<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, 2000
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, 2000, 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, 2000: 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, 2000 and December 31, 1999 . . . . . . . . . . . 1
Consolidated Statement of Earnings for the three and nine
months ended September 30, 2000 and 1999. . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2000 and 1999. . . . . . . . . . . . . . . . 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
(unaudited)
(Dollars in thousands)
<CAPTION>
At At
September 30, December 31,
2000 1999
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $ 839,412 $ 600,111
Net investment in capital leases . 5,408,612 5,337,200
Equipment on operating leases, net 2,677,589 3,386,686
Loans receivable . . . . . . . . . 3,817,952 3,535,498
Working capital financing
receivables. . . . . . . . . . . 2,617,973 2,963,583
Investments and other assets . . . 512,904 521,627
__________ ___________
Total Assets $15,874,442 $16,344,705
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . $ 4,942,922 $ 5,491,441
Short-term debt-IBM. . . . . . . . 3,123,862 1,641,447
Due to IBM and affiliates. . . . . 1,203,296 1,976,167
Interest and other accruals. . . . 468,756 454,261
Deferred income taxes. . . . . . . 913,196 877,916
Long-term debt . . . . . . . . . . 1,644,316 2,279,437
Long-term debt-IBM . . . . . . . . 1,587,904 1,391,702
___________ ___________
Total liabilities . . . . . . . 13,884,252 14,112,371
___________ ___________
Stockholder's equity:
Capital stock, par value $1.00 per share
Shares authorized: 10,000
Shares issued and outstanding:
936 in 2000 and 1999 . . . . 457,411 457,411
Retained earnings. . . . . . . . . 1,532,779 1,774,923
___________ ___________
Total stockholder's equity. . . 1,990,190 2,232,334
___________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $15,874,442 $16,344,705
=========== ===========
<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
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
________ ________ _________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . .$102,834 $ 99,887 $299,986 $285,419
Operating leases, net of
depreciation. . . . . . 132,478 114,796 374,264 335,671
________ ________ _________ ________
235,312 214,683 674,250 621,090
Income from working capital
financing. . . . . . . . . 70,309 63,755 198,010 171,179
Income from loans . . . . . 76,476 63,009 218,786 183,495
Equipment sales . . . . . . 152,831 75,303 423,253 356,012
Other income. . . . . . . . 14,577 21,821 50,343 71,716
________ ________ _________ _________
Total finance and other
income. . . . . . . . . 549,505 438,571 1,564,642 1,403,492
________ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . 162,218 141,255 452,854 419,945
Cost of equipment sales . . 137,973 68,462 384,215 314,444
Selling, general and
administrative . . . . . . 75,927 52,087 210,603 157,705
Provision for receivable
losses . . . . . . . . . . 94 8,003 8,952 23,008
_______ ________ _________ _________
Total cost and expenses. 376,212 269,807 1,056,624 915,102
_______ ________ _________ _________
EARNINGS BEFORE INCOME TAXES. 173,293 168,764 508,018 488,390
Provision for income taxes. . 68,279 66,493 200,162 192,426
________ ________ _________ _________
NET EARNINGS. . . . . . . . .$105,014 $102,271 $307,856 $295,964
========= ======= ========= ========
<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
(Unaudited)
(Dollars in thousands)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
___________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . $ 307,856 $ 295,964
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . 1,429,794 1,549,007
Provision for receivable losses. . . . . 8,952 23,008
Increase in deferred income taxes. . . . 35,280 48,912
Increase (decrease) in interest and
other accruals . . . . . . . . . . . . 14,495 (147,228)
Cost of equipment sold. . . . . . . . . 349,260 281,638
Decrease in amounts due IBM and
affiliates . . . . . . . . . . . . . . (772,871) (1,070,525)
Other, net . . . . . . . . . . . . . . . 3,616 45,066
___________ ___________
Cash provided by operating activities . . . 1,376,382 1,025,842
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . (1,959,101) (1,477,121)
Collections on capital leases, net of
income earned . . . . . . . . . . . . . 1,788,285 1,383,860
Investment in equipment on operating
leases. . . . . . . . . . . . . . . . . (946,150) (1,317,050)
Investment in loans receivable . . . . . (1,446,609) (1,457,151)
Collections on loans receivable, net
of interest earned. . . . . . . . . . . 1,163,805 1,234,121
Collections on working capital financing
receivables, net. . . 327,408 22,203
Purchases of marketable securities . . . - (24,390)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . - 93,203
Cash payment for lease portfolio
acquired . . . . . . . . . . . . . . . - (176,613)
Proceeds from the sale of the net assets
of IBM Credit International Factoring
Corporation. . . . . . . . . . . . . . - 273,759
Other, net . . . . . . . . . . . . . . . (11,748) (49,954)
___________ ___________
Cash used in investing activities . . . . . (1,084,110) (1,495,133)
___________ ___________
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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-4-
<PAGE> 6
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
Nine Months Ended
September 30,
2000 1999
___________ ___________
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . . . 1,442,000 1,674,288
Repayment of debt with original
maturities of one year or more . . . . . (632,080) (700,543)
Repayment of debt with original
maturities within one year, net. . . . . (312,891) (497,865)
Cash dividends paid to IBM. . . . . . . . (550,000) (75,000)
___________ ___________
Cash (used in) provided by financing
activities. . . . . . . . . . . . . . . . (52,971) 400,880
___________ ___________
Change in cash and cash equivalents. . . . . 239,301 (68,411)
Cash and cash equivalents, January 1 . . . . 600,111 822,844
___________ ___________
Cash and cash equivalents, September 30. . . $ 839,412 $ 754,433
=========== ===========
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.
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
-5-
<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.
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance with
applicable Securities and Exchange Commission requirements was 2.12 and
2.16 for the nine months ended September 30, 2000, and 1999, respectively.
ACCOUNTING CHANGES:
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 September 15, 2000, although early adoption
is encouraged. SFAS No. 133 and SFAS No. 138, _Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment to FASB
Statement No. 133,_ (SFAS 133) establish accounting and reporting
standards for derivative instruments. They require 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. The Company will adopt these standards as of January 1,
2001. Based on the Company's risk management portfolio, market rates and
currently published guidelines as of September 30, 2000, the Company does
not currently expect the adoption of SFAS 133 to have a material effect on
the Company's results of operations and financial condition. The actual
effect on the Company's financial statements will depend on the fair value
of the Company's derivatives and related financial instruments at the date
of adoption. The effect is also contingent upon the outcome of current
deliberations on certain issues by the Derivatives Implementation Group
(DIG) and the approval of the DIG's recommendations by the Financial
Accounting Standards Board.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), _Revenue Recognition in
Financial Statements,_ which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. The Company is currently reviewing the provisions of SAB 101 and
will complete this review by the end of the fourth quarter of 2000.
<PAGE> 8
RELATED COMPANY TRANSACTIONS:
-6-
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 $456.8 million and $690.1 million of such
financings during the nine months ended September 30, 2000, and 1999,
respectively. At September 30, 2000, and December 31, 1999, $1,326.4
million and $1,437.1 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 $167.8
million and $137.3 million for the first nine months of 2000, and 1999,
respectively.
The Company provides working capital financing, at market rates, to
certain remarketers of IBM products. IBM pays the Company a fee to
provide an interest-free financing period to its remarketers. Included in
income from working capital financing is $62.9 million and $74.9 million
of fee income earned from divisions of IBM for the nine months ended
September 30, 2000, and 1999, respectively.
The Company sells used equipment to IBM at the conclusion of IBM's lease
or from the Company's inventory. For the nine months ended September 30,
2000, and 1999, the Company's sales of equipment to IBM amounted to $103.1
million and $134.8 million, respectively.
In 1999, as part of IBM's sale of its global network to AT&T, the Company
sold approximately $76.3 million in leased assets to IBM with a cost of
$56.5 million resulting in gross profit of $19.8 million.
In the first quarter of 2000, the Company and IBM amended their operating
agreement to allow IBM to charge the Company for shared expenses at the
corporate and geographic levels. Where practical, shared expenses are
determined based upon measurable drivers of expense. When a clear and
measurable driver cannot be identified, shared expenses are determined on
a financial basis that is consistent with the Company's management system.
Management believes that these methods are reasonable. These expenses
amounted to $66.9 million for the nine months ended September 30, 2000,
and are included in selling, general and administrative expenses.
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. Also included in the
commercial financing segment are participation loans. Participation loans
-7-
<PAGE> 9
SEGMENT REPORTING (Continued):
are loans in which the Company has purchased a fixed percentage of a
specific customer's loan facility from a bank or other lending
institution. The Company then receives its fixed percentage of interest
and loan fees less administrative fees charged by the agent bank.
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.
(in thousands)
For the Three Months Ended September 30:
Customer Commercial
2000 Financing Financing Total
______________________ _____________ ____________ ___________
Finance and other income $ 461,467 $ 78,433 $ 539,900
Interest expense....... $ 130,154 $ 26,234 $ 156,388
Earnings before income
taxes................ $ 126,084 $ 43,436 $ 169,520
1999
______________________
Finance and other income $ 361,518 $ 64,252 $ 425,770
Interest expense....... $ 116,413 $ 16,427 $ 132,840
Earnings before income
taxes................ $ 129,732 $ 34,722 $ 164,454
For the Nine Months Ended September 30:
Customer Commercial
2000 Financing Financing Total
______________________ _____________ ____________ ___________
Finance and other income $ 1,315,716 $ 215,200 $ 1,530,916
Interest expense....... $ 366,052 $ 69,182 $ 435,234
Earnings before income
taxes................ $ 385,888 $ 106,025 $ 491,913
-8-
<PAGE> 10
SEGMENT REPORTING (Continued):
Customer Commercial
1999 Financing Financing Total
________________________ _____________ ____________ ___________
Finance and other income $ 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
At September 30, 2000:
Assets................. $ 11,684,812 $ 3,051,462 $14,736,274
At December 31, 1999:
Assets................. $ 12,537,711 $ 2,993,245 $15,530,956
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 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
_________ _________ __________ __________
(in thousands)
Finance and other income:
Total finance and other income
for reportable segments..... $ 539,900 $ 425,770 $1,530,916 $1,360,520
Other revenues............... 9,605 12,801 33,726 42,972
_________ _________ __________ __________
Total consolidated finance
and other income........... $ 549,505 $ 438,571 $1,564,642 $1,403,492
========= ========= ========== ==========
Interest Expense:
Total interest expense for
reportable segments......... $ 156,388 $ 132,840 $ 435,234 $ 394,130
Other interest expense....... 5,830 8,415 17,620 25,815
_________ ________ _________ __________
Total consolidated interest
expense..................... $ 162,218 $ 141,255 $ 452,854 $ 419,945
========= ========= ========== ==========
Earnings Before Income Taxes:
Total earnings before income
taxes for reportable segments$ 169,520 $ 164,454 $ 491,913 $ 471,313
Other earnings before income
taxes...................... 3,773 4,310 16,105 17,077
_________ _________ __________ __________
Total consolidated earnings
before income taxes......... $ 173,293 $ 168,764 $ 508,018 $ 488,390
========= ========= ========== ==========
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<PAGE> 11
SEGMENT REPORTING (Continued):
At At
September 30, December 31,
2000 1999
_____________ ______________
Assets:
Total assets for reportable
segments.................... $ 14,736,274 $ 15,530,956
Other assets.................. 1,138,168 813,749
_____________ _____________
Total consolidated assets..... $ 15,874,442 $ 16,344,705
============= =============
For the three months ended September 30, 2000, and 1999, IBM accounted for
$128.7 million and $85.0 million, respectively, of the Company's
consolidated revenues. For the nine months ended September 30, 2000, and
1999, IBM accounted for $357.5 million and $385.9 million, respectively,
of the Company's consolidated revenues.
The Company's business is conducted principally in the United States;
foreign operations are not material.
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 September 30, 2000, were $105.0
million. Net earnings for the nine months ended September 30, 2000, were
$307.9 million, yielding an annualized return on average equity of 18.4
percent. Net earnings for the three and nine months ended September 30,
1999, were $102.3 million and $296.0 million, respectively.
FINANCING ORIGINATED
For the three months ended September 30, 2000, the Company originated
customer equipment financing for end users of $1,654.1 million, an 11
percent increase from $1,486.5 million for the same period of 1999. For
the nine months ended September 30, 2000, the Company originated customer
equipment financing for end users of $4,332.7 million, a 10 percent
decrease from $4,817.2 million for the same period of 1999.
The overall decline in customer equipment financing originated is related
to a decrease in demand in the first half of 2000 for IBM's advanced
information processing products caused by the lingering effects of the
Year 2000 computer issue. These effects have eased in the third quarter
of 2000, as the Company's customers fully utilized the capacity that had
been reserved for Year 2000 issues, which caused the increase in
originations the Company experienced in the third quarter of 2000.
For the nine months ended September 30, 2000, customer financing
originations for end users included purchases of $2,184.8 million of IBM
information handling systems, consisting of $1,538.1 million for capital
leases and $646.7 million for operating leases. In addition, customer
financing originations for end users also included the following: (1)
financing for IBM software and services of $1,231.1 million; (2) financing
of $683.4 million for remarketed IBM equipment, as well as related non-IBM
equipment, software and services to meet IBM customers' total solution
requirements; (3) installment and lease financing for state and local
government customers of $131.5 million for the account of IBM; and (4)
financing originated for installment receivables of $101.9 million.
The Company's capital lease portfolio primarily includes direct financing
leases. Both direct financing leases and operating leases consist
principally of advanced information processing products with terms
generally from two to three years.
For the three months ended September 30, 2000, originations of working
capital financing of inventory for dealers and remarketers of information
industry products decreased by 10 percent to $3,407.9 million, from
$3,766.4 million for the same period of 1999. For the nine months ended
September 30, 2000, originations of working capital financing of inventory
for dealers and remarketers of information industry products decreased by
10 percent to $9,538.0 million, from $10,644.5 million for the same period
of 1999.
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<PAGE> 13
FINANCING ORIGINATED (Continued)
The decline in working capital financing originations of inventory
reflects volume decreases in IBM's workstation products, as well as volume
decreases, in non-IBM products, for remarketers financed by the Company
during the first nine months of 2000.
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
and non-IBM equipment. This equipment is primarily sourced from the
conclusion of lease transactions and is often 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, extensions of existing 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, 2000, the remarketing
activities contributed $63.3 million to pretax earnings, an increase of 2
percent compared with $62.3 million for the same period of 1999. For the
nine months ended September 30, 2000, the remarketing activities
contributed $212.7 million to pretax earnings, an increase of 7 percent
compared with $198.6 million for the first nine months of 1999.
At September 30, 2000, the investment in remarketed equipment on capital
and operating leases totaled $289.5 million, compared with the 1999
year-end investment of $281.5 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $15.9 billion at September 30, 2000, compared
with $16.3 billion at December 31, 1999. This decrease is primarily due
to the decrease in volumes for operating lease assets during the first
nine months of 2000, caused by the lingering effects of the Year 2000
computer issue, which have eased during the third quarter of 2000.
Additionally, the decline in working capital financing receivables caused
by the traditional seasonality of IBM's business contributed to the
overall decline in the Company's assets. Increases in the Company's
capital lease and loan portfolio and cash balances partially offset these
decreases.
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<PAGE> 14
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $11,299.0 million of debt at
September 30, 2000, an increase of $495.0 million, from $10,804.0 million
at December 31, 1999. This increase was the result of increases in
short-term debt-IBM of $1,482.4 million and long-term debt-IBM of $196.2
million, offset by decreases in commercial paper outstanding of $1.4
million, short-term debt of $547.1 million, and long-term debt of $635.1
million. Long-term debt-IBM of $1,587.9 million at September 30, 2000, is
payable at market terms and conditions and had maturity dates ranging from
October 15, 2001, to May 13, 2004. Interest expense of $148.5 million and
$93.6 million was incurred on loans from IBM and affiliates during the
nine months ended September 30, 2000, and 1999, respectively.
At September 30, 2000, the Company had available $9.8 billion of a shelf
registration with the Securities and Exchange Commission (SEC) for the
issuance of debt securities. The Company may 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, to issue and sell debt
securities under a Euro Medium Term Note Programme(EMTN)in an aggregate
nominal amount of up to EUR 4.0 billion, or its equivalent in any other
currency. At September 30, 2000, there was EUR 14.2 million available for
the issuance of debt securities under this program. The Company may issue
debt securities during the next twelve months under this program,
dependent 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. At September
30, 2000, the Company had $320.1 million of borrowings outstanding under
this agreement. At December 31, 1999, the Company had no borrowings
outstanding under this agreement.
The Company and IBM have also signed an additional master loan agreement
which allows for longer-term funding, made available at market terms and
conditions, upon the request of the Company. At September 30, 2000, and
December 31, 1999, the Company had $4,391.7 million and $3,033.1 million,
respectively, of borrowings outstanding under this agreement.
The Company periodically pays dividends to IBM in order to maintain its
capital structure at appropriate levels.
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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 and service fees. Also included in amounts due to IBM and
affiliates are amounts due for services received from IBM under the
intercompany operating agreement, as well as income taxes currently
payable under the intercompany tax allocation agreement. Amounts due to
IBM and affiliates decreased by approximately $772.9 million to $1,203.3
million at September 30, 2000, from $1,976.2 million at December 31, 1999.
This decrease was primarily attributable to a decrease in the amount
payable for capital equipment purchases during 2000 due to the lingering
effects of the Year 2000 computer issue, the traditional seasonality of
IBM's volumes and a decrease in the amount due to IBM for income taxes due
to the timing the Company's income tax payments.
At September 30, 2000, the Company's debt to equity ratio was 5.7:1,
compared with 4.8:1 at December 31, 1999.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $789.3 million for the first nine
months of 2000, compared with $6.6 million for the same period of 1999.
For the first nine months of 2000, total cash provided before dividends
reflects $1,376.4 million of cash provided by operating activities, offset
by $587.1 million of cash used in investing and financing activities
before dividends. For the first nine months of 1999, total cash provided
before dividends reflects $1,025.8 million of cash provided by operating
activities, offset by $1,019.2 million of cash used by investing and
financing activities before dividends. Cash and cash equivalents at
September 30, 2000, totaled $839.4 million, an increase of $239.3 million,
compared with the balance at December 31, 1999.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 10 percent to $235.3 million for the quarter
ended September 30, 2000, from $214.7 million for the same period in 1999;
for the nine months ended September 30, 2000, income from leases increased
9 percent to $674.3 million from $621.1 million for the same 1999 period.
These increases are primarily due to improved average lease yields. Income
from leases includes lease income resulting from remarketing transactions.
Lease income from remarketing transactions decreased 10 percent to $51.5
million, compared with $57.5 million for the same 1999 period. For the
nine months ended September 30, 2000, lease income from remarketing
transactions increased 8 percent to $177.6 million, compared with $165.1
million for the first nine months of 1999.
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RESULTS OF OPERATIONS (Continued)
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 $1,054.0 million residual value portfolio at
September 30, 2000, 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.
Although the Company did not recognize a write-down of residual values
during the third quarter of 2000, the Company did record a $7.3 million
reduction to income from leases during the first nine months of 2000, to
recognize decreases in the expected future residual value of specific
leased equipment. The Company recorded a write-down of residual values of
$2.0 million during the third quarter of 1999, for a total of $8.1 million
for the first nine months of 1999.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 10 percent to $70.3
million for the three months ended September 30, 2000, compared with $63.8
million for the same period of 1999. For the nine months ended September
30, 2000, income from working capital financing increased 16 percent to
$198.0 million, compared with $171.2 million for the same period of 1999.
These increases were primarily due to additional income from revolving
participation loans. Income from revolving participation loans increased
to $28.5 million for the first nine months of 2000, compared with $13.2
million for the same period of 1999. Additionally, an increase of $10.5
million in interest income from dealers due to higher yields contributed
to the increase in income from working capital financing for the first
nine months of 2000, compared with the same period of 1999.
INCOME FROM LOANS
Income from loans increased 21 percent to $76.5 million for the third
quarter of 2000, compared with $63.0 million for the third quarter of
1999. For the nine months ended September 30, 2000, income from loans
increased 19 percent to $218.8 million, compared with $183.5 million for
the same 1999 period. These increases were due to higher average loan
balances for the first nine months of 2000, compared with the same period
of 1999. Additionally, income from term participation loans contributed
to the increase in loan income. Income from term participation loans
amounted to $17.2 million and $0.9 million for the nine months ended
September 30, 2000, and 1999, respectively.
EQUIPMENT SALES
Equipment sales amounted to $152.8 million for the third quarter of 2000,
compared with $75.3 million for the same period of 1999; for the first
nine months of 2000, equipment sales amounted to $423.3 million, compared
with $356.0 million for the same 1999 period.
<PAGE> 17
RESULTS OF OPERATIONS (Continued)
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Gross profit on equipment sales for the third quarter of 2000 was $14.9
million compared with $6.8 million for the third quarter of 1999. For the
first nine months of 2000, gross profit from equipment sales decreased to
$39.0 million compared with $41.6 million for the same period of 1999.
The gross profit margin for the third quarter of 2000 increased to 9.7
percent, compared with 9.1 percent for the same 1999 period. For the
first nine months of 2000, the gross profit margin decreased to 9.2
percent, compared with 11.7 percent for the first nine months of 1999.
Excluding the sale of $76.3 million of leased equipment, with a gross
profit of $19.8 million, to IBM in relation to IBM's sale of its global
network business to AT&T in the second quarter of 1999, equipment sales,
gross profit and gross profit margin increased for the first nine months
of 2000, compared with the same period of 1999.
OTHER INCOME
Other income decreased 33 percent to $14.6 million for the third quarter
of 2000, compared with $21.8 million for the same period of 1999. For the
nine months ended September 30, 2000, other income decreased 30 percent to
$50.3 million, compared with $71.7 million for the nine months ended
September 30, 1999. These decreases in other income are primarily
attributable to a decline in the fees for the servicing of IBM's federal,
state and local lease and loan portfolio, interest income on cash and
factoring income.
INTEREST EXPENSE
Interest expense increased 15 percent to $162.2 million for the third
quarter of 2000, compared with $141.3 million for the same 1999 period.
For the first nine months of 2000, interest expense increased 8 percent to
$452.9 million, compared with $419.9 million for the first nine months of
1999. These increases in interest expense are primarily due to higher
interest rates. The Company's year-to-date average cost of debt for the
first nine months of 2000 increased to 5.9 percent from 5.4 percent for
the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $75.9 million for the
third quarter of 2000, an increase of 46 percent compared with $52.1
million for the same period in 1999. For the first nine months of 2000,
selling, general and administrative expenses increased 34 percent to
$210.6 million, compared with $157.7 million for the first nine months of
1999. These increases are primarily attributable to the increase in the
amount IBM charged the Company for services received. In the first
quarter of 2000, the Company renegotiated its operating agreement with IBM
at IBM's request. Refer to Related Company Transactions in the Notes to
Consolidated Financial Statements on page 6.
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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 region, industry and
individual unaffiliated customer.
The Company provides for working capital financing receivable losses on
the basis of actual collection experience and estimated collectibility of
the related financing receivables. With the continued trend toward
consolidation in this industry, the concentration of such financings for
certain large dealers and remarketers of information industry products,
while continuously declining, remains significant. At September 30, 2000,
and December 31, 1999, approximately 35 percent and 55 percent,
respectively, of the 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 1999 or in the first nine
months of 2000.
The overall provision for receivable losses decreased to $0.1 million for
the third quarter of 2000, compared with $8.0 million for the same period
in 1999. For the nine months ended September 30, 2000, the provision for
receivable losses decreased to $9.0 million, compared with $23.0 million
for the same period of 1999. The decline in the provision for receivable
losses was primarily attributable to lower reserve requirements, based
upon the Company's historical loss experience, assessment of
collectibility of specific receivables and its ability to effectively
manage credit risk.
INCOME TAXES
The provision for income taxes increased 3 percent to $68.3 million for
the quarter ended September 30, 2000, compared with $66.5 million for the
same period in 1999. For the first nine months of 2000, the provision for
income taxes increased 4 percent to $200.2 million, compared with $192.4
million for the nine months ended September 30, 1999. These increases are
due to the increase in pretax earnings for the third quarter and the first
nine months of 2000, compared with the same periods of 1999.
RETURN ON AVERAGE EQUITY
The results for the first nine months of 2000 yielded an annualized return
on average equity of 18.4 percent, compared with 20.1 percent for the same
period of 1999.
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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 contributes to the growth and
stability of IBM earnings.
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FORWARD LOOKING STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Quarterly Report on Form 10-Q may constitute
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to
differ materially, including, but not limited to, the Company's level of
equipment financing originations; the propensity for customers to finance
their acquisition of IBM products and services with the Company; the
competitive environment in which the Company operates; the success of the
Company in developing strategies to manage debt levels; the ultimate
impact of the various Year 2000 issues on the Company's business,
financial condition or results of operations; non-performance by a
customer of contractual requirements; the concentration of credit risk and
creditworthiness of the customers; the Company's associated collection and
asset management efforts; the Company's determination and subsequent
recoverabiltiy of recorded residual values; currency fluctuations on the
associated debt and liabilities; change 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 SEC and in IBM's filings with the SEC.
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<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 July 17, 2000, was filed with respect to the Company's
financial results for the six month period ended June 30, 2000.
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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 13, 2000 By: /s/ Paula L. Summa
(Paula L. Summa)
Vice President, Finance
and Chief Financial Officer
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