<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, 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 April 30, 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 April 30, 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 March 31, 2000 and December 31, 1999 . . . . . . 1
Consolidated Statement of Earnings for the Three
Months ended March 31, 2000 and 1999. . . . . . . . 2
Consolidated Statement of Cash Flows for the Three
Months ended March 31, 2000 and 1999. . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . 9
Part II - Other Information. . . . . . . . . . . . . . . . 17
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<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands)
<CAPTION> At At
March 31, December 31,
2000 1999
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $ 485,574 $ 600,111
Net investment in capital leases . 5,248,945 5,337,200
Equipment on operating leases, net 3,087,253 3,386,686
Loans receivable . . . . . . . . . 3,419,989 3,535,498
Working capital financing
receivables. . . . . . . . . . . 2,186,251 2,963,583
Investments and other assets . . . 470,416 521,627
__________ ___________
Total Assets $14,898,428 $16,344,705
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . $ 4,504,819 $ 5,491,441
Short-term debt, IBM . . . . . . . 3,035,383 1,641,447
Due to IBM and affiliates. . . . . 824,272 1,976,167
Interest and other accruals. . . . 349,348 454,261
Deferred income taxes. . . . . . . 890,909 877,916
Long-term debt . . . . . . . . . . 2,026,771 2,279,437
Long-term debt, IBM. . . . . . . . 937,904 1,391,702
___________ ___________
Total liabilities . . . . . . . 12,569,406 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. . . . . . . . . 1,871,611 1,774,923
___________ ___________
Total stockholder's equity. . . 2,329,022 2,232,334
___________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $14,898,428 $16,344,705
=========== ===========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31,
2000 1999
________ ________
<S> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . . . . . . . . . . $ 94,955 $ 88,015
Operating leases, net of depreciation. . 122,805 107,004
_________ ________
217,760 195,019
Income from working capital financing . . 68,296 52,545
Income from loans . . . . . . . . . . . . 68,592 60,499
Equipment sales . . . . . . . . . . . . . 120,481 97,623
Other income . . . . . . . . . . . . . . 21,883 28,830
_________ ________
Total finance and other income . . . . 497,012 434,516
_________ ________
COST AND EXPENSES:
Interest. . . . . . . . . . . . . . . . . 149,878 138,730
Cost of equipment sales . . . . . . . . . 116,972 90,000
Selling, general, and administrative. . . 65,411 49,603
Provision for receivable losses . . . . . 5,230 5,564
_________ ________
Total cost and expenses . . . . . . . 337,491 283,897
__________ ________
EARNINGS BEFORE INCOME TAXES . . . . . . . 159,521 150,619
Provision for income taxes . . . . . . . . 62,833 59,342
__________ ________
NET EARNINGS . . . . . . . . . . . . . . . $ 96,688 $ 91,277
========== ========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31,
2000 1999
_________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . .$ 96,688 $ 91,277
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . 500,636 480,873
Provision for receivable losses. . . . . 5,230 5,564
Increase in deferred income taxes. . . . 12,993 67,712
Decrease in interest and other accruals (104,913) (140,341)
Gross profit on equipment sales. . . . . (3,509) (7,623)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . 120,481 97,623
Decrease in amounts due IBM and
affiliates . . . . . . . . . . . . .(1,151,895)(1,032,561)
Other, net . . . . . . . . . . . . . . - 453
_________ __________
Cash used in operating activities . . . . . (524,289) (437,023)
_________ __________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . (497,831) (512,412)
Collections on capital leases, net of
income earned . . . . . . . . . . . . . 530,158 497,796
Investment in equipment on operating
leases. . . . . . . . . . . . . . . . . (186,848) (297,274)
Investment in loans receivable . . . . . (230,825) (371,607)
Collections on loans receivable, net
of interest earned. . . . . . . . . . . 387,964 428,941
Purchase of factored IBM receivables . . - (120,900)
Collections on factored IBM receivables. - 138,862
Collections on working capital financing
receivables, net. . . 757,400 477,910
Investment in participation loans, net . (30,928) (33,160)
Purchases of marketable securities . . . - (24,390)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . - 56,562
__________ __________
Total carried forward $ 729,090 $ 240,328
__________ __________
<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
(Continued)
Three Months Ended
March 31,
2000 1999
___________ __________
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Total brought forward $ 729,090 $ 240,328
Proceeds from the sale of the net assets
of IBM Credit International Factoring
Corporation . . . . . . . . . . . . . . - 273,759
Other, net . . . . . . . . . . . . . . . . (22,617) (109,339)
__________ __________
Cash provided by investing activities. . . . 706,473 404,748
__________ __________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . . . 200,000 849,861
Repayment of debt with original
maturities of one year or more . . . . . (306,000) (137,776)
Repayment of debt with original
maturities within one year, net. . . . . (190,721) (538,949)
Cash dividends paid to IBM. . . . . . . . - (75,000)
__________ _________
Cash (used in) provided by financing
activities. . . . . . . . . . . . . . . . (296,721) 98,136
__________ _________
Change in cash and cash equivalents. . . . . (114,537) 65,861
Cash and cash equivalents, January 1 . . . . 600,111 822,844
__________ __________
Cash and cash equivalents, March 31. . . . .$ 485,574 $ 888,705
========== ==========
<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 1.74 and
2.09 for the three months ended March 31, 2000, and 1999, respectively.
ACCOUNTING CHANGES:
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.
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:
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 $128.8 million and $150.0 million of such
financings during the three months ended March 31, 2000, and 1999,
respectively. At March 31, 2000, and December 31, 1999, $1,267.9 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 $52.8 million and $42.2 million
for the first three months of 2000, and 1999, respectively.
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<PAGE> 8
RELATED COMPANY TRANSACTIONS (Continued):
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 $20.5 million and $25.9 million
of fee income earned from divisions of IBM for the three months ended
March 31, 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 three months ended March 31,
2000, and 1999, the Company's sales of equipment to IBM amounted to $25.2
million and $22.5 million, respectively.
In the first quarter of 2000, the Company and IBM amended their operating
agreement to allow IBM to charge the Company with an allocation for shared
expenses at the corporate and geographic levels. Where practical, shared
expenses are allocated based upon measurable drivers of expense. When a
clear and measurable driver cannot be identified, shared expenses are
allocated on a financial basis that is consistent with the Company's
management system. Management believes that these methods are reasonable.
Total allocated expenses for the three months ended March 31, 2000,
amounted to $23.8 million.
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.
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<PAGE> 9
SEGMENT REPORTING (Continued):
The following schedules represent disaggregated income and expense
information for both segments. There are no intersegment transactions.
(in thousands)
For the Three Months Ended March 31:
Customer Commercial
2000 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 409,944 $ 72,143 $ 482,087
Interest expense....... $ 118,952 $ 22,791 $ 141,743
Earnings before income
taxes................ $ 126,345 $ 26,386 $ 152,731
1999
______________________
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, 2000:
Assets................. $ 11,742,479 $ 2,386,582 $14,129,061
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
March 31,
2000 1999
(in thousands) _________ _________
Revenues:
Total revenues for reportable segments..... $ 482,087 $ 418,498
Other revenues............................. 14,925 16,018
_________ _________
Total consolidated revenues................ $ 497,012 $ 434,516
========= =========
Interest Expense:
Total interest expense for reportable
segments.................................. $ 141,743 $ 130,470
Other interest expense..................... 8,135 8,260
_________ _________
Total consolidated interest expense........ $ 149,878 $ 138,730
========= =========
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<PAGE> 10
SEGMENT REPORTING (Continued):
Three Months Ended
March 31,
2000 1999
_________ _________
(in thousands)
Earnings Before Income Taxes:
Total earnings before income taxes for
reportable segments...................... $ 152,731 $ 142,795
Other earnings before income taxes........ 6,790 7,824
_________ _________
Total consolidated earnings before income
taxes.................................... $ 159,521 $ 150,619
========= =========
At At
March 31, December 31,
2000 1999
_____________ ______________
Assets:
Total assets for reportable
segments.................... $ 14,129,061 $ 15,530,956
Other assets.................. 769,367 813,749
_____________ _____________
Total consolidated assets..... $ 14,898,428 $ 16,344,705
============= =============
For the three months ended March 31, 2000, and 1999, one customer, IBM,
accounted for approximately $107.7 million and $109.6 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> 11
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, 2000, were $96.7
million, yielding a return on average equity of 16.9 percent. Net
earnings for the three months ended March 31, 1999, were $91.3 million,
yielding a return on average equity of 18.3 percent.
FINANCING ORIGINATED
For the three months ended March 31, 2000, the Company originated customer
equipment financing for end users of $1,014.4 million, a 24 percent
decrease from $1,337.1 million for the same period of 1999. The decline
in customer equipment financing originated is related to a decrease in
demand for IBM's advanced information processing products caused by the
lingering effects of the Year 2000 computer issue.
Customer financing originations for end users included purchases of $595.0
million of information handling systems from IBM, consisting of $436.8
million for capital leases and $158.2 million for operating leases. In
addition, customer financing originations for end users included the
following: (1) financing for IBM software and services of $185.3 million;
(2) financing of $155.1 million for IBM equipment, as well as related
non-IBM equipment, software and services to meet IBM customers' total
solution requirements; (3) financing originated for installment
receivables of $45.6 million; and (4) installment and lease financing for
state and local government customers of $33.4 million for the account of
IBM.
The Company's capital lease portfolio primarily includes direct financing
leases. Both direct financing leases and operating leases consist
principally of IBM advanced information processing products with terms
generally from two to three years.
For the three months ended March 31, 2000, originations of working capital
financing for dealers and remarketers of information industry products
decreased by 15 percent to $2,829.9 million, from $3,329.1 million for
1999. The decline in working capital financing originations reflects
volume decreases in IBM's workstation products and non-IBM products for
remarketers financed by the Company during the first quarter 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.
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<PAGE> 12
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 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 March 31, 2000, the remarketing activities contributed $63.6 million
to pretax earnings, an increase of 11 percent compared with $57.1 million
for 1999, primarily due to lease continuation income.
At March 31, 2000, the investment in remarketed equipment on capital and
operating leases totaled $294.8 million, compared with 1999 year-end
investment of $281.5 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $14.9 billion at March 31, 2000, compared with
$16.3 billion at December 31, 1999. This decrease is primarily
attributable to a decline in all asset categories due to the decline in
volumes caused by the lingering effects of the Year 2000 computer issue
and the traditional seasonality of IBM's volumes.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $10,504.9 million of debt at
March 31, 2000, a decrease of $299.1 million, from $10,804.0 million at
December 31, 1999. This decrease was the result of decreases in commercial
paper outstanding of $1,127.7 million, long-term debt payable to IBM of
$453.8 million, and long-term debt of $252.7 million, offset by an
increase in short-term debt of $141.2 million and short-term debt payable
to IBM of $1,393.9 million. Included in long-term debt at December 31,
1999, was $937.9 million payable to IBM at market terms and conditions,
with maturity dates ranging from April 27, 2001 to May 13, 2004. Interest
expense of $37.6 million and $28.9 million was incurred on loans from IBM
and affiliates during the three months ended March 31, 2000, and March 31,
1999, respectively.
At March 31, 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.
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<PAGE> 13
FINANCIAL CONDITION (Continued)
The Company has the option, together with IBM and IBM International
Finance, N.V., to issue and sell debt securities under a Euro Medium Term
Note Programme(EMTN)in an aggregate nominal amount of up to Euro 4.0
billion, or its equivalent in any other currency. At March 31, 2000, there
was Euro 815.0 million available for the issuance of debt securities under
this program. The Company may issue debt securities over 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 March 31,
2000, the Company had $790.1 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 March 31, 2000, and
December 31, 1999, the Company had $2,500.0 million and $2,350.0 million,
respectively, of borrowings outstanding under this agreement.
The Company and IBM have decided it would be more efficient to fund its
operations predominately through the use of intercompany debt. This is
primarily due to the new accounting and reporting requirements of SFAS
133, _Accounting for Derivatives and Hedging Activities_. See Accounting
Changes in the Notes to the Consolidated Financial Statements on page 5.
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 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 $1,151.9 million to $824.3 million at March 31,
2000, from $1,976.2 million at December 31, 1999. The decrease was
primarily attributable to a $754.1 million decrease in the amount payable
for capital equipment purchases during 2000 due to the lingering effects
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<PAGE> 14
FINANCIAL CONDITION (Continued)
of the Year 2000 computer issue and the traditional seasonality of IBM's
volumes and a decrease of $240.3 million for a fourth quarter of 1999
income tax payment.
At March 31, 2000, the Company's debt to equity ratio was 4.5:1, compared
with 4.8:1 at December 31, 1999.
TOTAL CASH USED BEFORE DIVIDENDS
Total cash used before dividends was $114.5 million for the first three
months of 2000, compared with total cash provided before dividends of
$140.9 million for the same period of 1999. For the first three months of
2000, total cash used before dividends reflects $409.8 million of cash
provided by investing and financing activities before dividends, offset by
$524.3 million of cash used in operating activities. For the first three
months of 1999, 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.
Cash and cash equivalents at March 31, 2000, totaled $485.6 million, a
decrease of $114.5 million, compared with the balance at December 31,
1999.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 12 percent to $217.8 million for the quarter
ended March 31, 2000, from $195.0 million for the same period in 1999 due
primarily to improved average lease yields. Income from leases includes
lease income resulting from remarketing transactions. Lease income from
remarketing transactions was $65.9 million for the first quarter of 2000,
an increase of 30 percent from $50.5 million for the first quarter of 1999
primarily due to increased lease continuation income.
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 $1,155.9 million residual value portfolio at
March 31, 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. However, the
Company did record a $3.8 million reduction to income from leases during
the first quarter of 2000 to recognize decreases in the expected future
residual value of specific leased equipment, compared with $1.0 million
during the same period in 1999.
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<PAGE> 15
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 30 percent to $68.3
million for the first three months of 2000, compared with $52.5 million
for the same period of 1999. This increase was primarily due to
additional income from participation loans. Participation loans 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 will then receive its fixed percentage of interest and loan fees
less administrative fees charged by the agent bank. Income from
participation loans increased to $9.8 million for the first quarter of
2000, compared with $2.2 million for the same period of 1999.
Additionally, an increase in income from dealer interest due to higher
yields and higher average outstanding receivable balances contributed to
the increase in income from working capital financing receivables for the
first quarter of 2000, compared with the same period of 1999.
INCOME FROM LOANS
Income from loans increased 13 percent to $68.6 million for the first
quarter of 2000, compared with $60.5 million for the first quarter of
1999. This increase was due to higher average loan balances for the first
quarter of 2000, compared with the same period of 1999.
EQUIPMENT SALES
Equipment sales amounted to $120.5 million for the first quarter of 2000,
compared with $97.6 million for the first quarter of 1999. Gross profit
on equipment sales for the first quarter of 2000 was $3.5 million, a
decrease of 54 percent, compared with $7.6 million for the first quarter
of 1999. The gross profit margin for the first three months of 2000
decreased to 2.9 percent, compared with 7.8 percent for the first three
months of 1999. These decreases are primarily due to write-downs of
certain equipment in inventory to its net realizable value. Additionally,
the mix of products available for sale and changing market conditions for
certain used equipment during the first three months of 2000 contributed
to the decrease in gross profit and gross profit margins compared with the
first three months of 1999.
OTHER INCOME
Other income decreased 24 percent to $21.9 million for the first three
months of 2000, compared with $28.8 million for the first three months of
1999. The decrease in other income is primarily attributable to a decline
in the fees for the servicing of IBM's federal, state and local lease and
loan portfolio and factoring income.
INTEREST EXPENSE
Interest expense increased 8 percent to $149.9 million for the first
quarter 2000, compared with $138.7 million for the first quarter of 1999
primarily due to higher interest rates. The Company's year-to-date
average cost of debt for the first three months of 2000 increased to 5.8
percent from 5.3 percent for the same period in 1999.
-15-
<PAGE> 16
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $65.4 million for the
first quarter of 2000, an increase of 32 percent compared with $49.6
million for the same period in 1999. This is 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 5.
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 coninuously declining, remains significant. At March 31, 2000, and
December 31, 1999, approximately 43 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 quarter of 2000.
The overall provision for receivable losses decreased 7 percent to $5.2
million for the first quarter of 2000, compared with $5.6 million for the
same period in 1999. The decline in the provision for receivable losses
was primarily attributable lower asset balances, 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 and contain losses contributed to the
decline in the provision for receivable losses.
INCOME TAXES
Income taxes increased 6 percent to $62.8 million for the quarter ended
March 31, 2000, from $59.3 million for the same period in 1999. This
increase is primarily attributable to the increase in pretax earnings for
the first quarter of 2000, compared with the first quarter of 1999.
-16-
<PAGE> 17
RETURN ON AVERAGE EQUITY
The results for the first three months of 2000 yielded an annualized
return on average equity of 16.9 percent, compared with 18.3 percent for
the first three months of 1999.
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.
-17-
<PAGE> 18
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.
-18-
<PAGE> 19
Part II - Other Information
Item 1. Legal Proceedings
None material.
Item 6(b). Reports on Form 8-K
A Form 8-K dated January 19, 2000, was filed with respect to the Company's
financial results for the period ended December 31, 1999.
-19-
<PAGE> 20
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 11, 2000 By: /s/ Paula L. Summa
(Paula L. Summa)
Vice President, Finance
and Chief Financial Officer
-20-
<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, 2000, 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 485,574
<SECURITIES> 0
<RECEIVABLES> 5,606,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,898,428
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 457,411
0
0
<OTHER-SE> 1,871,611
<TOTAL-LIABILITY-AND-EQUITY> 14,898,428
<SALES> 120,481
<TOTAL-REVENUES> 497,012
<CGS> 116,972
<TOTAL-COSTS> 116,972
<OTHER-EXPENSES> 65,411
<LOSS-PROVISION> 5,230
<INTEREST-EXPENSE> 149,878
<INCOME-PRETAX> 159,521
<INCOME-TAX> 62,833
<INCOME-CONTINUING> 96,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,688
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
