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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10 - Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

 

000-55786

(Commission file number)

 

IBM CREDIT LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-2351962

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS employer identification number)

 

Armonk, New York

 

10504

(Address of principal executive offices)

 

(Zip Code)

 

914-765-1900

(Registrant’s telephone number)

 

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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         Yes  x     No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

All of the limited liability company interests (“Interests”) in the registrant are held by an affiliate of the registrant. None of the Interests are publicly traded.

 

REDUCED DISCLOSURE FORMAT

 

IBM Credit LLC, an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM), 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.

 

 

 



Table of Contents

 

Index

 

 

 

Page

Part I - Financial Information:

 

 

 

 

 

Item 1. Consolidated Financial Statements (Unaudited):

 

 

 

 

 

Consolidated Statement of Earnings for the three and nine months ended September 30, 2017 and 2016

 

3

 

 

 

Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

 

3

 

 

 

Consolidated Statement of Financial Position at September 30, 2017 and December 31, 2016

 

4

 

 

 

Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 and 2016

 

5

 

 

 

Consolidated Statement of Changes in Member’s Interest for the nine months ended September 30, 2017 and 2016

 

6

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

30

 

 

 

Item 4. Controls and Procedures

 

46

 

 

 

Part II - Other Information:

 

 

 

 

 

Item 1. Legal Proceedings

 

46

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

 

46

 

 

 

Item 6. Exhibits

 

47

 

2



Table of Contents

 

Part I — Financial Information

 

Item 1. Consolidated Financial Statements:

 

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in millions)

 

2017

 

2016

 

2017

 

2016

 

Revenue

 

 

 

 

 

 

 

 

 

Financing revenue

 

$

321

 

$

340

 

$

986

 

$

1,026

 

Operating lease revenue

 

 

96

 

119

 

288

 

375

 

Total revenue

 

418

 

459

 

1,274

 

1,401

 

Financing cost (related party cost for the three and nine months: $66 and $201 in 2017, $77 and $240 in 2016)

 

95

 

94

 

267

 

277

 

Depreciation of equipment under operating lease

 

59

 

75

 

178

 

235

 

Net margin

 

264

 

290

 

829

 

888

 

Expense and other (income)

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

94

 

91

 

303

 

287

 

Provision for credit losses

 

2

 

2

 

11

 

82

 

Other (income) and expense

 

3

 

2

 

28

 

(9

)

Total expense and other (income)

 

99

 

95

 

341

 

360

 

Income from continuing operations before income taxes

 

165

 

195

 

488

 

528

 

Provision for income taxes

 

38

 

62

 

112

 

167

 

Income from continuing operations

 

$

127

 

$

133

 

$

376

 

$

361

 

Income from discontinued operations, net of tax

 

 

8

 

 

70

 

Net income

 

$

127

 

$

141

 

$

376

 

$

431

 

 

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

 

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in millions)

 

2017

 

2016

 

2017

 

2016

 

Net income

 

$

127

 

$

141

 

$

376

 

$

431

 

Other comprehensive income/(loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

143

 

12

 

360

 

144

 

Retirement-related benefit plans

 

0

 

0

 

1

 

1

 

Other comprehensive income/(loss), net of tax:

 

143

 

13

 

361

 

145

 

Total comprehensive income/(loss)

 

$

270

 

$

154

 

$

737

 

$

576

 

 

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

3



Table of Contents

 

Consolidated Financial Statements — (continued)

 

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(UNAUDITED)

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,892

 

$

1,772

 

Financing receivables

 

22,030

 

24,681

 

(net of allowances of $180 in 2017 and $242 in 2016)

 

 

 

 

 

Equipment under operating leases - net

 

431

 

506

 

Financing receivables from IBM

 

3,661

 

3,513

 

Receivables purchased/participated from IBM

 

4,676

 

3,897

 

(net of allowances of $41 in 2017 and $35 in 2016)

 

 

 

 

 

Other assets

 

2,312

 

910

 

Total assets

 

$

35,002

 

$

35,279

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable to IBM

 

$

1,247

 

$

2,127

 

Debt

 

4,158

 

724

 

Debt payable to IBM

 

24,349

 

26,306

 

Taxes

 

549

 

669

 

Other liabilities

 

1,477

 

1,750

 

Total liabilities

 

31,781

 

31,577

 

Member’s interest:

 

 

 

 

 

Prior investment from member

 

 

3,912

 

Member’s interest

 

3,068

 

 

Retained earnings

 

 

 

Accumulated other comprehensive income/(loss)

 

152

 

(209

)

Total member’s interest

 

3,220

 

3,703

 

Total liabilities and member’s interest

 

$

35,002

 

$

35,279

 

 

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

4



Table of Contents

 

Consolidated Financial Statements — (continued)

 

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

(Dollars in millions)

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

376

 

$

431

 

Adjustments to reconcile net income to cash provided by operating activities

 

 

 

 

 

Provision for credit losses

 

11

 

82

 

Depreciation

 

178

 

235

 

Deferred taxes

 

(35

)

(49

)

Net (gain)/loss on asset sales and other

 

187

 

(27

)

Change in operating assets and liabilities

 

 

 

 

 

Other assets/other liabilities

 

(111

)

(69

)

Net cash provided by operating activities

 

607

 

604

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Originations of financing receivables

 

(8,323

)

(7,294

)

Collection of financing receivables

 

9,097

 

10,281

 

Short-term financing receivables - net (1)

 

673

 

573

 

Purchase of equipment under operating leases

 

(202

)

(314

)

Proceeds from disposition of equipment under operating lease

 

79

 

79

 

Other investing activities - net

 

(1,350

)

(5,792

)

Net cash used in investing activities

 

(26

)

(2,468

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of debt from IBM

 

5,735

 

4,836

 

Principal payments on debt from IBM

 

(6,234

)

(5,727

)

Proceeds from issuance of debt

 

3,822

 

196

 

Principal payments on debt

 

(371

)

(218

)

Short-term borrowings from/(repayments to) IBM - net (1)

 

(2,206

)

3,967

 

Short-term borrowings/(repayments) - net (1)

 

(32

)

56

 

Net transfers (to)/from IBM

 

(942

)

(1,008

)

Contributions from IBM

 

88

 

 

Distributions to IBM

 

(365

)

 

Net cash (used in)/provided by financing activities

 

(504

)

2,102

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

43

 

2

 

Net change in cash and cash equivalents

 

120

 

240

 

 

 

 

 

 

 

Cash and cash equivalents at January 1

 

1,772

 

1,487

 

Cash and cash equivalents at September 30

 

$

1,892

 

$

1,727

 

 


(1) Short-term represents original maturities of 90 days or less.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

5



Table of Contents

 

Consolidated Financial Statements — (continued)

 

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S INTEREST

(UNAUDITED)

 

 

 

Prior

 

 

 

 

 

Accumulated

 

 

 

 

 

Investment

 

 

 

 

 

Other

 

Total

 

 

 

From

 

Member’s

 

Retained

 

Comprehensive

 

Member’s

 

(Dollars in millions)

 

Member

 

Interest

 

Earnings

 

Income/(Loss)

 

Interest

 

Member’s Interest, January 1, 2017

 

$

3,912

 

$

 

$

 

$

(209

)

$

3,703

 

Net income plus other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

Net income

 

137

 

 

 

239

 

 

 

376

 

Other comprehensive income/(loss), net of tax

 

 

 

 

 

 

 

361

 

361

 

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

$

737

 

Net transfers (to)/from IBM

 

(942

)

 

 

 

 

 

 

(942

)

Prior investment from member, March 31, 2017

 

3,106

 

 

 

 

 

 

 

 

 

Transfer upon consolidation

 

(3,106

)

3,106

 

 

 

 

 

 

 

Contributions from IBM

 

 

 

88

 

 

 

 

 

88

 

Distributions to IBM

 

 

 

(126

)

(239

)

 

 

(365

)

Member’s Interest, September 30, 2017

 

$

 

$

3,068

 

$

 

$

152

 

$

3,220

 

 

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

 

 

Prior

 

 

 

 

 

Accumulated

 

 

 

 

 

Investment

 

 

 

 

 

Other

 

Total

 

 

 

From

 

Member’s

 

Retained

 

Comprehensive

 

Member’s

 

(Dollars in millions)

 

Member

 

Interest

 

Earnings

 

Income/(Loss)

 

Interest

 

Member’s Interest, January 1, 2016

 

$

3,957

 

$

 

$

 

$

(224

)

$

3,733

 

Net income plus other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

Net income

 

431

 

 

 

 

 

 

 

431

 

Other comprehensive income/(loss), net of tax

 

 

 

 

 

 

 

145

 

145

 

Total comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

$

576

 

Net transfers (to)/from IBM (1)

 

(94

)

 

 

 

 

 

 

(94

)

Member’s Interest, September 30, 2016

 

$

4,294

 

$

 

$

 

$

(80

)

$

4,214

 

 


(1) Includes $1.0 billion non-cash equity contribution from IBM (see note 9, “Relationship with IBM and Related Party Transactions”.)

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

6



Table of Contents

 

Notes to Consolidated Financial Statements:

 

1. Basis of Presentation:

 

The accompanying Consolidated Financial Statements and footnotes of IBM Credit LLC (IBM Credit or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to page 37 of the company’s Form 10 registration statement, filed with the Securities and Exchange Commission (SEC) on May 5, 2017, as amended on June 22, 2017 (Form 10/A), for a discussion of the company’s critical accounting estimates.

 

During the second quarter of 2017, certain non-U.S. affiliates of IBM Credit became subsidiaries of the company, which are subsequently reported on a consolidated basis. The company filed a Form 8-K on July 25, 2017 (Form 8-K) to present the change in its financial statements and notes filed in the Form 10/A from a combined basis to a consolidated basis of presentation. There was no change to the amounts presented in the Consolidated Financial Statements and notes other than those required for the consolidated presentation format.

 

The historical presentation of the Consolidated Financial Statements for the company is based on the financing activities of IBM’s Global Financing (IGF) segment. The IGF segment operates two primary activities: IBM Credit’s financing businesses and IBM’s remanufacturing and remarketing business. In 2016, the company divested its remanufacturing and remarketing business in the U.S. to IBM. For additional information, see note L, “Discontinued Operations,” in the Form 8-K, and note 10, “Discontinued Operations,” in this Form 10-Q. For periods prior to 2017, account balances not discretely identified with IBM Credit were attributed based on the methodology described in note C, “Relationship with IBM and Related Party Transactions,” note I, “Taxes,” and note J, “Retirement-Related Benefits,” in the Form 8-K. During 2016, in connection with IGF’s separation of certain assets and liabilities related to IBM Credit’s financing businesses, Client Financing and Commercial Financing, from IBM’s other businesses in the majority of countries where IGF operates, certain impaired receivables and related allowances were retained by IBM due to IBM’s ongoing collection efforts. Accordingly, these impaired receivables and related provisions were historically part of the IBM Credit business and are included in the Consolidated Financial Statements in 2016, but are excluded as of December 31, 2016 and in all periods in 2017. For additional information, see note E, “Financing Receivables, Receivables Purchased/Participated from IBM,” in the Form 8-K. The Consolidated Financial Statements of IBM Credit include all the accounts of IBM Credit and its global subsidiaries.

 

Distributions by the company to IBM are considered first to be a return of profit as reflected in the balance of retained earnings in the Statement of Financial Position. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of the balance of member’s interest as reflected in the Statement of Financial Position.

 

Income tax expense is based on reported income before income taxes. Whereas the majority of non-U.S. entities are separate legal tax filers, the company’s U.S. federal and certain state and foreign operations will continue to be included in various IBM consolidated tax returns. In such cases, the income taxes for these entities are calculated using a separate return method modified to apply the benefits-for-loss approach, which is consistent with the company’s Tax Sharing Agreement with IBM. Under this approach, the provision for income taxes is computed as if the company filed tax returns on a separate tax return basis and is then adjusted, as necessary, to reflect IBM’s reimbursement for any tax benefits generated by the company.

 

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements included in the Form 8-K.

 

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.

 

7



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

2. Accounting Changes:

 

New Standards to be Implemented

 

In August 2017, the Financial Accounting Standards Board (FASB) issued guidance to simplify the application of current hedge accounting in certain areas and to better portray the economic results of an entity’s risk management activities in its financial statements, and make targeted improvements to the presentation and disclosure requirements for hedge accounting. The guidance is effective January 1, 2019, with early adoption permitted. The company plans to adopt the guidance as of January 1, 2018. The guidance is not expected to have a material impact in the consolidated financial results.

 

In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020, with a one-year early adoption permitted. The company is currently evaluating the impact of the new guidance.

 

In February 2016, the FASB issued guidance that changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The company will adopt the guidance as of the effective date of January 1, 2019. A cross-functional implementation team has been established which is evaluating the lease portfolio, system, process and policy change requirements. The company is currently evaluating the impact of the new guidance.

 

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. The company has concluded that substantially all of its financing and operating lease revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance is not expected to have a material impact on the company’s consolidated financial results. The company has also concluded its assessment of the data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and does not expect any material change to disclosures as a result of the adoption of the guidance.

 

3. Financial Instruments:

 

Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:

 

·                  Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

·                  Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·                  Level 3—Unobservable inputs for the asset or liability.

 

The guidance requires the use of observable market data if such data is available without undue cost and effort.

 

8



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

When available the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

 

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

 

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

 

·                  Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

·                  Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

 

As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

 

Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above. The company had no equity method investments or available-for-sale equity investments as of September 30, 2017 and December 31, 2016.

 

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.

 

The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016.

 

9



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At September 30, 2017

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit

 

$

 

$

1,005

 

$

 

$

1,005

 

Money market funds

 

174

 

 

 

174

 

Total

 

174

 

1,005

 

 

1,179

 

Derivative assets (2)

 

 

 

 

 

 

 

 

 

Foreign exchange contracts with IBM

 

 

21

 

 

21

 

Total

 

 

21

 

 

21

(4)

Total assets

 

$

174

 

$

1,026

 

$

 

$

1,200

(4)

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities (3)

 

 

 

 

 

 

 

 

 

Interest rate contracts with IBM

 

$

 

$

14

 

$

 

$

14

 

Foreign exchange contracts

 

 

2

 

 

2

 

Total liabilities

 

$

 

$

15

 

$

 

$

15

(4)

 


(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) The gross balance of derivative assets contained within other assets in the Consolidated Statement of Financial Position at September 30, 2017 is $21 million.

(3)  The gross balance of derivative liabilities contained within other liabilities in the Consolidated Statement of Financial Position at September 30, 2017 is $15 million.

(4) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $14 million.

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents (1)

 

 

 

 

 

 

 

 

 

Time deposits and certificates of deposit

 

$

 

$

1,019

 

$

 

$

1,019

 

Money market funds

 

100

 

 

 

100

 

Total

 

100

 

1,019

 

 

1,119

 

Derivative assets (2)

 

 

 

 

 

 

 

 

 

Foreign exchange contracts with IBM

 

 

115

 

 

115

 

Total

 

 

115

 

 

115

(4)

Total assets

 

$

100

 

$

1,134

 

$

 

$

1,234

(4)

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities (3)

 

 

 

 

 

 

 

 

 

Foreign exchange contracts with IBM

 

$

 

$

50

 

$

 

$

50

 

Foreign exchange contracts

 

 

47

 

 

47

 

Total liabilities

 

$

 

$

97

 

$

 

$

97

(4)

 


(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.

(2) The gross balance of derivative assets contained within other assets in the Consolidated Statement of Financial Position at December 31, 2016 is $115 million.

(3)  The gross balance of derivative liabilities contained within other liabilities in the Consolidated Statement of Financial Position at December 31, 2016 is $97 million.

(4) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would each have been reduced by $17 million.

 

There were no transfers between Levels 1, 2 and 3 for the nine months ended September 30, 2017 and the year ended December 31, 2016.

 

10



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

Financial Assets and Liabilities Not Measured at Fair Value

 

Short-Term Receivables and Payables

 

Short-term financing receivables are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (including debt payable to IBM) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt, which would be classified as Level 2.

 

Long-Term Receivables

 

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2017 and December 31, 2016, the difference between the carrying amount and estimated fair value for long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

 

Long-Term Debt

 

Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt, which includes debt payable to IBM, for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt (third-party as well as debt payable to IBM) was $13,631 million and $10,505 million and the estimated fair value is $13,605 million and $10,760 million at September 30, 2017 and December 31, 2016, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

 

Derivative Financial Instruments

 

The company operates in multiple currencies and is a lender and issuer in the global capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match funding with IBM and third parties. The terms of the debt payable are targeted to substantially match the term and currency of the underlying financing assets. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

 

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Statement of Financial Position and presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements. At September 30, 2017, the fair value of derivative contracts with IBM that were in an asset position totaled $21 million and the fair value of derivative contracts with IBM that were in a liability position totaled $14 million. These gross exposures were reduced by $14 million due to master netting arrangements with IBM.

 

Interest Rate Risk

 

Fixed and Variable Rate Borrowings

 

The company issues debt in the global capital markets to fund its operations. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2017, the total notional amount and fair value amount of the company’s interest rate swap contracts with IBM was $1,800 million and $14 million (in a liability position), respectively, and the weighted average maturity of these instruments at September 30, 2017 was approximately 3.2 years. The losses associated with these derivatives with IBM were $14 million and the gains associated with the underlying hedged debt were $14 million, for the three and nine months ended September

 

11



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

30, 2017, and are included in financing cost in the Consolidated Statement of Earnings. There was no interest rate swap activity during the three and nine months ended September 30, 2016.

 

Foreign Exchange Risk

 

Long-Term Investments in Foreign Subsidiaries (Net Investment)

 

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member’s interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At September 30, 2017, the total notional amount and fair value amount of derivative contracts with IBM designated as net investment hedges was $1,912 million and $21 million (in an asset position), respectively, and the weighted average maturity of these instruments was 0.2 years. The gains associated with the effective portion of these derivatives with IBM were $20 million (before taxes) for the three and nine months ended September 30, 2017, and are included in other comprehensive income in the Consolidated Statement of Comprehensive Income. The gains/losses associated with the amounts excluded from the assessment of these derivatives with IBM for the three and nine months ended September 30, 2017 were not material, and are included in financing cost in the Consolidated Statement of Earnings. There was no accounting hedge of net investment activity for the three and nine months ended September 30, 2016.

 

Foreign Currency Asset/Liability Management

 

The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties.

 

At September 30, 2017, the total notional amount and fair value amount of the foreign exchange derivative contracts was $118 million and $2 million (in a liability position), respectively. The weighted-average maturity of these derivatives was 0.6 years. These derivatives were not designated as hedges for accounting purposes; however, these derivatives represent economic hedges which provided an economic offset to the underlying foreign currency exposure. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities-net, in the Consolidated Statement of Cash Flows. The losses associated with these derivatives were $4 million for the three months ended September 30, 2017. The losses associated with these derivatives were $22 million for the nine months ended September 30, 2017.

 

At December 31, 2016, the total notional amount and fair value amount of the foreign exchange forward contracts was $753 million and $47 million (in a liability position), respectively. The weighted-average maturity of these derivatives was less than 2 months. There was no derivative instrument activity during the three and nine months ended September 30, 2016.

 

The foreign exchange forward contracts with IBM that were executed in late 2016 expired in early 2017 and were not replaced. There were no foreign exchange derivative contracts with IBM outstanding at September 30, 2017. There was no foreign exchange derivative instrument activity during the three months ended September 30, 2017. The net losses associated with these derivatives with IBM were $222 million for the nine months ended September 30, 2017, and are included in other (income) and expense in the Consolidated Statement of Earnings, and the associated cash flows are included in other investing activities—net, in the Consolidated Statement of Cash Flows.

 

At December 31, 2016, the total notional amount of the foreign exchange forward contracts with IBM was $10.6 billion. At December 31, 2016, the fair value of certain foreign exchange forward contracts with IBM were in an aggregate gross asset position of $115 million and certain foreign exchange forward contracts with IBM were in an aggregate gross liability position of $50 million. These exposures were reduced by $17 million due to master netting arrangements with IBM. The weighted average maturity of these derivatives was less than 1 month. There was no derivative instrument activity with IBM during the three and nine months ended September 30, 2016.

 

4. Financing Receivables, Receivables Purchased/Participated from IBM:

 

Financing receivables consist of Client Financing leases, loans, installment payment plans and participated receivables to end-user clients as well as loans to IBM for terms up to seven years. Assets financed are primarily IT products and services where IBM and the company have experience. Client Financing arrangements are priced to achieve a market yield. Financing

 

12



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

receivables also include Commercial Financing, which generally consists of working capital financing to suppliers, distributors and resellers of IBM and OEM IT products and services. Payment terms for working capital financing receivables generally range from 30 to 90 days.

 

The company purchases interests in certain of IBM’s trade accounts receivable at a discount, for which the company assumes the credit risk with IBM’s client. These receivables are primarily for IT related products and services, which are due within 30 days, and IBM performs all servicing under these arrangements. These receivables are included within the Commercial Financing segment. In addition, beginning in 2016, the company began participating receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government contracts. These receivables are included in the Client Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

 

Investment in direct financing leases

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Gross lease payments receivable

 

$

5,157

 

$

5,985

 

Estimated residual value

 

555

 

602

 

Deferred initial direct costs

 

52

 

56

 

Unearned income

 

(366

)

(453

)

Allowance for credit losses

 

(83

)

(95

)

Net investment in direct financing leases

 

$

5,314

 

$

6,094

 

 

Client Financing loans and installment payment receivables

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Gross loan payments receivable

 

$

8,997

 

$

9,697

 

Deferred initial direct costs

 

68

 

67

 

Unearned income

 

(456

)

(489

)

Allowance for credit losses

 

(83

)

(125

)

Net Client Financing loans and installment payment receivables

 

$

8,527

 

$

9,150

 

 

Commercial Financing receivables

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Commercial financing receivables

 

$

8,202

 

$

9,458

 

Allowance for credit losses

 

(14

)

(21

)

Net Commercial Financing receivables

 

$

8,189

 

$

9,436

 

 

Purchased and participated receivables from IBM

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Short-term purchased receivables from IBM

 

$

1,361

 

$

1,496

 

Allowance for credit losses on purchased receivables

 

(25

)

(22

)

Long-term participated receivables from IBM

 

3,356

 

2,436

 

Allowance for credit losses on participated receivables

 

(17

)

(13

)

Net purchased and participated receivables from IBM

 

$

4,676

 

$

3,897

 

 

13



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $640 million and $689 million at September 30, 2017 and December 31, 2016, respectively.

 

The company did not have any financing receivables held for sale as of September 30, 2017 and December 31, 2016.

 

Financing Receivables by Portfolio Segment

 

The following tables present Client Financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding Commercial Financing receivables and other miscellaneous financing receivables at September 30, 2017 and December 31, 2016. Commercial Financing receivables and purchased receivables from IBM are excluded from the presentation of financing receivables by portfolio segment as they are short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results are not material. The company determines its allowance for credit losses based on three portfolio segments: lease receivables, loan receivables and participated receivables from IBM, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At September 30, 2017:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Financing receivables

 

 

 

 

 

 

 

 

 

Lease receivables

 

$

3,283

 

$

674

 

$

885

 

$

4,842

 

Loan receivables

 

5,698

 

1,992

 

920

 

8,610

 

Participated receivables from IBM

 

626

 

1,400

 

1,331

 

3,356

 

Ending balance

 

$

9,607

 

$

4,066

 

$

3,135

 

$

16,808

 

Collectively evaluated for impairment

 

$

9,535

 

$

4,054

 

$

3,104

 

$

16,693

 

Individually evaluated for impairment

 

$

73

 

$

11

 

$

31

 

$

115

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2017

 

 

 

 

 

 

 

 

 

Lease receivables

 

$

38

 

$

2

 

$

55

 

$

95

 

Loan receivables

 

113

 

11

 

0

 

125

 

Participated receivables from IBM

 

8

 

3

 

2

 

13

 

Total

 

$

160

 

$

16

 

$

58

 

$

233

 

Write-offs

 

$

(40

)

$

(1

)

$

(19

)

$

(60

)

Recoveries

 

0

 

0

 

0

 

0

 

Provision

 

12

 

7

 

(6

)

12

 

Foreign currency translation adjustment

 

2

 

3

 

4

 

9

 

Other

 

(3

)

(6

)

(3

)

(12

)

Ending balance at September 30, 2017

 

$

131

 

$

18

 

$

33

 

$

182

 

Lease receivables

 

$

50

 

$

4

 

$

29

 

$

83

 

Loan receivables

 

$

68

 

$

13

 

$

2

 

$

83

 

Participated receivables from IBM

 

$

12

 

$

2

 

$

3

 

$

17

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

66

 

$

12

 

$

5

 

$

82

 

Individually evaluated for impairment

 

$

65

 

$

7

 

$

29

 

$

100

 

 

Write-offs of lease and loan receivables were $20 million and $40 million, respectively, during the first nine months of 2017. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $2 million, $7 million and $4 million, respectively, during the first nine months of 2017.

 

14



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

At December 31, 2016:

 

Americas

 

EMEA

 

Asia Pacific

 

Total

 

Financing receivables

 

 

 

 

 

 

 

 

 

Lease receivables

 

$

3,693

 

$

798

 

$

1,098

 

$

5,588

 

Loan receivables

 

5,678

 

2,284

 

1,313

 

9,275

 

Participated receivables from IBM

 

479

 

1,061

 

896

 

2,436

 

Ending balance

 

$

9,850

 

$

4,142

 

$

3,307

 

$

17,299

 

Collectively evaluated for impairment

 

$

9,755

 

$

4,132

 

$

3,251

 

$

17,139

 

Individually evaluated for impairment

 

$

95

 

$

10

 

$

55

 

$

160

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2016

 

 

 

 

 

 

 

 

 

Lease receivables

 

$

52

 

$

16

 

$

143

 

$

211

 

Loan receivables

 

122

 

51

 

200

 

373

 

Participated receivables from IBM (1)

 

 

 

 

 

Total

 

$

174

 

$

68

 

$

343

 

$

584

 

Write-offs

 

$

(13

)

$

(19

)

$

(79

)

$

(111

)

Recoveries

 

2

 

0

 

 

2

 

Provision

 

69

 

4

 

(16

)

57

 

Foreign currency translation adjustment

 

14

 

0

 

(17

)

(3

)

Other

 

(86

)

(37

)

(174

)

(297

)

Ending balance at December 31, 2016

 

$

160

 

$

16

 

$

58

 

$

233

 

Lease receivables

 

$

38

 

$

2

 

$

55

 

$

95

 

Loan receivables

 

$

113

 

$

11

 

$

0

 

$

125

 

Participated receivables from IBM

 

$

8

 

$

3

 

$

2

 

$

13

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

71

 

$

13

 

$

7

 

$

91

 

Individually evaluated for impairment

 

$

88

 

$

3

 

$

50

 

$

142

 

 


(1) Beginning in 2016, the company began participating receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government contracts.

 

Write-offs of lease receivables and loan receivables were $78 million and $33 million, respectively, in 2016. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $11 million, $34 million and $13 million, respectively, in 2016. The amount reported in “Other,” in the table above, which is primarily loans, reflects the reduction in allowance for credit losses in 2016 associated with certain impaired receivables that were retained by IBM due to IBM’s ongoing collection efforts. For additional information, see note 1, “Basis of Presentation.”

 

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

 

Financing Receivables on Non-Accrual Status

 

The following table presents the recorded investment in financing receivables which were on non-accrual status at September 30, 2017 and December 31, 2016, respectively. Financing receivables from IBM are short term receivables that the company considers collectable and without third party risk, as such, these receivables are not included in the non-accrual status reported.

 

15



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

 

 

At September 30,

 

At December 31,

 

(Dollars in millions)

 

2017

 

2016

 

Lease receivables

 

 

 

 

 

Americas

 

$

14

 

$

15

 

EMEA

 

0

 

2

 

Asia Pacific

 

2

 

11

 

Total lease receivables

 

$

17

 

$

28

 

 

 

 

 

 

 

Loan receivables

 

 

 

 

 

Americas

 

$

49

 

$

87

 

EMEA

 

51

 

5

 

Asia Pacific

 

2

 

1

 

Total loan receivables

 

$

102

 

$

93

 

Total receivables on non-accrual

 

$

119

 

$

121

 

 

There were no participated receivables from IBM on non-accrual at September 30, 2017 and December 31, 2016.

 

Impaired Receivables

 

The company considers any receivable with an individually evaluated reserve as an impaired receivable. Depending on the level of impairment, receivables will also be placed on non-accrual status.

 

The following tables present impaired receivables.

 

 

 

At September 30, 2017

 

At December 31, 2016

 

(Dollars in millions)

 

Recorded
Investment

 

Related
Allowance

 

Recorded
Investment

 

Related
Allowance

 

Americas

 

$

73

 

$

65

 

$

95

 

$

88

 

EMEA

 

11

 

7

 

10

 

3

 

Asia Pacific

 

31

 

29

 

55

 

50

 

Total

 

$

115

 

$

100

 

$

160

 

$

142

 

 

 

 

 

 

 

 

Interest

 

 

 

Average

 

Interest

 

Income

 

(Dollars in millions)

 

Recorded

 

Income

 

Recognized on

 

For the three months ended September 30, 2017:

 

Investment

 

Recognized

 

Cash Basis

 

Americas

 

$

89

 

$

0

 

$

0

 

EMEA

 

11

 

0

 

 

Asia Pacific

 

33

 

0

 

 

Total

 

$

133

 

$

0

 

$

0

 

 

 

 

 

 

 

 

Interest

 

 

 

Average

 

Interest

 

Income

 

(Dollars in millions)

 

Recorded

 

Income

 

Recognized on

 

For the three months ended September 30, 2016:

 

Investment

 

Recognized

 

Cash Basis

 

Americas

 

$

163

 

$

0

 

$

 

EMEA

 

56

 

0

 

 

Asia Pacific

 

283

 

0

 

 

Total

 

$

501

 

$

0

 

$

 

 

16



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

 

 

 

 

 

 

Interest

 

 

 

Average

 

Interest

 

Income

 

(Dollars in millions)

 

Recorded

 

Income

 

Recognized on

 

For the nine months ended September 30, 2017:

 

Investment

 

Recognized

 

Cash Basis

 

Americas

 

$

96

 

$

0

 

$

0

 

EMEA

 

10

 

0

 

 

Asia Pacific

 

44

 

0

 

 

Total

 

$

150

 

$

0

 

$

0

 

 

 

 

 

 

 

 

Interest

 

 

 

Average

 

Interest

 

Income

 

(Dollars in millions)

 

Recorded

 

Income

 

Recognized on

 

For the nine months ended September 30, 2016:

 

Investment

 

Recognized

 

Cash Basis

 

Americas

 

$

144

 

$

0

 

$

 

EMEA

 

60

 

0

 

 

Asia Pacific

 

297

 

0

 

 

Total

 

$

501

 

$

0

 

$

 

 

During the fourth quarter of 2016, in connection with IGF’s separation of certain assets and liabilities related to IBM Credit’s Client Financing business from IBM’s other businesses in the majority of countries where IGF operates, certain impaired receivables and related allowances were retained by IBM due to IBM’s ongoing collection efforts.

 

Credit Quality Indicators

 

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, as well as other information, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.

 

The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at September 30, 2017 and December 31, 2016. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. At September 30, 2017, 56 percent of the portfolio was investment grade as compared to 54 percent at December 31, 2016. All other credit quality indicators are considered non-investment grade. In certain circumstances, the company may mitigate credit risk through arrangements with third parties, including credit insurance, financial guarantees, or non-recourse borrowings. The credit quality indicators do not reflect these mitigation actions.

 

17



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

 

 

Lease Receivables

 

Loan Receivables

 

Participated Receivables with IBM

 

(Dollars in millions)

 

 

 

 

 

Asia

 

 

 

 

 

Asia

 

 

 

 

 

Asia

 

At September 30, 2017:

 

Americas

 

EMEA

 

Pacific

 

Americas

 

EMEA

 

Pacific

 

Americas

 

EMEA

 

Pacific

 

Credit Ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa — Aa3

 

$

337

 

$

28

 

$

39

 

$

587

 

$

83

 

$

42

 

$

64

 

$

58

 

$

60

 

A1 — A3

 

669

 

57

 

384

 

1,165

 

167

 

412

 

127

 

118

 

595

 

Baa1 — Baa3

 

760

 

214

 

228

 

1,323

 

632

 

244

 

144

 

447

 

353

 

Ba1 — Ba2

 

710

 

220

 

114

 

1,237

 

648

 

122

 

135

 

458

 

177

 

Ba3 — B1

 

394

 

101

 

45

 

687

 

299

 

48

 

75

 

211

 

70

 

B2 — B3

 

313

 

44

 

41

 

544

 

130

 

44

 

59

 

92

 

63

 

Caa — D

 

50

 

7

 

6

 

88

 

20

 

7

 

10

 

14

 

9

 

Total

 

$

3,233

 

$

671

 

$

856

 

$

5,630

 

$

1,979

 

$

918

 

$

614

 

$

1,398

 

$

1,328

 

 

 

 

Lease Receivables

 

Loan Receivables

 

Participated Receivables with IBM

 

(Dollars in millions)

 

 

 

 

 

Asia

 

 

 

 

 

Asia

 

 

 

 

 

Asia

 

At December 31, 2016:

 

Americas

 

EMEA

 

Pacific

 

Americas

 

EMEA

 

Pacific

 

Americas

 

EMEA

 

Pacific

 

Credit Ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aaa — Aa3

 

$

432

 

$

35

 

$

44

 

$

658

 

$

99

 

$

55

 

$

56

 

$

46

 

$

38

 

A1 — A3

 

757

 

77

 

403

 

1,152

 

220

 

507

 

97

 

102

 

345

 

Baa1 — Baa3

 

747

 

250

 

273

 

1,137

 

713

 

344

 

96

 

332

 

234

 

Ba1 — Ba2

 

796

 

239

 

153

 

1,211

 

682

 

193

 

102

 

317

 

131

 

Ba3 — B1

 

555

 

141

 

88

 

845

 

404

 

111

 

71

 

188

 

76

 

B2 — B3

 

287

 

48

 

69

 

437

 

139

 

87

 

37

 

64

 

60

 

Caa — D

 

81

 

6

 

12

 

123

 

17

 

15

 

10

 

8

 

10

 

Total

 

$

3,655

 

$

796

 

$

1,042

 

$

5,565

 

$

2,273

 

$

1,313

 

$

471

 

$

1,058

 

$

894

 

 

Past Due Financing Receivables

 

The company considers financing receivables past due when any installment is over 90 days past due. The following table summarizes receivables by aging category, where fully reserved receivables are excluded. The past due aging categories represent only the portion of a financing receivable which is past due. Current financing receivables represent the total financing receivables less past due greater than 90 days, excluding fully reserved receivables.  Past due financing receivables greater than 90 days and accruing represents the total billed and unbilled value at a contract level for receivables with outstanding installments greater than 90 days past due. Participated receivables from IBM are collected monthly from IBM. Amounts collected from IBM for participated receivables which are past due over 90 days are returned to IBM until paid by the client.

 

18



Table of Contents

 

Notes to Consolidated Financial Statements — (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

Total

 

Total

 

Total

 

Current

 

Total

 

Investment

 

(Dollars in millions)

 

Past Due

 

Past Due

 

Past Due

 

Financing

 

Financing

 

> 90 days and

 

At September 30, 2017

 

31-60 days (1)

 

61-90 days (1)

 

> 90 days (1)

 

Receivables

 

Receivables

 

accruing (2)

 

Lease receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

21

 

$

10

 

$

25

 

$

3,245

 

$

3,283

 

$

249

 

EMEA

 

3

 

2

 

7

 

665

 

674

 

15

 

Asia Pacific

 

0

 

0

 

3

 

852

 

885

 

9

 

Total lease receivables

 

$

24

 

$

12

 

$

35

 

$

4,762

 

$

4,842

 

$

273

 

Loan receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

39

 

$

14

 

$

39

 

$

5,608

 

$

5,698

 

$

394

 

EMEA

 

10

 

6

 

21

 

1,966

 

1,992

 

44

 

Asia Pacific

 

0

 

1

 

3

 

918

 

920

 

2

 

Total loan receivables

 

$

49

 

$

21

 

$

63

 

$

8,493

 

$

8,610

 

$

440

 

Participated receivables with IBM

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

N/A

 

$

N/A

 

$

5

 

$

621

 

$

626

 

$

 

EMEA

 

N/A

 

N/A

 

0

 

1,400

 

1,400

 

 

Asia Pacific

 

N/A

 

N/A

 

0

 

1,330

 

1,331

 

 

Total participated receivables with IBM

 

$

N/A

 

$

N/A

 

$

6

 

$

3,351

 

$

3,356

 

$

 

Total receivables

 

$

73

 

$

33

 

$

104

 

$

16,605

 

$

16,808

 

$

713

 

 


N/A - Not applicable

(1) Only the portion of a financing receivable which is past due the stated number of days, excluding amounts that are fully reserved.

(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded