Consolidated Financial
Statements on page 6.
-21-
<PAGE> 19
OTHER INCOME
Other income decreased 23 percent to $21.1 million for the three
months ended June 30, 1999, compared with $27.3 million for the
same 1998 period. Other income decreased 9 percent to $46.8 million
for the six months ended June 30, 1999, compared with $51.7 million
for the same 1998 period. The overall decrease in other income is
primarily due to a decline in fees for managing IBM's state and
local government installment and lease financing receivables
portfolio, a decline in interest income on cash and a decline in
income from partnerships.
INTEREST EXPENSE
As a result of a decrease in the Company's average outstanding debt
balance and a decline in interest rates, interest expense decreased
10 percent to $140.0 million for the three months ended June 30,
1999, compared with the three months ended June 30, 1998. For the
six months ended June 30, 1999, interest expense decreased 10
percent to $278.7 million, compared with the same period in 1998.
Due to the generally lower interest rates, the Company's
year-to-date average cost of debt through June 30, 1999, decreased
to 5.4 percent, from 5.7 percent for the same 1998 period. A lower
average cost of debt and lower average debt balances evenly
contributed to the decline in interest expense for both the three-
and six-month periods ended June 30, 1999, compared with the same
periods of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $56.0 million
for the three months ended June 30, 1999, compared with $53.1
million for the same 1998 period. For the first half of 1999,
selling, general, and administrative expenses increased to $105.6
million, compared with $102.8 million for the comparable period of
1998. This increase is primarily due to increased spending on
internal information technology systems.
PROVISION FOR RECEIVABLE LOSSES
The Company's portfolio of capital equipment leases and loans is
predominantly with investment grade customers. The Company
generally retains ownership or takes a security interest in any
underlying equipment financed. The Company provides for receivable
losses at the time financings are originated and from time to time
for capital equipment as conditions warrant. The portfolio is
diversified by geography, industry, and individual unaffiliated
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 is significant.
-22-
<PAGE> 20
PROVISION FOR RECEIVABLE LOSSES (Continued)
At June 30, 1999, and December 31, 1998, approximately 55 percent
and 56 percent, respectively, of working capital financing
receivables outstanding were concentrated in ten working capital
accounts. The Company's working capital financing business is
predominantly with non-investment grade customers. Such financing
receivables are typically collateralized by the inventory and
accounts receivable of the dealers and remarketers. The Company did
not experience material losses in 1998 or the first half of 1999.
The Company does not believe that there is a risk of loss in this
area that would have a material impact on its financial position or
results of operations.
The provision for receivable losses of $9.4 million for the three
months ended June 30, 1999, was relatively flat, compared with the
same 1998 period. For the six months ended June 30, 1999, the
provision for receivable losses decreased by 9 percent to $15.0
million, compared with $16.5 million for the first half of 1998.
The decrease in the provision for receivable losses for the six
months ended June 30, 1999, was attributable to lower reserve
requirements, based upon the Company's historical experience and
its ability to effectively manage credit risk and contain losses.
INCOME TAXES
The provision for income taxes increased to $66.6 million for the
three months ended June 30, 1999, from $46.6 million for the same
period in 1998. For the six months ended June 30, 1999, the
provision for income taxes increased to $125.9 million for the
three months ended June 30, 1999, from $95.8 million for the same
period in 1998. The increase in the provision for income taxes is
attributable to the increase in the Company's pretax earnings for
the three- and six-month periods ended June 30, 1999, compared with
the same periods in 1998.
RETURN ON AVERAGE EQUITY
The results for the first six months of 1999 yielded an annualized
return on average equity of 20.2 percent, compared with 17.1
percent for the first six months of 1998.
CLOSING DISCUSSION
The Company's resources continue to be sufficient to enable it to
carry out its mission of offering customers competitive leasing and
financing and providing information technology remarketers with
inventory and accounts receivable financing, which contribute to
the growth and stability of IBM earnings.
-23-
<PAGE> 21
YEAR 2000
The _Year 2000 issue_ arises because many computer hardware and
software systems use only two digits to represent the year. As a
result, these systems and programs may not process dates beyond
1999, which may cause errors in information or systems failures.
Given the uncertainty inherent in any assessment of the potential
Year 2000 issues, the Company recognizes the need to remain
vigilant and is continuing its analysis, assessment, conversion and
contingency planning for the various Year 2000 issues, across its
business.
With respect to its internal systems, the potential Year 2000
impacts extend beyond the Company's information technology systems
to its physical facilities and the manufacturing systems it applies
to returned equipment after the expiration of leases. The Company
is addressing these issues as part of its own efforts and in
coordination with its parent company, IBM, with respect to the
Company's physical facilities and certain applications related to
human resources, finance, accounts receivable and invoicing, among
others. Most conversion efforts have been completed, with extended
system integration planning and contingency planning projects
scheduled throughout 1999. Although the Company believes such
efforts will be successful and does not expect the total costs of
such efforts to exceed $11.0 million over a multi-year period, any
failure or delay could result in a disruption of business and in
the Company incurring substantial additional expense. To minimize
any such potential impact, the Company has initiated a contingency
planning effort.
The Year 2000 readiness of the Company's customers and the hardware
and software offerings from the Company's suppliers, subcontractors
and business partners may vary. Further, some commentators believe
that a significant amount of litigation will arise from Year 2000
issues. The Company continues to believe that it has good defenses
to any such claims brought against it. The Year 2000 issue also
presents a number of other risks and uncertainties that could
affect the Company, including utilities and telecommunications
failures, the lack of personnel skilled in the resolution of Year
2000 issues, and the nature of government responses to the issues,
among others. While the Company continues to believe that the Year
2000 matters discussed above will not have a material impact on its
business, financial condition or results of operations, it remains
uncertain whether or to what extent the Company may be affected.
The Year 2000 statements set forth above are designated _Year 2000
Readiness Disclosures_ pursuant to the Year 2000 Information and
Readiness Disclosure Act (P.L. 105-271).
-24-
<PAGE> 22
FORWARD LOOKING STATEMENTS
Except for the historical information and discussions contained
herein, statements contained in this Report on Form 10-Q may
constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements
involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, including, but not
limited to, the Company's level of equipment financing
originations; the propensity for customers to finance their
acquisition of IBM products and services with the Company; the
competitive environment in which the Company operates; the success
of the Company in developing strategies to manage debt levels; the
ultimate impact of the various Year 2000 issues on the Company's
business, financial condition or results of operation;
non-performance by a customer of contractual requirements; the
concentration of credit risk and creditworthiness of the customers;
the Company's associated collection and asset management efforts;
the Company's determination and subsequent recoverability of
recorded residual values; currency fluctuations on the associated
debt and liabilities; changes in interest rates; non-performance by
the counterparty in derivative transactions; the Company's ability
to attract and retain key personnel; the Company's ability to
manage acquisitions and alliances; legal, political and economic
changes and other risks, uncertainties and factors inherent in the
Company's business and otherwise discussed in this Form 10-Q and in
the Company's other filings with the Securities and Exchange
Commission and in IBM's filings with the SEC.
-25-
<PAGE> 23
Part II - Other Information
Item 1. Legal Proceedings
None material.
Item 6(b). Reports on Form 8-K
A Form 8-K dated April 21, 1999, was filed with respect to the
Company's financial results for the ended March 31, 1999.
-26-
<PAGE> 24
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 11, 1999 By: /s/ Kimberly A. Kispert
(Kimberly A. Kispert)
Vice President, Finance
and Chief Financial
Officer
-27-
<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, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 849,363
<SECURITIES> 36,641
<RECEIVABLES> 5,538,656
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,201,158
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,538,996
<TOTAL-LIABILITY-AND-EQUITY> 16,201,158
<SALES> 280,709
<TOTAL-REVENUES> 964,921
<CGS> 245,982
<TOTAL-COSTS> 245,982
<OTHER-EXPENSES> 105,618
<LOSS-PROVISION> 15,005
<INTEREST-EXPENSE> 278,690
<INCOME-PRETAX> 319,626
<INCOME-TAX> 125,933
<INCOME-CONTINUING> 193,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,693
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
