<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 March 31, 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 914-765-3000
____________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
___ ___
As of April 30, 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 April 30, 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 March 31, 1999 and December 31, 1998 . . . . . . . . . . . .1
Consolidated Statement of Earnings for the three
months ended March 31, 1999 and 1998. . . . . . . . . . . . . .2
Consolidated Statement of Cash Flows for the three
months ended March 31, 1999 and 1998. . . . . . . . . . . . . .3
Notes to Consolidated Financial Statements. . . . . . . . . . .5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . .10
Part II - Other Information . . . . . . . . . . . . . . . . . . . . .19
<PAGE> 3
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION>
At At
March 31, December 31,
1999 1998
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . . . . . $ 888,705 $ 822,844
Marketable securities. . . . . . . . . . . 36,760 68,838
Net investment in capital leases . . . . . 5,240,467 5,265,941
Equipment on operating leases, net . . . . 3,439,950 3,619,585
Loans receivable . . . . . . . . . . . . . 2,981,368 3,041,222
Working capital financing receivables. . . 2,311,955 2,789,029
Factored IBM receivables . . . . . . . . . - 292,310
Investments and other assets . . . . . . . 581,718 497,590
___________ ___________
Total Assets $15,480,923 $16,397,359
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . . . . . $ 5,785,858 $ 6,618,695
Short-term debt, IBM . . . . . . . . . . . 477,918 158,527
Due to IBM and affiliates. . . . . . . . . 1,322,089 2,354,650
Interest and other accruals. . . . . . . . 299,318 440,248
Deferred income taxes. . . . . . . . . . . 1,041,398 973,686
Long-term debt . . . . . . . . . . . . . . 2,177,201 1,903,188
Long-term debt, IBM. . . . . . . . . . . . 2,483,150 2,070,651
___________ ___________
Total liabilities . . . . . . . . . . . 13,586,932 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. . . . . . . . . . . . . 1,436,580 1,420,303
___________ ___________
Total stockholder's equity. . . . . . . 1,893,991 1,877,714
___________ ___________
Total Liabilities and Stockholder's Equity $15,480,923 $16,397,359
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE> 4
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31:
(Dollars in thousands)
<CAPTION>
1999 1998
________ ________
<S> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . . $ 88,015 $ 82,383
Operating leases, net of
depreciation. . . . . . . . . 107,004 84,454
________ ________
195,019 166,837
Income from working capital
financing. . . . . . . . . . . . 52,545 66,180
Income from loans . . . . . . . . 60,499 49,816
Equipment sales . . . . . . . . . 97,623 109,829
Income from factored IBM
receivables. . . . . . . . . . . 3,138 15,338
Other income. . . . . . . . . . . 25,692 24,371
________ ________
Total finance and other
income. . . . . . . . . . . . 434,516 432,371
________ ________
COST AND EXPENSES:
Interest. . . . . . . . . . . . . 138,730 156,161
Cost of equipment sales . . . . . 90,000 94,534
Selling, general, and
administrative . . . . . . . . . 49,603 49,657
Provision for receivable losses . 5,564 7,119
________ ________
Total cost and expenses. . . . 283,897 307,471
________ ________
EARNINGS BEFORE INCOME TAXES: 150,619 124,900
Provision for income taxes. . . . . 59,342 49,210
________ ________
NET EARNINGS:. . . . . . . . . $ 91,277 $ 75,690
======== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE> 5
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31:
(Dollars in thousands) 1999 1998
__________ _________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . $ 91,277 $ 75,690
Adjustments to reconcile net earnings to
cash used in operating activities:
Depreciation and amortization. . . . . . . . . 480,873 463,943
Provision for receivable losses. . . . . . . . 5,564 7,119
Increase in deferred income taxes. . . . . . . 67,712 30,428
Decrease in interest and other accruals . . . (140,341) (70,363)
Gross profit on equipment sales. . . . . . . . (7,623) (15,295)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . . . . 97,623 109,829
Decrease in amounts due IBM and affiliates . (1,032,561) (898,335)
Other, net . . . . . . . . . . . . . . . . . 453 3,388
__________ _________
Cash used in operating activities . . . . . . . . (437,023) (293,596)
__________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . . . . (512,412) (563,059)
Collection of capital leases, net of income
earned. . . . . . . . . . . . . . . . . . . . 497,796 570,078
Investment in equipment on operating leases. . (297,274) (368,966)
Investment in loans receivable . . . . . . . . (371,607) (318,368)
Collection of loans receivable, net of
income earned . . . . . . . . . . . . . . . . 428,941 333,856
Purchase of factored IBM receivables . . . . . (120,900)(1,556,471)
Collection of factored IBM receivables . . . . 138,862 1,606,322
Proceeds from the sale of the net
assets of IBM Credit International
Factoring Corporation . . . . . . . . . . . . 273,759 -
Collection of working capital
financing receivables, net . . . . . . . . . 477,910 588,917
Purchases of marketable securities . . . . . . (24,390) (29,000)
Maturities of marketable securities. . . . . . 56,562 53,262
Other, net . . . . . . . . . . . . . . . . . . (142,499) (126,330)
___________ _________
Cash provided by investing activities . . . . . . 404,748 190,241
___________ __________
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE> 6
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31:
(Continued)
1999 1998
__________ _________
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt . . . 849,861 900,106
Repayment of debt with original maturities
of one year or more . . . . . . . . . . . . . (137,776) (105,962)
Repayment of debt with original
maturities within one year, net . . . . . . . (538,949) (824,504)
Cash dividends paid to IBM . . . . . . . . . . (75,000) (25,000)
__________ _________
Cash provided by (used in) financing activities . 98,136 (55,360)
__________ _________
Change in cash and cash equivalents . . . . . . . 65,861 (158,715)
Cash and cash equivalents, January 1. . . . . . . 822,844 792,471
__________ _________
Cash and cash equivalents, March 31 . . . . . . . $ 888,705 $ 633,756
========== =========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<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-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 2.09 and 1.80 for the three
months ended March 31, 1999, and 1998, respectively.
ACCOUNTING CHANGES:
In the first quarter of 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income," which established
standards for displaying comprehensive income and
components. For the three-month periods ending March 31,
1999 and 1998, respectively, other than net earnings, there
were no items to report.
Effective December 31, 1998, the Company adopted SFAS 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 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments. It requires
that 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 stockholders'
equity or net income depending on whether the derivative
instrument qualifies as a hedge and, if so, the nature of
the hedging activity. The Company will adopt this new
standard as of January 1, 2000. 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
$150.0 million and $213.1 million of such financings during
the three months ended March 31, 1999, and 1998,
respectively. At March 31, 1999, and December 31, 1998,
approximately $1,412.6 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 $42.2 million and $32.9 million in the first
three months of 1999 and 1998, respectively.
WORKING CAPITAL FINANCING:
__________________________
The Company provides working capital financing, at market
rates, to certain remarketers of IBM products. Included in
income from working capital financing is $25.9 million and
$30.6 million of fee income earned from divisions of IBM for
the three months ended March 31, 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 another
subsidiary of IBM, IBM International Holdings Finance
Company, Ltd. (IIHFC), all of their factoring assets and
substantially all of their related liabilities.
During the three months ended March 31, 1999 and 1998, ICIFC
and ICEFC acquired IBM customer receivables having a nominal
value of $122.0 million and $1,578.2 million, respectively,
for approximately $120.9 million and $1,556.5 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.
-6-
<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 customer's 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 upon 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.
-7-
<PAGE> 10
SEGMENT REPORTING (Continued):
For the Periods Ending March 31:
Customer Commercial
1999 Financing Financing Total
___________________________ ____________ ______________ ____________
Revenues. . . . . . . . . . $ 365,316 $ 53,182 $ 418,498
Interest expense. . . . . . $ 118,071 $ 12,399 $ 130,470
Earnings before income
taxes . . . . . . . . . . $ 112,866 $ 29,929 $ 142,795
At March 31:
Assets. . . . . . . . . . . $ 11,917,896 $ 2,400,608 $14,318,504
For the Periods Ending March 31:
1998
___________________________
Revenues. . . . . . . . . . $ 339,430 $ 66,906 $ 406,336
Interest expense. . . . . . $ 116,959 $ 20,491 $ 137,450
Earnings before income
taxes . . . . . . . . . . $ 84,797 $ 33,231 $ 118,028
At December 31:
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:
1999 1998
____________ ____________
Revenues:
Total revenues for reportable
segments . . . . . . . . . . $ 418,498 $ 406,336
Other revenues . . . . . . . . 16,018 26,035
____________ ____________
Total consolidated revenues. . $ 434,516 $ 432,371
============ ============
Interest Expense:
Total interest expense for
reportable segments. . . . . $ 130,470 $ 137,450
Other interest expense . . . . 8,260 18,711
____________ ____________
Total consolidated interest
expense . . . . . . . . . . $ 138,730 $ 156,161
============ ============
-8-
<PAGE> 11
SEGMENT REPORTING (Continued):
Earnings Before Income Taxes:
Total earnings before income
taxes. . . . . . . . . . . . $ 142,795 $ 118,028
Other earnings before income
taxes. . . . . . . . . . . . 7,824 6,872
____________ ____________
Total consolidated earnings
before income taxes . . . . $ 150,619 $ 124,900
============ ============
At At
March 31, December 31,
1999 1998
____________ ____________
Assets:
Total assets for reportable
segments . . . . . . . . . . $ 14,318,504 $ 15,023,459
Other assets . . . . . . . . . 1,162,419 1,373,900
____________ ____________
Total consolidated assets . . $ 15,480,923 $ 16,397,359
============ ============
For the quarter ended March 31, 1999, Customer Financing
revenue increased 8 percent to $365.3 million from $339.4
million for the quarter ended March 31, 1998. This is
primarily due to growth in the customer financing lease and
loan portfolio and a reduction in residual value
write-downs.
Earnings before income taxes for Customer Financing
increased 33 percent to $112.9 million for the first quarter
of 1999, compared with $84.8 million for the first quarter
of 1998. This increase is primarily due to the increase in
revenue during the first quarter of 1999, as compared with
the same 1998 period.
Commercial Financing revenue decreased 21 percent to $53.2
million for the quarter ended March 31, 1999, compared with
the same 1998 period. This is due to a decrease in
income from dealer interest due to lower average receivable
balances outstanding and a decline in fee income from IBM
during the first quarter of 1999, compared with the same
1998 period.
Earnings before income taxes for Commercial Financing
decreased 10 percent to $29.9 million for the quarter ended
March 31, 1999, from $33.2 million for the quarter ended
March 31, 1998. This decrease is primarily attributable to
a decrease in income from dealer interest, partially offset
by the shift towards higher margin fee income earned from
IBM.
The Company's business is conducted principally in the
United States; foreign operations are not material.
For the quarters ended March 31, 1999, and 1998, one
customer, IBM, accounted for approximately $109.6 million
and $110.9 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.
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<PAGE> 12
IBM CREDIT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net earnings for the three months ended March 31, 1999, were
$91.3 million, yielding an annualized return on average
equity of 18.3 percent. Net earnings for the three months
ended March 31, 1998, were $75.7 million.
FINANCING ORIGINATED
For the three months ended March 31, 1999, the Company
originated capital equipment financing for end users of
$1,337.1 million, a 1 percent decrease from $1,346.1 million
for the same 1998 period. For the three months ended March
31, 1999, originations of working capital financing for
dealers and remarketers of information industry products
increased by 4 percent to $3,329.1 million, from $3,209.2
million for the same 1998 period.
Capital equipment financings for end users were relatively
flat year-to-year. Decreases in leasing volumes were offset
by increased loan originations during the first quarter of
1999, compared with the same 1998 period.
Capital equipment financings for end users included
purchases of $741.9 million of information handling systems
from IBM, consisting of $475.0 million for capital leases
and $266.9 million for operating leases. In addition,
capital equipment financings for end users included the
following: (1) financing originated for installment
receivables of $70.4 million; (2) financing for IBM software
and services of $301.2 million; (3) installment and lease
financing for state and local government customers of $60.1
million for the account of IBM; and (4) other financing of
$163.5 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.
The growth in working capital financing originations
reflects volume increases in IBM's workstation products for
remarketers financed by the Company during the quarter ended
March 31, 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.
-10-
<PAGE> 13
REMARKETING ACTIVITIES
In addition to originating new financing, the Company
remarkets used IBM equipment. This equipment is primarily
sourced from customers at the conclusion of lease
transactions and is typically remarketed in cooperation with
the IBM sales force. The equipment is generally leased or
sold to end users. These transactions may be with existing
lessees or, when equipment is returned, with new customers.
Remarketing activities are fully integrated in the Company's
financial statements. Remarketing activities comprise income
from follow-on capital and operating leases and gross profit
on equipment sales, net of write-downs in residual values of
certain leased equipment. For the three months ended March
31, 1999, remarketing activities contributed $57.1 million
to pre-tax earnings, an increase of 17 percent compared with
$48.7 million for the same 1998 period. Refer to Equipment
Sales in Management's Discussion and Analysis on page 14 for
additional details.
At March 31, 1999, the net investment in remarketed
equipment on capital and operating leases totaled $258.1
million, a 1 percent decrease from the 1998 year-end
investment of $259.7 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $15.5 billion at March 31, 1999,
compared with $16.4 billion at December 31, 1998. This
decrease is primarily attributable to a decline in the
working capital financing receivables outstanding at March
31, 1999, from year-end 1998. This decline is primarily due
to cash collections exceeding originations of working
capital financing receivables. The decrease in total assets
is also 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 fair
market value and therefore no gain or loss was recognized on
the transaction.
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 March 31, 1999, marketable securities
included investments in corporate debt securities of $12.3
million and other marketable securities of $24.5 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 $10,924.1
million of debt at March 31, 1999. Total short-term and
long-term debt increased by approximately $173.0 million,
from $10,751.1 million at December 31, 1998. The increase
was the result of increases in short-term debt payable to
IBM of $319.4 million, long-term debt payable of $274.0
million and long-term debt payable to IBM of $412.5 million,
partially offset by
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<PAGE> 14
FINANCIAL CONDITION (Continued)
decreases in commercial paper outstanding of $120.5 million
and medium term notes of $712.4 million. Included in
long-term debt, IBM, at March 31, 1999, was $2,483.1 million
payable, at market terms and conditions, with maturity dates
ranging from April 27, 2000 to June 25, 2003.
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 March 31, 1999, the Company had available $1.8 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 4.0 billion in Euro, or
its equivalent in any other currency. At March 31, 1999,
there was Euro 1.7 billion available for the issuance of
debt securities under this program. The Company may issue
debt securities over the next twelve months under this
program, depending 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 twelve months under
this shelf registration is depending on prevailing market
conditions and its need for such funding.
The Company is an authorized borrower of up to $3.0 billion
under a $10.0 billion IBM committed global credit facility,
and has a liquidity agreement with IBM for $500.0 million.
The Company has no borrowings outstanding under the
committed global credit facility or the liquidity agreement.
The Company and IBM have signed master loan agreements
providing additional funding flexibility to each other.
These agreements allow for short-term (up to 270-day)
funding, made available at market terms and conditions, upon
the request of either the Company or IBM. The Company had
borrowings outstanding under this arrangement of $127.9
million and $58.2 million at March 31, 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 March
31, 1999, and December 31, 1998, the Company had $2,150.0
million and $1,481.7 million outstanding under this
agreement.
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<PAGE> 15
FINANCIAL CONDITION (Continued)
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 $1,032.6 million
to $1,322.1 million at March 31, 1999, from $2,354.7 million
at December 31, 1998. This decline was primarily
attributable to the traditional decline in capital equipment
and working capital financing originations between the
fourth and first quarters of any given year.
Total stockholder's equity at March 31, 1999, was $1,894.0
million, up $16.3 million from year-end 1998. The increase
in stockholder's equity reflects net earnings of $91.3
million for the first three months of 1999, offset by the
payment of $75.0 million in cash dividends to IBM during the
first quarter of 1999.
At March 31, 1999, the Company's debt to equity ratio was
5.8:1, compared with 5.7:1 at December 31, 1998.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $140.9 million for
the three months ended March 31, 1999, compared with total
cash used before dividends of $133.7 million for the same
1998 period. Total cash provided before dividends reflects
$577.9 million of cash provided by investing and financing
activities before dividends, offset by $437.0 million of
cash used in operating activities for the first three months
of 1999. For the three months ended March 31, 1998, total
cash used before dividends reflected $159.9 million of cash
provided by investing and financing activities before
dividends, offset by $293.6 million of cash used in
operating activities. Cash and cash equivalents at March 31,
1999, totaled $888.7 million, an increase of $65.9 million,
compared with the balance at December 31, 1998.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 17 percent to $195.0 million
for the three months ended March 31, 1999, from $166.8
million for the same 1998 period. Factors contributing to
this increase are the growth in the average portfolio yield
and average asset balances outstanding, as well as a
reduction in residual value write-downs.
-13-
<PAGE> 16
RESULTS OF OPERATIONS (Continued)
Income from leases includes lease income resulting from
remarketing transactions. Lease income from remarketing
transactions was $50.5 million for the three months ended
March 31, 1999, an increase of 22 percent from the same 1998
period.
On a periodic basis, the Company reassesses the future
residual values of its portfolio of leases. In accordance
with generally accepted accounting principles, anticipated
increases in specific future residual values are not
recognized before realization and are thus a source of
potential future profits. Anticipated decreases in specific
future residual values, that are considered to be other than
temporary, are recognized currently.
A review of the Company's $1,240.9 million residual value
portfolio at March 31, 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 $1.0
million reduction to income from leases during the first
quarter of 1999, compared with a $9.3 million reduction to
income from leases during the first quarter of 1998.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing decreased 21 percent
to $52.5 million for the three months ended March 31, 1999,
compared with the same 1998 period. This decline was
primarily due to a decrease in income from dealer interest
caused by lower outstanding receivable balances and a
decline in fee income from IBM.
INCOME FROM LOANS
Income from loans increased 21 percent to $60.5 million for
the three months ended March 31, 1999, compared with the
respective 1998 period. This increase resulted from higher
asset balances, which in turn were primarily due to an
increase in financing originated for software and services
during 1998 and the first three months of 1999.
EQUIPMENT SALES
Equipment sales amounted to $97.6 million for the three
months ended March 31, 1999, compared with $109.8 million
for the same 1998 period. The decrease in equipment sales
is primarily attributable to the growth of equipment
remarketed as operating leases, rather than as sales. The
revenue associated with outright sales and sales-type leases
is included in equipment sales. Company-owned equipment may
be sold or re-leased to existing lessees or, when equipment
is returned, to new users of that equipment.
Gross profit on equipment sales for the three months ended
March 31, 1999, was $7.6 million, a decrease of 50 percent,
compared with $15.3 million for the same 1998 period. The
gross profit margin for first quarter of 1999 decreased to
7.8 percent, compared with 13.9 percent for the same
-14-
<PAGE> 17
RESULTS OF OPERATIONS (Continued)
1998 period. The mix of products available for sale and
changing market conditions for certain used equipment during
the applicable periods are factors contributing to the
changes in gross profit margin.
INCOME FROM FACTORED IBM RECEIVABLES:
Income from factored IBM receivables was $3.1 million for
the three months ended March 31, 1999, compared with $15.3
million for the same 1998 period. The decline in income
from factored IBM receivables is primarily attributable to
the sale of the net assets of ICEFC and ICIFC to IIHFC.
OTHER INCOME
Other income increased 5 percent to $25.7 million for the
three months ended March 31, 1999, compared with $24.4
million for the same 1998 period. This increase is
primarily attributable to an increase in fees for servicing
of IBM financing receivables securitized and sold during the
first quarter of 1999, compared with the same 1998 period.
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 11 percent to $138.7 million for
the three months ended March 31, 1999, compared with the
same 1998 period. Due to the generally lower interest
rates, the Company's average cost of debt through March 31,
1999, decreased to 5.3 percent, from 5.6 percent for the
same 1998 period.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $49.6
million for the three months ended March 31, 1999, compared
with $49.7 million for the same 1998 period. Selling,
general, and administrative expenses for the first quarter
ended March 31, 1999, were relatively flat, compared with
the respective 1998 period.
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
-15-
<PAGE> 18
RESULTS OF OPERATIONS (Continued)
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 segment, the concentration of
such financings for certain large dealers and remarketers of
information industry products is significant.
At March 31, 1999, and December 31, 1998, approximately 59
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 three 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.
The provision for receivable losses decreased to $5.6
million for the quarter ended March 31, 1999, compared with
$7.1 million for the same 1998 period. This decrease in the
provision for receivable losses 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 21 percent to $59.3
million for the three months ended March 31, 1999, from
$49.2 million for the same period in 1998. The increase in
the provision for income taxes is primarily attributable to
the increase in the Company's pretax earnings for the first
quarter of 1999, compared with the same 1998 period.
RETURN ON AVERAGE EQUITY
The results for the first three months of 1999 yielded an
annualized return on average equity of 18.3 percent,
compared with 17.9 percent for the first three months of
1998.
CLOSING DISCUSSION
Management believes 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.
-16-
<PAGE> 19
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 its 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 the 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).
-17-
<PAGE> 20
FORWARD LOOKING STATEMENTS
Except for the historical information and discussions
contained herein, statements contained in this Report on
Form 10-Q may constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual
results to differ materially, including, but not limited to,
the Company's level of equipment financing originations; the
propensity for customers to finance their acquisition of IBM
products and services with the Company; the competitive
environment in which the Company operates; the success of
the Company in developing strategies to manage debt levels;
the ultimate impact of the various Year 2000 issues on the
Company's business, financial condition or results of
operations; nonperformance 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;
nonperformance 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.
-18-
<PAGE> 21
Part II - Other Information
___________________________
Item 1. Legal Proceedings
__________________________
None material.
Item 6(b). Reports on Form 8-K
_______________________________
A Form 8-K dated January 21, 1999, was filed with respect to the Company's
financial results for the period ended December 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IBM CREDIT CORPORATION
______________________
(Registrant)
Date: May 13, 1999 By: /s/ Kimberly A. Kispert
_________________ ___________________________
(Kimberly A. Kispert)
Vice President, Finance
and Chief Financial Officer
-19-
<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 THREE MONTHS ENDED MARCH 31, 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 888,705
<SECURITIES> 36,760
<RECEIVABLES> 5,293,323
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,480,923
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,436,580
<TOTAL-LIABILITY-AND-EQUITY> 15,480,923
<SALES> 97,623
<TOTAL-REVENUES> 434,516
<CGS> 90,000
<TOTAL-COSTS> 90,000
<OTHER-EXPENSES> 49,603
<LOSS-PROVISION> 5,564
<INTEREST-EXPENSE> 138,730
<INCOME-PRETAX> 150,619
<INCOME-TAX> 59,342
<INCOME-CONTINUING> 91,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,277
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
