<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 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 July 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 June 30, 2000 and December 31, 1999 . . . . . . . . . . . 1
Consolidated Statement of Earnings for the three and six
months ended June 30, 2000 and 1999. . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows for the six months
ended June 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. . . . . . . . . . . . . . . . . . . .18
<PAGE> 3
<TABLE>
IBM CREDIT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
(Dollars in thousands)
<CAPTION> At At
June 30, December 31,
2000 1999
_____________ ____________
<S> <C> <C>
ASSETS:
Cash and cash equivalents. . . . . $ 692,795 $ 600,111
Net investment in capital leases . 5,321,949 5,337,200
Equipment on operating leases, net 2,779,112 3,386,686
Loans receivable . . . . . . . . . 3,689,346 3,535,498
Working capital financing
receivables. . . . . . . . . . . 2,411,334 2,963,583
Investments and other assets . . . 479,516 521,627
__________ ___________
Total Assets $15,374,052 $16,344,705
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Short-term debt. . . . . . . . . . $ 3,781,110 $ 5,491,441
Short-term debt-IBM. . . . . . . . 3,613,536 1,641,447
Due to IBM and affiliates. . . . . 1,268,375 1,976,167
Interest and other accruals. . . . 368,491 454,261
Deferred income taxes. . . . . . . 897,089 877,916
Long-term debt . . . . . . . . . . 1,872,372 2,279,437
Long-term debt-IBM . . . . . . . . 1,487,904 1,391,702
___________ ___________
Total liabilities . . . . . . . 13,288,877 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. . . . . . . . . 1,627,764 1,774,923
___________ ___________
Total stockholder's equity. . . 2,085,175 2,232,334
___________ ___________
Total Liabilities and Stockholder's
Equity . . . . . . . . . . . . . . $15,374,052 $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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
________ ________ ________ ________
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Income from leases:
Capital leases . . . . .$102,197 $ 97,517 $197,152 $185,532
Operating leases, net of
depreciation. . . . . . 118,981 113,870 241,786 220,875
________ ________ ________ ________
221,178 211,387 438,938 406,407
Income from working capital
financing. . . . . . . . . 59,405 54,880 127,701 107,424
Income from loans . . . . . 73,718 59,988 142,310 120,486
Equipment sales . . . . . . 149,941 183,086 270,422 280,709
Other income. . . . . . . . 13,883 21,064 35,766 49,895
________ ________ ________ _________
Total finance and other
income. . . . . . . . . 518,125 530,405 1,015,137 964,921
________ ________ _________ _________
COST AND EXPENSES:
Interest. . . . . . . . . . 140,758 139,961 290,636 278,690
Cost of equipment sales . . 129,270 155,982 246,242 245,982
Selling, general, and
administrative . . . . . . 69,265 56,015 134,676 105,618
Provision for receivable
losses . . . . . . . . . . 3,628 9,440 8,858 15,005
_______ ________ ________ _________
Total cost and expenses. 342,921 361,398 680,412 645,295
_______ ________ ________ _________
EARNINGS BEFORE INCOME TAXES. 175,204 169,007 334,725 319,626
Provision for income taxes. . 69,050 66,591 131,883 125,933
________ ________ ________ _________
NET EARNINGS. . . . . . . . .$106,154 $102,416 $202,842 $193,693
========= ======= ======== ========
<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> Six Months Ended
June 30,
2000 1999
___________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . $ 202,842 $ 193,693
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization. . . . . . 977,519 1,011,537
Provision for receivable losses. . . . . 8,858 15,005
Increase in deferred income taxes. . . . 19,173 54,340
Decrease in interest and other accruals (85,770) (170,531)
Gross profit on equipment sales. . . . . (24,180) (34,727)
Other items that provided (used) cash:
Proceeds from equipment sales. . . . . 270,422 280,709
Decrease in amounts due IBM and
affiliates . . . . . . . . . . . . . (707,792) (628,239)
Other, net . . . . . . . . . . . . . . - 12,601
___________ ___________
Cash provided by operating activities . . . 661,072 734,388
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in capital leases . . . . . . (1,113,257) (1,185,040)
Collections on capital leases, net of
income earned . . . . . . . . . . . . . 1,010,780 1,069,257
Investment in equipment on operating
leases. . . . . . . . . . . . . . . . . (419,421) (881,181)
Investment in loans receivable . . . . . (979,028) (1,058,759)
Collections on loans receivable, net
of interest earned. . . . . . . . . . . 825,180 808,498
Collections on working capital financing
receivables, net. . . 533,791 353,674
Purchases of marketable securities . . . - (24,390)
Proceeds from redemption of marketable
securities. . . . . . . . . . . . . . . - 56,562
Cash payment for lease portfolio
acquired . . . . . . . . . . . . . . . - (176,613)
___________ ___________
Total carried forward $ (141,955) $(1,037,992)
___________ ___________
<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
(Unaudited)
(Continued)
Six Months Ended
June 30,
2000 1999
___________ ___________
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued):
Total brought forward $ (141,955) $(1,037,992)
Proceeds from the sale of the net assets
of IBM Credit International Factoring
Corporation . . . . . . . . . . . . . . - 273,759
Other, net . . . . . . . . . . . . . . . . (29,720) (2,071)
___________ ___________
Cash used in investing activities. . . . . . (171,675) (766,304)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt . . . . . . . . . . . . . . . . . . 925,000 1,174,984
Repayment of debt with original
maturities of one year or more . . . . . (481,000) (455,544)
Repayment of debt with original
maturities within one year, net. . . . . (490,713) (586,005)
Cash dividends paid to IBM. . . . . . . . (350,000) (75,000)
___________ ___________
Cash (used in) provided by financing
activities. . . . . . . . . . . . . . . . (396,713) 58,435
___________ ___________
Change in cash and cash equivalents. . . . . 92,684 26,519
Cash and cash equivalents, January 1 . . . . 600,111 822,844
___________ ___________
Cash and cash equivalents, June 30 . . . . . $ 692,795 $ 849,363
=========== ===========
Supplemental schedule of noncash investing and financing activities:
In May 1999, the Company purchased selected assets from the leasing
portfolio of Comdisco, Inc. The purchase price was financed, in part,
through the assumption of debt of $102.0 million and through the issuance
of a credit on account of $195.4 million.
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
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<PAGE> 7
IBM CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
In the opinion of management of IBM Credit Corporation (the Company), all
adjustments necessary for a fair statement of the results for the three-
and six-month periods are reflected in the unaudited interim financial
statements presented. These adjustments are of a normal recurring nature.
RATIO OF EARNINGS TO FIXED CHARGES:
The ratio of earnings to fixed charges calculated in accordance with
applicable Securities and Exchange Commission requirements was 2.15 for
both the six months ended June 30, 2000, and 1999.
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 June 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,_ 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. 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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (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 effects of SAB 101 and does not believe
its adoption will have a material effect on the Company's results of
operations or financial position. The Company expects to complete its
review of SAB 101 by the end of 2000.
-5-
<PAGE> 8
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 $267.6 million and $432.9 million of such
financings during the six months ended June 30, 2000, and 1999,
respectively. At June 30, 2000, and December 31, 1999, $1,344.3 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 $107.1 million and $88.4 million
for the first six 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 $40.9 million and $49.4 million
of fee income earned from divisions of IBM for the six months ended June
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 six months ended June 30, 2000,
and 1999, the Company's sales of equipment to IBM amounted to $64.6
million and $135.4 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 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 of $43.8 million for the six months ended June
30, 2000, 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
are loans in which the Company has purchased a fixed percentage of a
specific customer's loan facility from a bank or other lending
-6-
<PAGE> 9
SEGMENT REPORTING (Continued):
institution. The Company will then receive 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 June 30:
Customer Commercial
2000 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 444,305 $ 64,624 $ 508,929
Interest expense....... $ 116,946 $ 20,157 $ 137,103
Earnings before income
taxes................ $ 133,459 $ 36,203 $ 169,662
1999
______________________
Revenues............... $ 460,820 $ 55,432 $ 516,252
Interest expense....... $ 119,082 $ 11,738 $ 130,820
Earnings before income
taxes................ $ 135,103 $ 28,960 $ 164,063
For the Six Months Ended June 30:
Customer Commercial
2000 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 854,249 $ 136,767 $ 991,016
Interest expense....... $ 235,898 $ 42,948 $ 278,846
Earnings before income
taxes................ $ 259,804 $ 62,589 $ 322,393
-7-
<PAGE> 10
SEGMENT REPORTING (Continued):
Customer Commercial
1999 Financing Financing Total
______________________ _____________ ____________ ___________
Revenues............... $ 826,136 $ 108,614 $ 934,750
Interest expense....... $ 237,153 $ 24,137 $ 261,290
Earnings before income
taxes................ $ 247,966 $ 58,888 $ 306,854
At June 30, 2000:
Assets................. $ 11,693,415 $ 2,723,755 $14,417,170
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
_________ _________ __________ __________
(in thousands)
Revenues:
Total revenues for reportable
segments.................... $ 508,929 $ 516,252 $ 991,016 $ 934,750
Other revenues............... 9,196 14,153 24,121 30,171
_________ _________ __________ __________
Total consolidated revenues.. $ 518,125 $ 530,405 $1,015,137 $ 964,921
========= ========= ========== ==========
Interest Expense:
Total interest expense for
reportable segments......... $ 137,103 $ 130,820 $ 278,846 $ 261,290
Other interest expense....... 3,655 9,141 11,790 17,400
_________ ________ _________ __________
Total consolidated interest
expense..................... $ 140,758 $ 139,961 $ 290,636 $ 278,690
========= ========= ========== ==========
Earnings Before Income Taxes:
Total earnings before income
taxes for reportable segments$ 169,662 $ 164,063 $ 322,393 $ 306,854
Other earnings before income
taxes...................... 5,542 4,944 12,332 12,772
_________ _________ __________ __________
Total consolidated earnings
before income taxes......... $ 175,204 $ 169,007 $ 334,725 $ 319,626
========= ========= ========== ==========
-8-
<PAGE> 11
SEGMENT REPORTING (Continued):
At At
June 30, December 31,
2000 1999
_____________ ______________
Assets:
Total assets for reportable
segments.................... $ 14,417,170 $ 15,530,956
Other assets.................. 956,882 813,749
_____________ _____________
Total consolidated assets..... $ 15,374,052 $ 16,344,705
============= =============
For the three months ended June 30, 2000, and 1999, IBM accounted for
$121.1 million and $191.0 million, respectively, of the Company's
consolidated revenues. For the six months ended June 30, 2000, and 1999,
IBM accounted for $228.8 million and $300.9 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.
-9-
<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 June 30, 2000, were $106.2
million. Net earnings for the six months ended June 30, 2000 were $202.8
million, yielding an annualized return on average equity of 17.7 percent.
Net earnings for the three and six months ended June 30, 1999, were $102.4
million and $193.7 million, respectively.
FINANCING ORIGINATED
For the three months ended June 30, 2000, the Company originated customer
equipment financing for end users of $1,664.2 million, a 17 percent
decrease from $1,993.6 million for the same period of 1999. For the six
months ended June 30, 2000, the Company originated customer equipment
financing for end users of $2,678.6 million, a 20 percent decrease from
$3,330.7 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.
For the six months ended June 30, 2000, customer financing originations
for end users included purchases of $1,297.6 million of IBM information
handling systems, consisting of $941.2 million for capital leases and
$356.4 million for operating leases. In addition, customer financing
originations for end users included the following: (1) financing for IBM
software and services of $850.8 million; (2) financing of $383.7 million
for 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 $77.4 million for the account of IBM; and (4) financing originated for
installment receivables of $69.1 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 June 30, 2000, originations of working capital
financing of inventory for dealers and remarketers of information industry
products decreased by 7 percent to $3,300.2 million, from $3,549.0 million
for the same period of 1999. For the six months ended June 30, 2000,
originations of working capital financing of inventory for dealers and
remarketers of information industry products decreased by 11 percent to
$6,130.1 million, from $6,878.1 million for the same period of 1999. The
decline in working capital financing originations of inventory reflects
volume decreases in IBM's workstation products and non-IBM products for
remarketers financed by the Company during the first half of 2000.
-10-
<PAGE> 13
FINANCING ORIGINATED (Continued)
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 and gross profit on equipment sales, net of write-downs
in residual values of certain leased equipment. For the three months
ended June 30, 2000, the remarketing activities contributed $73.6 million
to pretax earnings, a decrease of 7 percent compared with $79.2 million
for the same period of 1999. For the six months ended June 30, 2000, the
remarketing activities contributed $142.5 million to pretax earnings, an
increase of 5 percent compared with $136.3 million for the first six
months of 1999.
At June 30, 2000, the investment in remarketed equipment on capital and
operating leases totaled $288.1 million, compared with 1999 year-end
investment of $281.5 million.
FINANCIAL CONDITION
ASSETS
Total assets decreased to $15.4 billion at June 30, 2000, compared with
$16.3 billion at December 31, 1999. This decrease is due to the decline
in volumes caused by the lingering effects of the Year 2000 computer issue
and the traditional seasonality of IBM's business.
LIABILITIES AND STOCKHOLDER'S EQUITY
The assets of the Company were financed with $10,754.9 million of debt at
June 30, 2000, a decrease of $49.1 million, from $10,804.0 million at
December 31, 1999. This decrease was the result of decreases in commercial
paper outstanding of $1,613.6 million, short-term debt of $96.7 million,
and long-term debt of $407.1 million, offset by an increase in short-term
debt-IBM of $1,972.1 million and long-term debt-IBM of $96.2 million.
Long-term debt-IBM of $1,487.9 million at June 30, 2000, is payable at
market terms and conditions and had maturity dates ranging from July 9,
2001 to May 13, 2004. Interest expense of $84.9 million and $65.9 million
was incurred on loans from IBM and affiliates during the six months ended
June 30, 2000, and 1999, respectively.
<PAGE> 14
FINANCIAL CONDITION (Continued)
-11-
At June 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 and IBM International
Finance, N.V., to issue and sell debt securities under a Euro Medium Term
Note Programme(EMTN)in an aggregate nominal amount of up to Euro 4.0
billion, or its equivalent in any other currency. At June 30, 2000, there
was Euro 107.0 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 June 30,
2000, the Company had $868.3 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 June 30, 2000, and
December 31, 1999, the Company had $3,550.0 million and $2,350.0 million,
respectively, of borrowings outstanding under this agreement.
These financing sources, along with the Company's internally generated
cash and medium-term note and commercial paper programs, provide
flexibility to the Company to grow its lease, working capital financing
and loan portfolios, to fund working capital requirements and to service
debt.
Amounts due to IBM and affiliates include trade payables arising from
purchases of equipment for term leases and installment receivables,
working capital financing receivables for dealers and remarketers, and
software license 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 $707.8 million to $1,268.4
million at June 30, 2000, from $1,976.2 million at December 31, 1999. The
decrease was primarily attributable to a $433.9 million decrease in the
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<PAGE> 15
FINANCIAL CONDITION (Continued)
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 tax payments of $181.2 million due to the timing these payments.
At June 30, 2000, the Company's debt to equity ratio was 5.2:1, compared
with 4.8:1 at December 31, 1999.
TOTAL CASH PROVIDED BEFORE DIVIDENDS
Total cash provided before dividends was $442.7 million for the first half
of 2000, compared with $101.5 million for the same period of 1999. For the
first half of 2000, total cash provided before dividends reflects $661.1
million of cash provided by operating activities, offset by $218.4 million
of cash used in investing and financing activities before dividends. For
the first half of 1999, total cash provided before dividends reflects
$632.9 million of cash used by investing and financing activities before
dividends, offset by $734.4 million of cash provided by operating
activities. Cash and cash equivalents at June 30, 2000, totaled $692.8
million, an increase of $92.7 million, compared with the balance at
December 31, 1999.
RESULTS OF OPERATIONS
INCOME FROM LEASES
Income from leases increased 5 percent to $221.2 million for the quarter
ended June 30, 2000, from $211.4 million for the same period in 1999; for
the six months ended June 30, 2000, income from leases increased 8 percent
to $438.9 million from $406.4 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 12 percent to $50.2
million, compared with $57.1 million for the same 1999 period. For the
six months ended June 30, 2000, lease income from remarketing transactions
increased 8 percent to $116.1 million, compared with $107.6 million for
the first half of 1999.
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 $1,090.4 million residual value portfolio at
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RESULTS OF OPERATIONS (Continued)
June 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. However, the
Company did record a $3.5 million reduction to income from leases during
the second quarter of 2000, for a total of $7.3 million during the first
half of 2000, to recognize decreases in the expected future residual value
of specific leased equipment, compared with $5.1 million during the second
quarter of 1999, for a total of $6.1 million for the first half of 1999.
INCOME FROM WORKING CAPITAL FINANCING
Income from working capital financing increased 8 percent to $59.4 million
for the three months ended June 30, 2000, compared with $54.9 million for
the same period of 1999. For the six months ended June 30, 2000, income
from working capital financing increased 19 percent to $127.7 million,
compared with $107.4 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 $17.3
million for the first half of 2000, compared with $6.6 million for the
same period of 1999, due to a substantial increase in the amount
outstanding in the current period. Additionally, an increase of $12.7
million in income from dealer interest due to higher yields contributed to
the increase in income from working capital financing receivables for the
first half of 2000, compared with the same period of 1999.
INCOME FROM LOANS
Income from loans increased 23 percent to $73.7 million for the second
quarter of 2000, compared with $60.0 million for the second quarter of
1999. For the six months ended June 30, 2000, income from loans increased
18 percent to $142.3 million, compared with $120.5 million for the same
1999 period. These increases were due to higher average loan balances for
the first half 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
$9.1 million for the six months ended June 30, 2000. There was no income
from term participation loans for the six months ended June 30, 1999.
EQUIPMENT SALES
Equipment sales amounted to $149.9 million for the second quarter of 2000,
compared with $183.1 million for the same period of 1999; for the first
six months of 2000, equipment sales amounted to $270.4 million, compared
with $280.7 million for the same 1999 period.
Gross profit on equipment sales for the second quarter of 2000 was $20.7
million compared with $27.1 million for the second quarter of 1999. For
the first half of 2000, gross profit from equipment sales decreased to
$24.2 million compared with $34.7 million for the same period of 1999.
The gross profit margin for the second quarter of 2000 decreased to 13.8
percent, compared with 14.8 percent for the same 1999 period. For the
first half of 2000, the gross profit margin decreased to 8.9 percent,
compared with 12.4 percent for the first half of 1999.
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RESULTS OF OPERATIONS (Continued)
These decreases are due to 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.
Excluding the sale of these assets in 1999, equipment sales, gross profit
and gross profit margin have increased for both the second quarter and
first half of 2000, compared with the respective periods of 1999.
OTHER INCOME
Other income decreased 34 percent to $13.9 million for the second quarter
of 2000, compared with $21.1 million for the same period of 1999. For the
six months ended June 30, 2000, other income decreased 28 percent to $35.8
million, compared with $49.9 million for the six months ended June 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 1 percent to $140.8 million for the second
quarter of 2000, compared with $140.0 million for the same 1999 period.
For the first half of 2000, interest expense increased 4 percent to $290.6
million, compared with $278.7 million for the first half 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 six months
of 2000 increased to 5.7 percent from 5.4 percent for the same period in
1999.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $69.3 million for the
second quarter of 2000, an increase of 24 percent compared with $56.0
million for the same period in 1999. For the first half of 2000, selling,
general, and administrative expenses increased 28 percent to $134.7
million, compared with $105.6 million for the first half 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.
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.
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RESULTS OF OPERATIONS (Continued)
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 June 30, 2000, and
December 31, 1999, approximately 39 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 half of 2000.
The overall provision for receivable losses decreased to $3.6 million for
the second quarter of 2000, compared with $9.4 million for the same period
in 1999. For the six months ended June 30, 2000, the provision for
receivable losses decreased to $8.9 million, compared with $15.0 million
for the same period of 1999. The decline in the provision for receivable
losses was primarily attributable to lower asset balances and 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 4 percent to $69.1 million for
the quarter ended June 30, 2000, compared with $66.6 million for the same
period in 1999. For the first half of 2000, the provision for income
taxes increased 5 percent to $131.9 million, compared with $125.9 million
for the six months ended June 30, 1999. These increases are due to the
increase in pretax earnings for the second quarter and the first half of
2000, compared with the same periods of 1999.
RETURN ON AVERAGE EQUITY
The results for the first six months of 2000 yielded an annualized return
on average equity of 17.7 percent, compared with 20.2 percent for the
first half 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.
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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> 20
Part II - Other Information
Item 1. Legal Proceedings
None material.
Item 6(b). Reports on Form 8-K
A Form 8-K dated April 18, 2000, was filed with respect to the Company's
financial results for the quarterly period ended March 31, 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: August 14, 2000 By: /s/ Paula L. Summa
(Paula L. Summa)
Vice President, Finance
and Chief Financial Officer
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