<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, 1999
Commission file number 1-8175
__________________________________
IBM CREDIT CORPORATION
___________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 22-2351962
____________________________ _____________________________
(State of incorporation) (IRS employer identification
number)
North Castle Drive, MS NCA-306
Armonk, New York 10504-1785
_______________________________________________________
_______________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 914-765-1900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
As of October 31, 1999, 936 shares of capital stock, par value
$1.00 per share, were held by International Business Machines
Corporation. Aggregate market value of the voting stock held by
nonaffiliates of the registrant at October 31, 1999: NONE.
The registrant meets the conditions set forth in General
Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing
this Form with the reduced disclosure format.
<PAGE> 2
INDEX
Part I - Financial Information:
Page
Item 1. Financial Statements:
Consolidated Statement of Financial Position
at September 30, 1999 and December 31,
1998................... 1
Consolidated Statement of Earnings for the three and nine
months ended September 30, 1999 and
1998...................... 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 and
1998............................. 3
Notes to Consolidated Financial
Statements...................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.........
11
Part II - Other Information.....................................
22
-1-
<PAGE> 3
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION>
At At
September 30, December 31,
1999 1998
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $ 754,433 $ 822,844
Marketable securities. . . . . . . - 68,838
Net investment in capital leases . 5,473,401 5,265,941
Equipment on operating leases, net 3,413,010 3,619,585
Loans receivable . . . . . . . . . 3,257,845 3,041,222
Working capital financing
receivables. . . . . . . . . . . 2,836,613 2,861,780
Factored IBM receivables . . . . . - 292,310
Investments and other assets . . . 486,077 424,839
__________ ___________
Total Assets $16,221,379 $16,397,359
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . $ 5,703,438 $ 6,618,695
Short-term debt, IBM . . . . . . . 1,941,727 158,527
Due to IBM and affiliates. . . . . 1,284,125 2,354,650
Interest and other accruals. . . . 487,831 440,248
Deferred income taxes. . . . . . . 1,022,598 973,686
Long-term debt . . . . . . . . . . 1,891,280 1,903,188
Long-term debt, IBM. . . . . . . . 1,791,702 2,070,651
___________ ___________
Total liabilities . . . . . . . 14,122,701 14,519,645
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 1999 and 1998 . . . . 457,411 457,411
Retained earnings. . . . . . . . . 1,641,267 1,420,303
___________ ___________
Total stockholder's equity. . . 2,098,678 1,877,714
___________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $16,221,379 $16,397,359
=========== ===========
-2-
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-3-
<PAGE> 4
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
________ ________ ________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . .$ 99,887 $ 85,924 $285,419 $246,628
Operating leases, net of
depreciation. . . . . . 114,796 93,255 335,671 274,791
_________ ________ _________ ________
214,683 179,179 621,090 521,419
Income from working capital
financing. . . . . . . . . 63,755 56,686 171,179 182,422
Income from loans . . . . . 63,009 52,974 183,495 152,409
Equipment sales . . . . . . 75,303 103,971 356,012 308,912
Income from factored IBM
receivables. . . . . . . . - 11,722 3,138 41,142
Other income. . . . . . . . 21,821 28,061 68,578 79,777
________ ________ ________ _________
Total finance and other
income. . . . . . . . . 438,571 432,593 1,403,492 1,286,081
________ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . 141,255 148,420 419,945 459,756
Cost of equipment sales . . 68,462 93,365 314,444 273,221
Selling, general, and
administrative . . . . . . 52,087 49,491 157,705 152,241
Provision for receivable
losses . . . . . . . . . . 8,003 9,388 23,008 25,873
_______ ________ ________ _________
Total cost and expenses. 269,807 300,664 915,102 911,091
_______ ________ ________ _________
EARNINGS BEFORE INCOME TAXES. 168,764 131,929 488,390 374,990
Provision for income taxes. . 66,493 51,980 192,426 147,746
________ ________ ________ _________
NET EARNINGS. . . . . . . . .$102,271 $ 79,949 $295,964 $227,244
========= ======= ======== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
-4-
</TABLE>
-5-
<PAGE> 5
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30:
(Dollars in thousands)
<CAPTION>
1999 1998
_________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . $ 295,964 $ 227,244
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . 1,549,007 1,420,189
Provision for receivable losses. . . . . 23,008 25,873
Increase in deferred income taxes. . . . 48,912 62,912
Decrease in interest and other accruals (147,228) (144,114)
Gross profit on equipment sales. . . . . (41,568) (35,691)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . 356,012 308,912
Decrease in amounts due IBM and
affiliates . . . . . . . . . . . . . (1,070,525) (847,302)
Other, net . . . . . . . . . . . . . . 12,260 4,447
_________ __________
Cash provided by operating activities . . . 1,025,842 1,022,470
_________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . (1,674,686)(1,748,030)
Collections on capital leases, net of
income earned . . . . . . . . . . . . . 1,649,213 1,541,615
Investment in equipment on operating
leases. . . . . . . . . . . . . . . . . (1,389,299)(1,260,845)
Investment in loans receivable . . . . . (1,314,468)(1,087,441)
Collections on loans receivable, net
of interest earned . . . . . . . . . . . 1,234,121 912,486
Purchase of factored IBM receivables . . (120,900)(4,820,766)
Collections on factored IBM receivables. 138,862 4,839,278
Collections on working capital financing
receivables, net. . . 289,481 785,858
Investment in participation loans. . . . (482,712) -
Collections on participation loans . . . 72,751 61,960
Purchases of marketable securities . . . (24,390) (82,165)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . 93,203 127,105
___________ __________
Total carried forward $(1,528,824) $(730,945)
___________ __________
<FN>
-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
NINE MONTHS ENDED SEPTEMBER 30:
(Continued)
1999 1998
___________ __________
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Total brought forward $(1,528,824)$ (730,945)
Proceeds from the sale of the net assets
of IBM Credit International Factoring
Corporation . . . . . . . . . . . . . . 273,759 -
Cash payment for lease portfolio
acquired. . . . . . . . . . . . . . . . (176,613) -
Other, net . . . . . . . . . . . . . . . . (63,455) (90,348)
__________ __________
Cash used in investing activities . . . (1,495,133) (821,293)
__________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . $1,674,288 $2,456,215
Repayment of debt with original
maturities of one year or more . . . (700,543) (932,552)
Repayment of debt with original
maturities within one year, net. . . (497,865)(1,719,215)
Cash dividends paid to IBM. . . . . . (75,000) (25,000)
__________ _________
Cash provided by (used in) financing
activities. . . . . . . . . . . . . . 400,880 (220,552)
__________ _________
Change in cash and cash equivalents. . . (68,411) (19,375)
Cash and cash equivalents, January 1 . . 822,844 792,471
__________ __________
Cash and cash equivalents, September 30. $ 754,433 $ 773,096
========== ==========
<FN>
<F1
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, which had
been fully utilized at September 30, 1999.
<F2>
The accompanying notes are an integral part of this statement.
-8-
</FN>
</TABLE>
-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 nine-month periods are reflected in the
unaudited interim financial statements presented. These
adjustments are of a normal recurring nature.
The Consolidated Statement of Financial Position at December 31,
1998, and the Statement of Cash Flows for the period ended
September 30, 1998, have been restated to conform to current year
presentation.
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance
with applicable Securities and Exchange Commission requirements was
2.16 and 1.82 for the nine months ended September 30, 1999, and
1998, respectively.
ACCOUNTING CHANGES:
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130 _Reporting
Comprehensive Income,_ which established standards for displaying
comprehensive income and components. For the three- and nine-month
periods ending September 30, 1999, and 1998, respectively, other
than net earnings, there were no items to report.
Effective December 31, 1998, the Company adopted SFAS No. 131,
_Disclosures About Segments of an Enterprise and Related
Information,_ which establishes standards for reporting operating
segments and disclosures about products and services, geographic
areas and major customers. Refer to Segment Reporting in the Notes
to Consolidated Financial Statements on page 7.
In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, _Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No.
133._ This statement defers the effective date of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, to
fiscal years beginning after June 15, 2000, although early adoption
is permitted. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments.
-10-
<PAGE> 8
ACCOUNTING CHANGES (Continued):
It requires an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value. Additionally, the fair value
adjustments will affect either stockholder's equity or net income
depending on whether the derivative instrument qualifies as a hedge
for accounting purposes and, if so, the nature of the hedging
activity. Management does not expect the adoption to have a
material effect on the Company's results of operations, however,
the effect on the Company's financial position depends on the fair
values of the Company's derivatives and related financial
instruments at the date of adoption.
RELATED COMPANY TRANSACTIONS:
EQUIPMENT LEASING:
The Company provides equipment, software and services financing at
market rates to IBM and affiliated companies for both IBM and
non-IBM products. The Company originated $690.1 million and $661.4
million of such financings during the nine months ended September
30, 1999, and 1998, respectively. At September 30, 1999, and
December 31, 1998, $1,412.0 million and $1,421.3 million,
respectively, of such financings were included in the Company's
lease and loan portfolio. The operating lease income, net of
depreciation, and income from loans earned from transactions with
IBM and affiliated companies, was approximately $137.3 million and
$128.6 million for the first nine months of 1999, and 1998,
respectively.
In addition, as part of IBM's sale of its global network to AT&T,
the Company sold $76.3 million in leased assets to IBM with a cost
of $56.5 million resulting in a gross profit of $19.8 million. The
above revenue and cost figures have been adjusted from the second
quarter balances to reflect final actual amounts.
WORKING CAPITAL FINANCING:
The Company provides working capital financing, at market rates, to
certain remarketers of IBM products. IBM pays the Company a fee to
provide a preset free financing period to its remarketers.
Included in income from working capital financing is $74.9 million
and $82.7 million of fee income earned from divisions of IBM for
the nine months ended September 30, 1999, and 1998, respectively.
-11-
<PAGE> 9
ACCOUNTS RECEIVABLE PURCHASES:
In 1997, IBM Credit International Factoring Corporation (ICIFC) and
IBM Credit EMEA Factoring Co., LTD. (ICEFC), subsidiaries of the
Company, entered into factoring agreements with selected IBM
subsidiaries. Under these agreements, ICIFC and ICEFC periodically
purchased, without recourse, all the rights, title and interest to
certain outstanding IBM customer receivables. In December 1998 and
February 1999, respectively, ICEFC and ICIFC sold to a subsidiary
of IBM, IBM International Holdings Finance Company, Ltd. (IIHFC),
all of their factoring assets and substantially all of their
related liabilities.
During the nine months ended September 30, 1999, and 1998, ICIFC
and ICEFC acquired IBM customer receivables having a nominal value
of $122.0 million and $4,881.5 million, respectively, for $120.9
million and $4,820.8 million, respectively. The receivables
acquired were short-term in nature and were denominated in non-U.S.
currencies. The purchases were financed by the Company through the
issuance of short-term debt. Transactions related to these
receivables are fully integrated in the Company's consolidated
financial statements.
SEGMENT REPORTING:
The Company is organized on the basis of its finance offerings.
The Company's reportable segments are strategic business units that
offer different financing solutions based upon the customers'
needs.
The Company's operations are conducted primarily through its two
operating segments: Customer Financing and Commercial Financing.
The Customer Financing segment provides lease and loan financing of
IBM and non-IBM advanced information processing products and
services to end users. The Commercial Financing segment provides
primarily secured inventory and accounts receivable financing
(_working capital financing_) for dealers and remarketers of
information industry products.
The accounting policies of the segments are the same as those
followed by the Company. Segment data includes an allocation of
interest expense and all corporate headquarters costs to each of
its operating segments. Interest expense is allocated primarily on
the basis of a planned leverage ratio using an average interest
rate. Corporate headquarters expenses are allocated on the basis
of headcount, an annual survey of the corporate staff to determine
the time spent on each business segment, and asset utilization
depending on the type of expense. The Company evaluates the
performance of its segments and allocates resources to them based
upon their earnings before taxes.
The following schedules represent disaggregated income and expense
information for both segments. There are no intersegment
transactions.
-12-
<PAGE 10>
SEGMENT REPORTING (Continued):
(in thousands)
For the Three Months Ending September 30:
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 361,518 $ 64,252 $ 425,770
Interest expense....... $ 116,413 $ 16,427 $ 132,840
Earnings before income
taxes................ $ 129,732 $ 34,722 $ 164,454
1998
______________________
Revenues............... $ 346,710 $ 57,153 $ 403,863
Interest expense....... $ 117,050 $ 11,688 $ 128,738
Earnings before income
taxes................ $ 90,785 $ 32,722 $ 123,507
For the Nine Months Ending September 30:
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 1,187,654 $ 172,866 $ 1,360,520
Interest expense....... $ 353,566 $ 40,564 $ 394,130
Earnings before income
taxes................ $ 377,702 $ 93,611 $ 471,313
1998
______________________
Revenues............... $ 1,015,891 $ 184,402 $ 1,200,293
Interest expense....... $ 351,489 $ 49,515 $ 401,004
Earnings before income
taxes................ $ 251,952 $ 97,441 $ 349,393
At September 30, 1999:
Assets................. $ 12,269,745 $ 2,955,156 $15,224,901
At December 31, 1998:
Assets................. $ 12,164,432 $ 2,859,027 $15,023,459
-13-
<PAGE> 11
SEGMENT REPORTING (Continued):
A reconciliation of total segment revenues, total segment interest
expense, total segment earnings before income taxes and total
segment assets to the Company's consolidated amounts are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
_________ _________ ________ __________
(in thousands)
Revenues:
Total revenues for
reportable segments.. $ 425,770 $403,863 $1,360,520 $1,200,293
Other revenues........ 12,801 28,730 42,972 85,788
__________ ________ _________ __________
Total consolidated
revenues............. $ 438,571 $432,593 $1,403,492 $1,286,081
========== ======== ========= ==========
Interest Expense:
Total interest expense
for reportable
segments............. $ 132,840 $128,738 $ 394,130 $ 401,004
Other interest expense 8,415 19,682 25,815 58,752
__________ ________ _________ __________
Total consolidated
interest expense..... $ 141,255 $148,420 $ 419,945 $ 459,756
========== ======== ========= ==========
Earnings Before Income Taxes:
Total earnings before
income taxes for
reportable segments.. $ 164,454 $123,507 $ 471,313 $ 349,393
Other earnings before
income taxes......... 4,310 8,422 17,077 25,597
__________ ________ _________ __________
Total consolidated
earnings before
income taxes......... $ 168,764 $131,929 $ 488,390 $ 374,990
========== ======== ========== ==========
At At
September, 30 December 31,
1999 1998
_____________ ______________
Assets:
Total assets for reportable
segments....................$ 15,224,901 $ 15,023,459
Other assets.................. 996,478 1,373,900
_____________ _____________
Total consolidated assets.....$ 16,221,379 $ 16,397,359
============= =============
-14-
<PAGE> 12
SEGMENT REPORTING (Continued):
For the three months ended September 30, 1999, and 1998, one
customer, IBM, accounted for approximately $85.0 million and $112.0
million, respectively, of the Company's consolidated revenues of
both the customer financing and commercial financing segments. For
the nine months ended September 30, 1999, and 1998, IBM accounted
for approximately $385.9 million and $330.3 million, respectively,
of the Company's consolidated revenues of both the customer
financing and commercial financing segments.
The Company continues to evaluate its organizational structure
which could lead to changes in future reportable segments.
-15-
<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 September 30, 1999, were
$102.3 million. Net earnings for the nine months ended September
30, 1999, were $296.0 million yielding an annualized return on
average equity of 20.1 percent. Net earnings for the three and nine
months ended September 30, 1998, were $79.9 million and $227.2
million, respectively.
FINANCING ORIGINATED
For the three months ended September 30, 1999, the Company
originated capital equipment financing for end users of $1,486.5
million, a 7 percent decrease from $1,603.7 million for the same
1998 period. For the nine months ended September 30, 1999, the
Company originated capital equipment financing for end users of
$4,817.2 million, an 8 percent increase from $4,480.4 million for
the same 1998 period. The decrease in capital equipment financing
originated for the three months ended September 30, 1999, is
related to a decline in placements by IBM of its information
handling equipment in the United States. For the nine months ended
September 30, 1999, the decrease in placements in the third quarter
of 1999 was offset by increases in placements during the half of
1999.
For the nine months ended September 30, 1999, capital equipment
financings for end users included purchases of $2,662.3 million of
information handling systems from IBM, consisting of $1,558.1
million for capital leases and $1,104.2 million for operating
leases. In addition, capital equipment financings for end users
included the following: (1) financing originated for installment
receivables of $232.3 million; (2) financing for IBM software and
services of $1,082.2 million; (3) installment and lease financing
for state and local government customers of $291.5 million for the
account of IBM; and (4) other financing of $548.9 million for IBM
equipment, as well as related non-IBM equipment to meet IBM
customers' total solution requirements.
The Company's capital lease portfolio primarily includes direct
financing leases. Direct financing leases consist principally of
IBM information handling equipment with terms generally from three
to four years. Operating leases consist principally of IBM
information handling equipment with terms generally from two to
four years.
-16-
<PAGE> 14
FINANCING ORIGINATED (Continued):
For the three months ended September 30, 1999, originations of
working capital financing for dealers and remarketers of
information industry products increased by 1 percent to $3,766.4
million, from $3,717.7 million for the same 1998 period. For the
nine months ended September 30, 1999, originations of working
capital financing for dealers and remarketers of information
industry products increased by 7 percent to $10,644.5 million, from
$9,992.0 million for the same 1998 period.
The growth in working capital financing originations reflects
volume increases in IBM's workstation products for remarketers
financed by the Company during the nine months ended September 30,
1999. Working capital financing receivables arise primarily from
secured inventory and accounts receivable financing for dealers and
remarketers of IBM and non-IBM products. Payment terms for
inventory secured financing generally range from 30 days to 75
days. Payment terms for accounts receivable secured financing
generally range from 30 days to 90 days.
REMARKETING ACTIVITIES
In addition to originating new financing, the Company remarkets
used IBM equipment. This equipment is primarily sourced from
customers at the conclusion of lease transactions and is typically
remarketed in cooperation with the IBM sales force. The equipment
is generally leased or sold to end users. These transactions may be
with existing lessees or, when equipment is returned, with new
customers.
Remarketing activities comprise income from follow-on capital and
operating leases and gross profit on equipment sales, net of
write-downs in residual values of certain leased equipment. For the
three months ended September 30, 1999, remarketing activities
contributed $62.3 million to pretax earnings, an increase of 8
percent compared with $57.7 million for the same 1998 period. For
the nine months ended September 30, 1999, remarketing activities
contributed $198.6 million to pretax earnings, an increase of 23
percent compared with $161.3 million for the same 1998 period.
Refer to Equipment Sales in Management's Discussion and Analysis on
page 16 for additional details.
At September 30, 1999, the investment in remarketed equipment on
capital and operating leases totaled $246.4 million, a 5 percent
decrease from the 1998 year-end investment of $259.7 million.
-17-
<PAGE> 15
FINANCIAL CONDITION
ASSETS
Total assets decreased to $16.2 billion at September 30, 1999,
compared with $16.4 billion at December 31, 1998. This decrease is
primarily attributable to the sale of $274.3 million of factored
IBM receivables during the first quarter of 1999. The assets were
sold at book value, which approximated market value, and therefore
no gain or loss was recognized on the transaction. This decrease
was partially offset by increases in the Company's lease and loan
portfolios.
At September 30, 1999, there were no marketable securities on hand.
At December 31, 1998, marketable securities included corporate debt
securities of $20.8 million and certificates of deposit of $48.0
million. The carrying amount of marketable securities, as reported
in the Consolidated Statement of Financial Position, approximates
market value. These marketable securities were available-for-sale.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the business were financed with $11,328.1 million of
debt at September 30, 1999. Total short-term and long-term debt
increased by $577.0 million, from $10,751.1 million at December 31,
1998. This increase was the result of increases in long-term debt
payable to IBM of $612.5 million, long-term debt payable of $853.2
million, short-term debt payable to IBM of $891.7 million and
commercial paper of $516.6 million, offset by a decline in
short-term notes of $2,297.0 million. Included in long-term debt,
IBM, at September 30, 1999, was $1,791.7 million, payable at market
terms and conditions, with maturity dates ranging from October 6,
2000 to May 13, 2004.
The Company has the option, as approved by the Board of Directors
on December 31, 1998, to issue and sell debt securities in domestic
and foreign markets based upon its need for such funding.
At September 30, 1999, the Company had available $898.2 million of
a shelf registration with the Securities and Exchange Commission
for the issuance of debt securities. Additionally, on September 6,
1999, with an effective date of October 6, 1999, the Company filed
an additional shelf registration statement with the Securities and
Exchange Commission for $10.0 billion, which incorporates the
remaining balance on the prior shelf registration. The Company
intends to issue debt securities under this shelf registration as
the need arises. This allows the Company rapid access to domestic
financial markets. The Company has no firm commitments for the
purchase of debt securities that it may issue from the unused
portion of this shelf registration.
The Company has the option, together with IBM and IBM International
Finance, N.V., to issue and sell debt securities under a Euro
Medium Term Note Programme (EMTN) in an aggregate nominal amount of
up to Euro 4.0 billion, or its equivalent in any other currency.
-18-
<PAGE> 16
FINANCIAL CONDITION (Continued)
At September 30, 1999, there was Euro 1.8 billion available for the
issuance of debt securities under this program. The Company's
issuance of debt securities over the next twelve months under this
program is dependent on prevailing market conditions and its need
for such funding.
The Company has the option, as approved by the Board of Directors
on November 1, 1996, to sell, assign, pledge or transfer up to $3.0
billion of assets to third parties through December 31, 1999.
Included within this $3.0 billion authorization is $450.0 million
of a separate shelf registration for issuance of asset-backed
securities, which the Company has available. The Company's issuance
of any asset-backed securities over the next three months under
this shelf registration is dependent upon prevailing market
conditions and its need for such funding.
The Company is an authorized borrower of up to $3.0 billion under a
$10.0 billion IBM committed global credit facility, and has a
liquidity agreement with IBM for $500.0 million. The Company has
no borrowings outstanding under the committed global credit
facility or the liquidity agreement.
The Company and IBM have signed master loan agreements providing
additional funding flexibility to each other. These agreements
allow for short-term (up to 270-day) funding, made available at
market terms and conditions, upon the request of either the Company
or IBM. The Company had $600.3 million and $58.2 million, of
borrowings outstanding under this agreement at September 30, 1999,
and December 31, 1998, respectively. The Company and IBM have also
signed an additional master loan agreement which allows for
longer-term funding, made available at market terms and conditions,
upon the request of the Company. As of September 30, 1999, and
December 31, 1998, the Company had $2,450.0 million and $1,481.7
million, respectively, outstanding under this agreement.
These financing sources, along with the Company's internally
generated cash and medium-term note and commercial paper programs,
provide flexibility to the Company to grow its lease, working
capital financing and loan portfolios, to fund working capital
requirements and to service debt.
Amounts due to IBM and affiliates include trade payables arising
from purchases of equipment for term leases and installment
receivables, working capital financing receivables for dealers and
remarketers, and software license fees. Also included in amounts
due to IBM and affiliates are income taxes currently payable under
the intercompany tax allocation agreement. Amounts due to IBM and
affiliates decreased by approximately $1,070.6 million to $1,284.1
million at September 30, 1999, from $2,354.7 million at December
31, 1998. This decline was primarily attributable to a $1,024.1
million decrease in the amount payable for capital equipment
purchases and for working capital financings during the first nine
months of 1999, due to the seasonality of the business.
-19-
<PAGE> 17
FINANCIAL CONDITION (Continued)
Total stockholder's equity at September 30, 1999, was $2,098.7
million, up $221.0 million from year-end 1998. The increase in
stockholder's equity reflects net earnings of $296.0 million for
the first nine months of 1999, offset by the payment of $75.0
million in cash dividends to IBM during the first quarter of 1999.
At September 30, 1999, there Company's debt to equity ratio was
5.4:1, compared with 5.7:1 at December 31, 1998.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $6.6 million for the nine
months ended September 30, 1999, compared with total cash provided
before dividends of $5.6 million for the same 1998 period. Total
cash provided before dividends reflects $1,019.2 million of cash
used by investing and financing activities before dividends, offset
by $1,025.8 million of cash provided by operating activities for
the first nine months of 1999.
For the nine months ended September 30, 1998, total cash provided
before dividends reflected $1,016.8 million of cash used by
investing and financing activities before dividends, offset by
$1,022.5 million of cash provided by operating activities. Cash and
cash equivalents at September 30, 1999, totaled $754.4 million, a
decrease of $68.4 million, compared with the balance at December
31, 1998.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 20 percent to $214.7 million for the
three months ended September 30, 1999, from $179.2 million for the
same 1998 period; for the nine months ended September 30, 1999,
income from leases increased 19 percent to $621.1 million, from
$521.4 for the same 1998 period. Improved average lease yields and
reduced residual value writedowns contributed to the overall
increase in income from leases for the three- and nine-month
periods ending September 30, 1999. Additionally, growth in the
lease portfolio during the nine months ended September 30, 1999,
contributed to the increase in lease income. Income from leases
includes lease income resulting from remarketing transactions.
Lease income from remarketing transactions was $57.5 million and
$165.1 million for the three- and nine-month periods ended
September 30, 1999, increases of 7 percent and 11 percent,
respectively, from the comparable 1998 periods.
On a periodic basis, the Company reassesses the future residual
values of its portfolio of leases. In accordance with generally
accepted accounting principles, anticipated increases in specific
future residual values are not recognized before realization and
are thus a source of potential future profits.
-20-
<PAGE> 18
INCOME FROM LEASES (Continued)
Anticipated decreases in specific future residual values,
considered to be other than temporary, are recognized currently. A
review of the Company's $1,259.8 million residual value portfolio
at September 30, 1999, indicated the overall estimated future value
of the portfolio continues to be greater than the value currently
recorded, which is the lower of the Company's cost or net
realizable value. To recognize decreases in the expected future
residual value of specific leased equipment, the Company recorded a
$2.0 million reduction to income from leases during the third
quarter of 1999, for a total of $8.1 million during the first nine
months of 1999, compared with a $6.3 million reduction to income
from leases during the third quarter of 1998 for a total of $23.2
million during the first nine months of 1998.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 13 percent to $63.8
million for the three months ended September 30, 1999, compared
with the same 1998 period. For the first nine months of 1999,
income from working capital financing decreased 6 percent to $172.1
million, as compared with $182.4 million for the first nine months
of 1998. This decrease is primarily due to a decrease in income
from dealer interest caused by lower outstanding receivable
balances and a decline in fee income from IBM due to shorter
payment terms, partially offset by increased income from interest
and loan fees due to the increase in participation loans during the
second and third quarters of 1999.
INCOME FROM LOANS
Income from loans increased 19 percent to $63.0 million for the
three months ended September 30, 1999, as compared with the same
period of 1998. For the first nine months of 1999, income from
loans increased 20 percent to $183.5 million, as compared to the
first nine months of 1998. These increases resulted from higher
asset balances, which were due to the continued growth of financing
originated for software and services.
EQUIPMENT SALES
Equipment sales amounted to $75.3 million for the three months
ended September 30, 1999, compared with $104.0 million for the same
1998 period. For the first nine months of 1999, equipment sales
amounted to $356.0 million, compared with $308.9 million for the
comparable 1998 period.
Gross profit on equipment sales for the three months ended
September 30, 1999 was $6.8 million, compared with $10.6 million
for the same 1998 period. For the first nine months of 1999, gross
profit on equipment sales increased to $41.6 million compared with
$35.7 million for the first nine months of 1998.
-21-
<PAGE> 19
EQUIPMENT SALES (Continued)
The gross profit margin for the third quarter of 1999 decreased to
9.1 percent, compared with 10.2 percent for the same 1998 period.
For the first nine months of 1999, the gross profit margin
increased to 11.7 percent, compared with 11.6 percent for the first
nine months of 1998.
The decrease in sales, gross profit and gross profit margin for the
three months ended September 30, 1999, was attributable to the mix
of products available for sale and changing market conditions for
certain used equipment. For the nine months ended September 30,
1999, these factors were partially offset by the increase in sales
and gross profit from the sale of leased assets to IBM relating to
the sale of IBM's global network to AT&T.
INCOME FROM FACTORED IBM RECEIVABLES:
Income from factored IBM receivables was $3.1 million for the nine
months ended September 30, 1999, compared with $41.1 million for
the first nine months of 1998. This decline is attributable to
the sale of the net assets of ICEFC and ICIFC to IIHFC. Refer to
Accounts Receivable purchases in the Notes to Consolidated
Financial Statements on page 7.
OTHER INCOME
Other income decreased 22 percent to $21.8 million for the three
months ended September 30, 1999, compared with $28.1 million for
the same 1998 period. Other income decreased 14 percent to $68.6
million for the nine months ended September 30, 1999, compared with
$79.8 million for the same 1998 period. The overall decrease in
other income is primarily due to a decline in fees for managing
IBM's state and local government installment and lease financing
receivables portfolio and a decline in interest income on cash.
INTEREST EXPENSE
As a result of a decrease in the Company's average outstanding debt
balance and a decline in interest rates, interest expense decreased
5 percent to $141.3 million for the three months ended September
30, 1999, compared with the three months ended September 30, 1998.
For the nine months ended September 30, 1999, interest expense
decreased 9 percent to $419.9 million, compared with the same
period in 1998. Due to lower interest rates, the Company's
year-to-date average cost of debt through September 30, 1999,
decreased to 5.4 percent, from 5.7 percent for the same 1998
period. A lower average cost of debt and lower average debt
balances evenly contributed to the decline in interest expense for
both the three- and nine-month periods ended September 30, 1999,
compared with the same periods of 1998.
-22-
<PAGE> 20
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $52.1 million
for the three months ended September 30, 1999, compared with $49.5
million for the same 1998 period. For the first nine months of
1999, selling, general, and administrative expenses increased to
$157.7 million, compared with $152.2 million for the comparable
period of 1998. This increase is primarily due to increased
spending on internal information technology systems.
PROVISION FOR RECEIVABLE LOSSES
The Company's portfolio of capital equipment leases and loans is
predominantly with investment grade customers. The Company
generally retains ownership or takes a security interest in any
underlying equipment financed. The Company provides for receivable
losses at the time financings are originated and from time to time
for capital equipment as conditions warrant. The portfolio is
diversified by geography, industry, and individual unaffiliated
customers.
The Company provides for working capital financing receivable
losses on the basis of actual collection experience and estimated
collectibility of the related financing receivables. With the
continued trend toward consolidation in this industry, the
concentration of such financings for certain large dealers and
remarketers of information industry products is significant.
At September 30, 1999, and December 31, 1998, approximately 58
percent and 56 percent, respectively, of working capital financing
receivables outstanding were concentrated in ten working capital
accounts. The Company's working capital financing business is
predominantly with non-investment grade customers. Such financing
receivables are typically collateralized by the inventory and
accounts receivable of the dealers and remarketers. The Company did
not experience material losses in 1998 or in the first nine months
of 1999. The Company does not believe that there is a risk of loss
in this area that would have a material impact on its financial
position or results of operations.
For the three months ended September 30, 1999, the provision for
receivable losses decreased 15 percent to $8.0 million from $9.4
million for the same period of 1998. For the nine months ended
September 30, 1999, the provision for receivable losses decreased
by 11 percent to $23.0 million, compared with $25.9 million for the
first nine months of 1998. The decrease in the provision for
receivable losses for the three- and nine-month periods ended
September 30, 1999, was attributable to lower reserve requirements,
based upon the Company's historical experience and its ability to
effectively manage credit risk and contain losses.
-23-
<PAGE> 21
INCOME TAXES
The provision for income taxes increased to $66.5 million for the
three months ended September 30, 1999, from $52.0 million for the
same period in 1998. For the nine months ended September 30, 1999,
the provision for income taxes increased to $192.4 million, from
$147.7 million for the same period in 1998. The increase in the
provision for income taxes is attributable to the increase in the
Company's pretax earnings for the three- and nine-month periods
ended September 30, 1999, compared with the same periods in 1998.
RETURN ON AVERAGE EQUITY
The results for the first nine months of 1999 yielded an annualized
return on average equity of 20.1 percent, compared with 17.2
percent for the first nine months of 1998.
CLOSING DISCUSSION
The Company's resources continue to be sufficient to enable it to
carry out its mission of offering customers competitive leasing and
financing and providing information technology remarketers with
inventory and accounts receivable financing, which contribute to
the growth and stability of IBM earnings.
-24-
<PAGE> 22
YEAR 2000
The _Year 2000 issue_ arises because many computer hardware and
software systems use only two digits to represent the year. As a
result, these systems and programs may not process dates beyond
1999, which may cause errors in information or systems failures.
Given the uncertainty inherent in any assessment of the potential
Year 2000 issues, the Company recognizes the need to remain
vigilant and is continuing its analysis, assessment, conversion and
contingency planning for the various Year 2000 issues, across its
business.
With respect to its internal systems, the potential Year 2000
impacts extend beyond the Company's information technology systems
to its physical facilities and the manufacturing systems it applies
to returned equipment after the expiration of leases. The Company
is addressing these issues as part of its own efforts and in
coordination with its parent company, IBM, with respect to the
Company's physical facilities and certain applications related to
human resources, finance, accounts receivable and invoicing, among
others. Most conversion efforts have been completed, with extended
system integration planning and contingency planning projects
scheduled throughout 1999. Although the Company believes such
efforts will be successful and does not expect the total costs of
such efforts to exceed $11.0 million over a multi-year period, any
failure or delay could result in a disruption of business and in
the Company incurring substantial additional expense. To minimize
any such potential impact, the Company has initiated a contingency
planning effort.
The Year 2000 readiness of the Company's customers and the hardware
and software offerings from the Company's suppliers, subcontractors
and business partners may vary. Further, some commentators believe
that a significant amount of litigation will arise from Year 2000
issues. The Company continues to believe that it has good defenses
to any such claims brought against it. The Year 2000 issue also
presents a number of other risks and uncertainties that could
affect the Company, including utilities and telecommunications
failures, the lack of personnel skilled in the resolution of Year
2000 issues, and the nature of government responses to the issues,
among others. While the Company continues to believe that the Year
2000 matters discussed above will not have a material impact on its
business, financial condition or results of operations, it remains
uncertain whether or to what extent the Company may be affected.
The Year 2000 statements set forth above are designated _Year 2000
Readiness Disclosures_ pursuant to the Year 2000 Information and
Readiness Disclosure Act (P.L. 105-271).
-25-
<PAGE> 23
FORWARD LOOKING STATEMENTS
Except for the historical information and discussions contained
herein, statements contained in this Report on Form 10-Q may
constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements
involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, including, but not
limited to, the Company's level of equipment financing
originations; the propensity for customers to finance their
acquisition of IBM products and services with the Company; the
competitive environment in which the Company operates; the success
of the Company in developing strategies to manage debt levels; the
ultimate impact of the various Year 2000 issues on the Company's
business, financial condition or results of operation;
non-performance by a customer of contractual requirements; the
concentration of credit risk and creditworthiness of the customers;
the Company's associated collection and asset management efforts;
the Company's determination and subsequent recoverability of
recorded residual values; currency fluctuations on the associated
debt and liabilities; changes in interest rates; non-performance by
the counterparty in derivative transactions; the Company's ability
to attract and retain key personnel; the Company's ability to
manage acquisitions and alliances; legal, political and economic
changes and other risks, uncertainties and factors inherent in the
Company's business and otherwise discussed in this Form 10-Q and in
the Company's other filings with the Securities and Exchange
Commission and in IBM's filings with the SEC.
-26-
<PAGE> 24
Part II - Other Information
Item 1. Legal Proceedings
None material.
Item 6(b). Reports on Form 8-K
A Form 8-K dated July 19, 1999, was filed with respect to the
Company's financial results for the period ended June 30, 1999.
-27-
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
IBM CREDIT CORPORATION
_______________________________
(Registrant)
Date: November 11, 1999 By: /s/ Paula Summa_________
(Paula Summa)
Vice President, Finance
and Chief Financial
Officer
-28-
<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, 1999, 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-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 754,433
<SECURITIES> 0
<RECEIVABLES> 6,094,458
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,221,379
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,641,267
<TOTAL-LIABILITY-AND-EQUITY> 16,221,379
<SALES> 356,012
<TOTAL-REVENUES> 1,403,492
<CGS> 314,444
<TOTAL-COSTS> 314,444
<OTHER-EXPENSES> 157,705
<LOSS-PROVISION> 23,008
<INTEREST-EXPENSE> 419,945
<INCOME-PRETAX> 488,390
<INCOME-TAX> 192,426
<INCOME-CONTINUING> 295,964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295,964
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
