Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - IBM CREDIT LLC | a17-21959_1ex32d2.htm |
EX-32.1 - EX-32.1 - IBM CREDIT LLC | a17-21959_1ex32d1.htm |
EX-31.2 - EX-31.2 - IBM CREDIT LLC | a17-21959_1ex31d2.htm |
EX-31.1 - EX-31.1 - IBM CREDIT LLC | a17-21959_1ex31d1.htm |
EX-12 - EX-12 - IBM CREDIT LLC | a17-21959_1ex12.htm |
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 |
|
(IRS employer identification number) |
Armonk, New York |
|
10504 |
(Address of principal executive offices) |
|
(Zip Code) |
914-765-1900
(Registrants 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.
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.)
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 |
| ||
Members interest: |
|
|
|
|
| ||
Prior investment from member |
|
|
|
3,912 |
| ||
Members interest |
|
3,068 |
|
|
| ||
Retained earnings |
|
|
|
|
| ||
Accumulated other comprehensive income/(loss) |
|
152 |
|
(209 |
) | ||
Total members interest |
|
3,220 |
|
3,703 |
| ||
Total liabilities and members interest |
|
$ |
35,002 |
|
$ |
35,279 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
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.)
Consolidated Financial Statements (continued)
IBM CREDIT LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS INTEREST
(UNAUDITED)
|
|
Prior |
|
|
|
|
|
Accumulated |
|
|
| |||||
|
|
Investment |
|
|
|
|
|
Other |
|
Total |
| |||||
|
|
From |
|
Members |
|
Retained |
|
Comprehensive |
|
Members |
| |||||
(Dollars in millions) |
|
Member |
|
Interest |
|
Earnings |
|
Income/(Loss) |
|
Interest |
| |||||
Members 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 |
) | |||||
Members 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 |
|
Members |
|
Retained |
|
Comprehensive |
|
Members |
| |||||
(Dollars in millions) |
|
Member |
|
Interest |
|
Earnings |
|
Income/(Loss) |
|
Interest |
| |||||
Members 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 |
) | |||||
Members 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.)
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 companys management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the companys 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 managements 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 companys 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 companys 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 IBMs Global Financing (IGF) segment. The IGF segment operates two primary activities: IBM Credits financing businesses and IBMs 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 IGFs separation of certain assets and liabilities related to IBM Credits financing businesses, Client Financing and Commercial Financing, from IBMs other businesses in the majority of countries where IGF operates, certain impaired receivables and related allowances were retained by IBM due to IBMs 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 companys available balance in retained earnings is considered a return of a portion of the balance of members 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 companys 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 companys 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 IBMs 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.
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 entitys 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 companys 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 1Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;
· Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
· Level 3Unobservable 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.
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 companys 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 companys 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 companys financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016.
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.
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 companys 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
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 members 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 companys 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 activitiesnet, 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
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 IBMs trade accounts receivable at a discount, for which the company assumes the credit risk with IBMs 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 IBMs 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 IBMs 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 |
|
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 companys 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.
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 IBMs 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 IBMs 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.
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 |
|
Related |
|
Recorded |
|
Related |
| ||||
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 |
|
$ |
|
|
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 IGFs separation of certain assets and liabilities related to IBM Credits Client Financing business from IBMs other businesses in the majority of countries where IGF operates, certain impaired receivables and related allowances were retained by IBM due to IBMs ongoing collection efforts.
Credit Quality Indicators
The companys 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 Moodys Investors Service credit ratings as shown below. The company uses information provided by Moodys, 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.
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.
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 |
| ||||||
|
|
Total |
|
Total |
|
Total |
|
Current |
|
Total |
|
Investment |
| ||||||
(Dollars in millions) |
|
Past Due |
|
Past Due |
|
Past Due |
|
Financing |
|
Financing |
|
> 90 days and |
| ||||||
At December 31, 2016 |
|
31-60 days (1) |
|
61-90 days (1) |
|
> 90 days (1) |
|
Receivables |
|
Receivables |
|
accruing (2) |
| ||||||
Lease receivables |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Americas |
|
$ |
9 |
|
$ |
4 |
|
$ |
8 |
|
$ |
3,666 |
|
$ |
3,693 |
|
$ |
37 |
|
EMEA |
|
3 |
|
2 |
|
2 |
|
790 |
|
798 |
|
6 |
| ||||||
Asia Pacific |
|
1 |
|
1 |
|
11 |
|
1,041 |
|
1,098 |
|
37 |
| ||||||
Total lease receivables |
|
$ |
13 |
|
$ |
7 |
|
$ |
20 |
|
$ |
5,497 |
|
$ |
5,588 |
|
$ |
80 |
|
Loan receivables |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Americas |
|
$ |
15 |
|
$ |
7 |
|
$ |
12 |
|
$ |
5,639 |
|
$ |
5,678 |
|
$ |
57 |
|
EMEA |
|
8 |
|
5 |
|
5 |
|
2,273 |
|
2,284 |
|
14 |
| ||||||
Asia Pacific |
|
|
|
|
|
4 |
|
1,308 |
|
1,313 |
|
42 |
| ||||||
Total loan receivables |
|
$ |
23 |
|
$ |
12 |
|
$ |
20 |
|
$ |
9,220 |
|
$ |
9,275 |
|
$ |
113 |
|
Participated receivables with IBM |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Americas |
|
N/A |
|
N/A |
|
$ |
|
|
$ |
479 |
|
$ |
479 |
|
$ |
|
| ||
EMEA |
|
N/A |
|
N/A |
|
|
|
1,060 |
|
1,060 |
|
|
| ||||||
Asia Pacific |
|
N/A |
|
N/A |
|
|
|
896 |
|
896 |
|
|
| ||||||
Total participated receivables with IBM |
|
N/A |
|
N/A |
|
$ |
|
|
$ |
2,436 |
|
$ |
2,436 |
|
$ |
|
| ||
Total receivables |
|
$ |
36 |
|
$ |
18 |
|
$ |
41 |
|
$ |
17,152 |
|
$ |
17,299 |
|
$ |
195 |
|
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.
Notes to Consolidated Financial Statements (continued)
The increase year to date in the amount of recorded investment of financing receivables greater than 90 days past due and accruing was due to the late collection of certain accounts.
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2017 or for the year ended December 31, 2016.
5. Equipment Under Operating Lease:
Equipment under operating lease consists primarily of lease contracts for IT equipment. Equipment under operating lease, net of accumulated depreciation as of September 30, 2017 and December 31, 2016, was as follows:
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2017 |
|
2016 |
| ||
Equipment under operating lease, at cost |
|
$ |
775 |
|
$ |
1,005 |
|
Less: Accumulated depreciation |
|
(344 |
) |
(499 |
) | ||
Equipment under operating lease - net |
|
$ |
431 |
|
$ |
506 |
|
6. Segments:
The companys operations consist of two business segments: Client Financing and Commercial Financing. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The company is organized on the basis of its financing offerings. The companys reportable segments are business units that offer different financing solutions based upon clients needs.
Client Financing provides leases and loan financing to end-user clients and acquires installment payment plans offered to end-user clients by IBM; as well as acquires participation interests in IBM financing receivables for which the company assumes the IBM clients credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBMs hardware, software, and services, as well as OEM IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBMs Technology Services & Cloud Platforms segments acquisition of IT assets, which it uses in external, revenue-producing services contracts.
Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. Commercial Financing also purchases interests in certain of IBMs trade accounts receivable at a discount and assumes the credit risk with IBMs client.
The segments expense includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.
IBM Credit and its consolidated subsidiaries are reported by the companys parent, IBM, as part of IBMs Global Financing segment, which also includes IBMs remanufacturing and remarketing business.
Notes to Consolidated Financial Statements (continued)
SEGMENT INFORMATION
|
|
Client |
|
Commercial |
|
Total |
| |||
(Dollars in millions) |
|
Financing |
|
Financing |
|
Segments |
| |||
|
|
|
|
|
|
|
| |||
For the three months ended September 30, 2017: |
|
|
|
|
|
|
| |||
Total revenue |
|
$ |
309 |
|
$ |
109 |
|
$ |
418 |
|
Pre-tax income from continuing operations |
|
123 |
|
42 |
|
165 |
| |||
Depreciation of equipment under operating lease |
|
59 |
|
|
|
59 |
| |||
Financing cost (interest expense) |
|
66 |
|
29 |
|
95 |
| |||
Provision for credit losses |
|
2 |
|
0 |
|
2 |
| |||
|
|
|
|
|
|
|
| |||
For the three months ended September 30, 2016: |
|
|
|
|
|
|
| |||
Total revenue |
|
$ |
360 |
|
$ |
99 |
|
$ |
459 |
|
Pre-tax income from continuing operations |
|
151 |
|
43 |
|
195 |
| |||
Depreciation of equipment under operating lease |
|
75 |
|
|
|
75 |
| |||
Financing cost (interest expense) |
|
70 |
|
24 |
|
94 |
| |||
Provision for credit losses |
|
(1 |
) |
3 |
|
2 |
|
SEGMENT INFORMATION
|
|
Client |
|
Commercial |
|
Total |
| |||
(Dollars in millions) |
|
Financing |
|
Financing |
|
Segments |
| |||
|
|
|
|
|
|
|
| |||
For the nine months ended September 30, 2017: |
|
|
|
|
|
|
| |||
Total revenue |
|
$ |
945 |
|
$ |
330 |
|
$ |
1,274 |
|
Pre-tax income from continuing operations |
|
363 |
|
125 |
|
488 |
| |||
Depreciation of equipment under operating lease |
|
178 |
|
|
|
178 |
| |||
Financing cost (interest expense) |
|
184 |
|
83 |
|
267 |
| |||
Provision for credit losses |
|
13 |
|
(2 |
) |
11 |
| |||
|
|
|
|
|
|
|
| |||
For the nine months ended September 30, 2016: |
|
|
|
|
|
|
| |||
Total revenue |
|
$ |
1,111 |
|
$ |
290 |
|
$ |
1,401 |
|
Pre-tax income from continuing operations |
|
402 |
|
126 |
|
528 |
| |||
Depreciation of equipment under operating lease |
|
235 |
|
|
|
235 |
| |||
Financing cost (interest expense) |
|
203 |
|
74 |
|
277 |
| |||
Provision for credit losses |
|
75 |
|
7 |
|
82 |
|
7. Equity Activity:
IBM Credit had no available-for-sale securities or unrealized gains or (losses) on cash flow hedges during the periods presented in the following tables:
Notes to Consolidated Financial Statements (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the three months ended September 30, 2017: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
151 |
|
$ |
(8 |
) |
$ |
143 |
|
Retirement-related benefit plans (1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
|
0 |
|
0 |
|
0 |
| |||
Curtailments and settlements |
|
0 |
|
0 |
|
0 |
| |||
Amortization of prior service (credits)/costs |
|
0 |
|
0 |
|
0 |
| |||
Amortization of net (gains)/losses |
|
0 |
|
0 |
|
0 |
| |||
Total retirement-related benefit plans |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
Other comprehensive income/(loss) |
|
$ |
151 |
|
$ |
(8 |
) |
$ |
143 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the three months ended September 30, 2016: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
12 |
|
$ |
|
|
$ |
12 |
|
Retirement-related benefit plans (1): |
|
|
|
|
|
|
| |||
Amortization of net (gains)/losses |
|
0 |
|
0 |
|
0 |
| |||
Total retirement-related benefit plans |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
Other comprehensive income/(loss) |
|
$ |
13 |
|
$ |
0 |
|
$ |
13 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the nine months ended September 30, 2017: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
368 |
|
$ |
(8 |
) |
$ |
360 |
|
Retirement-related benefit plans (1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
|
1 |
|
0 |
|
1 |
| |||
Curtailments and settlements |
|
0 |
|
0 |
|
0 |
| |||
Amortization of prior service (credits)/costs |
|
(1 |
) |
0 |
|
(1 |
) | |||
Amortization of net (gains)/losses |
|
1 |
|
0 |
|
1 |
| |||
Total retirement-related benefit plans |
|
$ |
2 |
|
$ |
0 |
|
$ |
1 |
|
Other comprehensive income/(loss) |
|
$ |
370 |
|
$ |
(8 |
) |
$ |
361 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.)
Notes to Consolidated Financial Statements (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the nine months ended September 30, 2016: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
144 |
|
$ |
|
|
$ |
144 |
|
Retirement-related benefit plans (1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
|
0 |
|
0 |
|
0 |
| |||
Amortization of net (gains)/losses |
|
0 |
|
0 |
|
0 |
| |||
Total retirement-related benefit plans |
|
$ |
1 |
|
$ |
0 |
|
$ |
1 |
|
Other comprehensive income/(loss) |
|
$ |
145 |
|
$ |
0 |
|
$ |
145 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.)
8. Retirement-Related Benefits:
IBM Credit employees are eligible to participate in IBMs retirement plans. Retirement-related plans are accounted for as multiemployer or multiple-employer plans as required by local regulations.
Multiemployer Plans:
For multiemployer plans, IBM allocates charges to the company based on the number of employees. The charges related to multiemployer plans are recorded in the companys operating results in the Consolidated Statement of Earnings. The amounts of (income) or expense attributed to the company by IBM for the three and nine months ended September 30, 2017 and 2016 were not material.
Charges from IBM to the company in relation to these plans (including non pension post retirement benefits) are limited to service costs. Contributions and any other types of costs are the responsibility of IBM.
Multiple-Employer Plans:
For multiple-employer plans (mainly in Germany, Japan and Spain), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Statement of Financial Position.
Any gains or losses recorded to Accumulated Other Comprehensive Income in the three and nine months ended September 30, 2017 and 2016 were not material.
Costs related to multiple-employer plans are recorded in the companys operating results in the Consolidated Statement of Earnings. The total costs for multiple-employer plans for the three and nine months ended September 30, 2017 and 2016 were not material.
9. Relationship with IBM and Related Party Transactions:
IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an arms-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBMs relationship with a client. The following is a description of certain material relationships between IBM Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements.
Support Agreement
Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the companys
Notes to Consolidated Financial Statements (continued)
fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the companys fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is understood to mean, for any calendar quarter, IBM Credits debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credits periodic report covering such fiscal quarter (refer to page 32 of this Form 10-Q). In the event that the companys leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the companys leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.
Operating Relationship
The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBMs hardware, software, and services.
In the second half of 2016, the company began participating in receivables from IBM for certain long-term financing receivables generated from IBMs Total Solution Offerings in certain countries as well as for certain government contracts. The company carries the credit risk of IBMs clients for all participated receivables from IBM. These receivables earned interest income of $43 million and $119 million in the three and nine months ended September 30, 2017, respectively, an increase of $40 million and $116 million, respectively, as compared to the same periods in 2016. The interest income is included in the Consolidated Statement of Earnings as financing revenue. For additional information, see note 4, Financing Receivables, Receivables Purchased/Participated from IBM.
The company purchases interests in certain of IBMs trade accounts receivable at a discount and assumes the associated credit risk of IBMs client. For the three months ended September 30, 2017, finance income earned from these receivables was $8 million, an increase of $1 million as compared to the same period in 2016. For the nine months ended September 30, 2017, finance income earned from these receivables was $27 million, a decrease of $3 million as compared to the same period in 2016. The finance income is included in financing revenue in the Consolidated Statement of Earnings. For additional information, see note 4, Financing Receivables, Receivables Purchased/Participated from IBM.
In certain countries, the company provides loans to IBM, primarily in support of IBMs Technology Services & Cloud Platforms segments acquisition of IT assets, which it uses in external, revenue-producing services contracts. This financing is included in the Consolidated Statement of Financial Position as financing receivables from IBM. For the three months ended September 30, 2017, the interest income earned from these receivables was $38 million, an increase of $1 million as compared to the same period in 2016. For the nine months ended September 30, 2017, the interest income earned was $101 million, an increase of $4 million as compared to the same period in 2016. Interest income is included in financing revenue in the Consolidated Statement of Earnings. The amount of such financings outstanding was $3,661 million at September 30, 2017 and $3,513 million at December 31, 2016.
The company invests a portion of its excess cash in short-term interest-bearing accounts with IBM, which can be withdrawn upon demand. The companys investment with IBM was $1,869 million at September 30, 2017 and $450 million at December 31, 2016. The higher cash position in 2017 provided additional liquidity to certain IBM Credit subsidiaries. The investment of excess cash on deposit with IBM is presented in other assets in the Consolidated Statement of Financial Position, and in other investing activities-net in the Consolidated Statement of Cash Flows. Interest income earned from these investments was $9 million and $28 million in the three and nine months ended September 30, 2017, respectively. Interest income earned from these investments in the three and nine months ended September 30, 2016 was $4 million. The interest income is included in financing revenue in the Consolidated Statement of Earnings.
In addition, the company provides financing at market rates to suppliers, distributors and resellers of IBM products and services, a portion of which is supplemented by financing incentives from IBM to cover an interest free period. Fee income earned from these financing incentives under these arrangements for the three months ended September 30, 2017 was $34 million, a decrease of $1 million as compared to the same period in 2016. Fee income earned for the nine months ended September 30, 2017 was $106 million, a decrease of $7 million as compared to the same period in 2016. These fees are included in financing revenue in the Consolidated Statement of Earnings and are deferred and recognized over the term of the financing arrangement.
Notes to Consolidated Financial Statements (continued)
Borrowing Relationship
The company has a credit facility with IBM that allows the company to obtain short-term and long-term funding. These loans are included in the Consolidated Statement of Financial Position as debt payable to IBM. Interest expense incurred on loans from IBM was $66 million and $201 million for the three and nine months ended September 30, 2017, respectively, as compared to $77 million and $240 million for the three and nine months ended September 30, 2016, respectively. Interest expense is included in financing cost in the Consolidated Statement of Earnings. For additional information on short-term and long-term funding, see note 11, Borrowings.
Services and Other Arrangements
The company sources a number of services from IBM, including functional support for collection administration, treasury, accounting, legal, tax, human resources, marketing and IT. In certain instances, IBM acts as IBM Credits billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $54 million and $51 million in the third quarter of 2017 and 2016, respectively, and $173 million for both the nine months ended September 30, 2017 and 2016.
The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation and multiemployer retirement-related plans expense during the periods reported were not material.
Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Statement of Earnings. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party.
The outstanding amount of accounts payable to IBM of $1,247 million at September 30, 2017, and $2,127 million at December 31, 2016, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing and short term in nature and is expected to be settled in the normal course of business. In the first quarter of 2016, approximately $1,000 million of the balance payable to IBM as of December 31, 2015 was settled through a non-cash, equity contribution to the company from IBM.
Starting in 2016, with the formation of the new financing subsidiaries, the company agreed to sell equipment returned from lease to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology through an early lease termination. Upon early termination of the lease, IBM will purchase the returned equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The companys net gross profit from sales of returned equipment to IBM was $12 million and $9 million for the three months ended September 30, 2017 and 2016, respectively. The net gross profit from sales of returned equipment to IBM was $40 million and $27 million for the nine months ended September 30, 2017 and 2016, respectively. These sales are recorded net in other (income) and expense in the Consolidated Statement of Earnings.
Tax Sharing Agreement
The companys U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the companys behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for tax attributes generated. Such charges or reimbursements are based upon a calculation of the companys relevant pro forma stand-alone tax return.
10. Discontinued Operations:
During the first quarter of 2017, IBM Credit received a cash payment from IBM of $121 million as settlement of the divestiture of the companys remanufacturing and remarketing business in the U.S. to IBM as of December 31, 2016. This settlement amount is presented in other investing activities net, in the Consolidated Statement of Cash Flows. There was no gain or loss recognized from the divestiture of the business to IBM.
Notes to Consolidated Financial Statements (continued)
The companys Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 includes $56 million in net cash provided by operating activities generated by the divested business.
Profit / (Loss) from Discontinued Operations
(Dollars in millions) |
|
|
| |
For the three months ended September 30: |
|
2016 |
| |
Revenue |
|
$ |
83 |
|
Cost of sales |
|
55 |
| |
Selling, general, and administrative expense |
|
15 |
| |
Income from discontinued operations before income taxes |
|
$ |
13 |
|
Provision for income taxes |
|
5 |
| |
Net income from discontinued operations - net of tax |
|
$ |
8 |
|
(Dollars in millions) |
|
|
| |
For the nine months ended September 30: |
|
2016 |
| |
Revenue |
|
$ |
382 |
|
Cost of sales |
|
214 |
| |
Selling, general, and administrative expense |
|
52 |
| |
Income from discontinued operations before income taxes |
|
$ |
115 |
|
Provision for income taxes |
|
45 |
| |
Net income from discontinued operations - net of tax |
|
$ |
70 |
|
11. Borrowings:
The company may, at times, pledge financing receivables as collateral for non-recourse short-term and long-term borrowings. The amount of these secured borrowings is reflected in the following short-term and long-term debt tables.
Short-Term Debt
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2017 |
|
2016 |
| ||
Short-term loans |
|
$ |
49 |
|
$ |
36 |
|
Secured borrowings |
|
20 |
|
8 |
| ||
Debt |
|
$ |
69 |
|
$ |
44 |
|
Debt payable to IBM |
|
14,808 |
|
16,481 |
| ||
Total |
|
$ |
14,877 |
|
$ |
16,525 |
|
The weighted-average interest rate for short-term loans was 8.9 percent and 14.1 percent at September 30, 2017 and December 31, 2016, respectively, and relates primarily to borrowings in Latin America.
The weighted-average interest rate for secured borrowings was 4.2 percent and 3.9 percent at September 30, 2017 and December 31, 2016, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $20 million at September 30, 2017 and $8 million at December 31, 2016.
The weighted-average interest rate for debt payable to IBM was 1.0 percent and 0.8 percent at September 30, 2017 and December 31, 2016, respectively.
In August 2017, IBM Credit established a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper can be used for general corporate purposes, including, among other items, the
Notes to Consolidated Financial Statements (continued)
repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued can vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer. At September 30, 2017, there was no commercial paper balance outstanding.
Long-Term Debt
|
|
|
|
Balance |
|
Balance |
| ||
(Dollars in millions) |
|
Maturities |
|
9/30/2017 |
|
12/31/2016 |
| ||
Long-term notes (average interest rate at September 30, 2017) |
|
|
|
|
|
|
| ||
1.6% |
|
2019 |
|
$ |
1,400 |
|
$ |
|
|
1.7% |
|
2021 |
|
1,100 |
|
|
| ||
2.2% |
|
2022 |
|
500 |
|
|
| ||
|
|
|
|
$ |
3,000 |
|
$ |
|
|
|
|
|
|
|
|
|
| ||
Long-term loans (6.8% average interest rate at September 30, 2017) |
|
2017-2020 |
|
496 |
|
|
| ||
Secured borrowings (5.0% average interest rate at September 30, 2017) |
|
2017-2023 |
|
620 |
|
681 |
| ||
Long-term debt |
|
|
|
$ |
4,116 |
|
$ |
681 |
|
Less: net unamortized discount |
|
|
|
2 |
|
|
| ||
Less: net unamortized debt issuance costs |
|
|
|
10 |
|
|
| ||
Less: fair value adjustment* |
|
|
|
14 |
|
|
| ||
Debt |
|
|
|
$ |
4,090 |
|
$ |
681 |
|
Debt payable to IBM (1.2% average interest rate at September 30, 2017) |
|
|
|
9,541 |
|
9,824 |
| ||
Total |
|
|
|
$ |
13,631 |
|
$ |
10,505 |
|
* The portion of the companys fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debts carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
The company utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $620 million at September 30, 2017 and $681 million at December 31, 2016, and relate primarily to borrowings in the U.S. and Latin America.
During the third quarter of 2017, the company filed a shelf registration statement with the SEC allowing it to offer for sale public debt securities. The company issued fixed rate debt securities in the aggregate amount of $1,800 million with rates ranging from 1.625 percent to 2.200 percent and floating rate debt securities in the aggregate amount of $1,200 million with rates of Libor plus 15 or 26 basis points. The maturity dates of the debt securities issued range from 2019 to 2022. The net proceeds to the company from the issuance, after adjusting for and deducting related discounts, commissions and expenses of approximately $7 million, are being utilized for general corporate purposes. The interest rates, maturities and amounts of the debt securities issued by the company are provided in the long-term debt table presented above.
The companys indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens) to 15 percent of the companys consolidated net tangible assets, and restrict the companys ability to merge or consolidate unless certain conditions are met.
Contractual maturities of long-term debt and long-term debt payable to IBM outstanding at September 30, 2017, are as follows:
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 and |
|
Total |
| |||||||
Long-term debt |
|
$ |
86 |
|
$ |
535 |
|
$ |
1,797 |
|
$ |
69 |
|
$ |
1,120 |
|
$ |
508 |
|
$ |
4,116 |
|
Debt payable to IBM |
|
1,086 |
|
4,080 |
|
1,906 |
|
1,842 |
|
479 |
|
148 |
|
9,541 |
| |||||||
Total |
|
$ |
1,173 |
|
$ |
4,616 |
|
$ |
3,703 |
|
$ |
1,911 |
|
$ |
1,599 |
|
$ |
655 |
|
$ |
13,657 |
|
Interest on Debt
The company recognized interest expense of $95 million and $267 million for the three and nine months ended September 30, 2017, respectively, of which $66 million and $201 million was interest expense on debt payable to IBM, respectively. The company recognized interest expense of $94 million and $277 million for the three and nine months ended September 30, 2016, respectively, of which $77 million and $240 million was interest expense on debt payable to IBM, respectively.
Lines of Credit
The company has committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.
On July 20, 2017, IBM and the company (the Borrowers) entered into a $2.5 billion 364-Day Credit Agreement, and a $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions. As of September 30, 2017, there were no borrowings under the Credit Agreements.
The companys Credit Agreements each contain significant debt covenants, which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of IBMs consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (ii) the companys leverage ratio cannot be greater than 11 to 1 as of the last day of the each fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million.
The company is in compliance with all of its significant debt covenants, and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. See Support Agreement in note 9, Relationship with IBM and Related Party Transactions, for additional information.
12. Contingencies:
The company is or may be involved in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning customer allegations of wrongful repossession or defamation of credit.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of
Notes to Consolidated Financial Statements (continued)
other matters and qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses. As of September 30, 2017, there were no matters for which the likelihood of material loss is at least reasonably possible.
13. Commitments:
The companys extended lines of credit to third-party entities include unused amounts of $7,704 million and $6,174 million at September 30, 2017 and December 31, 2016, respectively. A portion of these amounts is available to the companys Commercial Financing clients to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $553 million and $404 million at September 30, 2017 and December 31, 2016, respectively.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
Financial Results Summary - Three Months Ended September 30:
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2017 |
|
2016 |
|
Change |
| ||
Total revenue |
|
$ |
418 |
|
$ |
459 |
|
(9.1 |
)% |
Net margin |
|
$ |
264 |
|
$ |
290 |
|
(9.1 |
)% |
Net margin percentage |
|
63.2 |
% |
63.2 |
% |
0 |
pts. | ||
Total expense and other (income) |
|
$ |
99 |
|
$ |
95 |
|
3.8 |
% |
Income from continuing operations before income taxes |
|
$ |
165 |
|
$ |
195 |
|
(15.4 |
)% |
Provision for income taxes |
|
$ |
38 |
|
$ |
62 |
|
(38.4 |
)% |
Income from continuing operations |
|
$ |
127 |
|
$ |
133 |
|
(4.7 |
)% |
Income from continuing operations margin |
|
30.4 |
% |
29.0 |
% |
1.4 |
pts. | ||
Income from discontinued operations - net of tax |
|
$ |
|
|
$ |
8 |
|
NM |
% |
Net income |
|
$ |
127 |
|
$ |
141 |
|
(10.0 |
)% |
NM - Not Meaningful
Organization of Information:
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 companys Form 10 Registration Statement filed on May 5, 2017 (Form 10) and Amendment No. 1 to the Form 10 filed on June 22, 2017 (Amendment No. 1, and together with the Form 10, the Form 10/A), contained historical information for the years 2016, 2015 and 2014 as well as the first quarter of 2017, presented on a combined basis. The company filed a Form 8-K on July 25, 2017 (Form 8-K) to present the change to 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.
On December 31, 2016, the company divested the assets and liabilities of its U.S. remanufacturing and remarketing business to IBM. The operating results of this business are reported as discontinued operations in the Consolidated Financial Statements for the periods presented for the year 2016. For additional information, see note L, Discontinued Operations, in the companys Form 8-K, and note 10, Discontinued Operations, in this Form 10-Q.
Financial Performance Summary Three Months Ended September 30:
In the third quarter of 2017, the company delivered revenue of $418 million and net income from continuing operations of $127 million. In the third quarter of 2016, the company had revenue of $459 million, income from continuing operations, net of tax, of $133 million and income from discontinued operations, net of tax, of $8 million, resulting in net income of $141 million. In the third quarter of 2017 and 2016, return on equity from continuing operations was 15.6 percent and 14.1 percent, respectively.
Total revenue decreased $42 million, or 9.1 percent, in the third quarter of 2017 as compared to 2016, primarily driven by a decrease in operating lease revenue of $23 million, which declined 19.1 percent, and a decrease in financing revenue of $19 million, or 5.6 percent. The decrease in operating lease revenue was mainly due to lower lease volumes across all geographies. The decrease in financing revenue was due to declining Client Financing average asset balances and yields. For any category of assets, average assets are calculated as the sum of the balance of the assets at the beginning of the period plus the balance of the assets at the end of the period divided by two. Yields from any category of assets are the companys rate of return on these assets and are calculated by dividing income from these assets by the average assets during the period.
From a segment perspective, Client Financing revenue of $309 million in the third quarter of 2017 declined 14.4 percent as compared to the prior year. The decline in revenue in 2017 was driven by a decrease in financing average assets and yields, as well as a decrease in operating leases. Commercial Financing revenue of $109 million in the third quarter of 2017 increased 10.2 percent as compared to the third quarter of 2016. The increase in revenue in 2017 was driven by an increase in average asset balances.
From a geographic perspective, revenue in the third quarter of 2017 declined across each of the three geographies, as compared to the same period in 2016. Americas revenue of $227 million declined 10.3 percent, EMEA revenue of $116 million declined 0.4 percent and Asia Pacific revenue of $74 million declined 17.0 percent.
Net margin, which is calculated as revenue minus financing costs and depreciation of equipment under operating lease, in the third quarter of 2017 was $264 million, a decrease of $26 million, or 9.1 percent, as compared to the same period in 2016. The decline in the third quarter of 2017 was driven by the decrease in revenue noted above, partially offset by a decrease in depreciation expense of $17 million, or 22.3 percent, as compared to the same period in the prior year. Financing cost increased $1 million, or 1.5 percent, in the third quarter of 2017 as compared to the third quarter of 2016, primarily due to an increase in the average debt balance, partially offset by a decrease in interest rates as compared to the same period in 2016. Net margin percentage of 63.2 percent in the third quarter of 2017 was flat as compared to the net margin percentage in the same period in 2016.
Total expense and other (income) of $99 million in the third quarter of 2017 increased $4 million, or 3.8 percent, compared to the same period in 2016. The year-to-year increase was primarily driven by increased selling, general and administrative expenses when compared to the same period in 2016.
Pre-tax income from continuing operations of $165 million in the third quarter of 2017 decreased 15.4 percent as compared to the third quarter of 2016. The decrease in 2017 was primarily driven by financing margin declines. Pre-tax income from continuing operations margin percentage in the third quarter of 2017 of 39.5 percent decreased on a year-to-year basis by 2.9 points.
Income from continuing operations after tax decreased $6 million, or 4.7 percent, in the third quarter of 2017 as compared to the same period in 2016. In the third quarter of 2017, income from continuing operations margin of 30.4 percent increased 1.4 points on a year-to-year basis. The continuing operations effective tax rate was 23.0 percent in the third quarter of 2017 as compared to 31.6 percent in the same period of 2016, driven by a more favorable geographic mix of earnings.
Net income decreased $14 million in the third quarter of 2017 as compared to the same period in 2016. The decrease was primarily driven by declines in financing margin and the decline in net income from discontinued operations of $8 million due to the companys divestiture of its U.S. remanufacturing and remarketing business to IBM in 2016. For additional information, see note 10, Discontinued Operations. The decreases in financing margin and net income from discontinued operations were partially offset by the benefit from a decline in the effective tax rate in the current year. In the third quarter of 2017, return on equity from continuing operations increased 1.5 points primarily driven by a lower average equity balance year to year, partially offset by the decline in net income.
The company generated $145 million in cash flow from operating activities in the third quarter of 2017, a decrease of $22 million when compared to the third quarter of 2016, primarily driven by lower net income performance. Net cash provided by investing activities was $430 million for the three months ended September 30, 2017 compared to net cash used of $4,891 million for the three months ended September 30, 2016, with the decline primarily driven by lower levels of cash invested with IBM in the current year. Net cash used in financing activities was $473 million for the three months ended September 30, 2017 compared to net cash provided of $4,921 million for the three months ended September 30, 2016, with the decline primarily driven by proceeds from internal debt in the prior year. In the third quarter of 2016, $5.7 billion was invested with IBM and was subsequently borrowed by the company in the form of short-term debt in multiple currencies. These amounts were settled early in the fourth quarter of 2016 and are presented as separate cash flows with the cash invested with IBM reflected within other investing activities-net within investing activities and the subsequent borrowing from IBM reflected within short-term borrowings from/(repayments to) IBM-net within financing activities in the Consolidated Statement of Cash Flows as of September 30, 2016.
Financial Results Summary - Nine Months Ended September 30:
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2017 |
|
2016 |
|
Change |
| ||
Total revenue |
|
$ |
1,274 |
|
$ |
1,401 |
|
(9.0 |
)% |
Net margin |
|
$ |
829 |
|
$ |
888 |
|
(6.7 |
)% |
Net margin percentage |
|
65.1 |
% |
63.4 |
% |
1.7 |
pts. | ||
Total expense and other (income) |
|
$ |
341 |
|
$ |
360 |
|
(5.2 |
)% |
Income from continuing operations before income taxes |
|
$ |
488 |
|
$ |
528 |
|
(7.6 |
)% |
Provision for income taxes |
|
$ |
112 |
|
$ |
167 |
|
(32.8 |
)% |
Income from continuing operations |
|
$ |
376 |
|
$ |
361 |
|
4.0 |
% |
Income from continuing operations margin |
|
29.5 |
% |
25.8 |
% |
3.7 |
pts. | ||
Income from discontinued operations - net of tax |
|
$ |
|
|
$ |
70 |
|
NM |
% |
Net income |
|
$ |
376 |
|
$ |
431 |
|
(12.8 |
)% |
NM - Not Meaningful
|
|
|
|
|
|
Yr.-to-Date |
| ||
|
|
|
|
|
|
Percent |
| ||
|
|
At 9/30/2017 |
|
At 12/31/2016 |
|
Change |
| ||
Assets |
|
$ |
35,002 |
|
$ |
35,279 |
|
(0.8 |
)% |
Liabilities |
|
$ |
31,781 |
|
$ |
31,577 |
|
0.6 |
% |
Members Interest |
|
$ |
3,220 |
|
$ |
3,703 |
|
(13.0 |
)% |
Debt-to-Equity
|
|
At September 30, |
|
At December 31, |
|
|
|
2017 |
|
2016 |
|
Debt-to-Equity Ratio * |
|
8.9x |
|
7.3x |
|
* The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of members interest in the company at the end of the reporting period presented.
Return on Equity
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(Dollars in millions) |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
| ||||
After-tax income from continuing operations |
|
$ |
127 |
|
$ |
133 |
|
$ |
376 |
|
$ |
361 |
|
Annualized after-tax income from continuing operations (1) * |
|
508 |
|
533 |
|
501 |
|
482 |
| ||||
Average equity (2) ** |
|
3,264 |
|
3,784 |
|
3,329 |
|
3,733 |
| ||||
Return on equity (1)/(2) |
|
15.6 |
% |
14.1 |
% |
15.1 |
% |
12.9 |
% | ||||
* Calculated based upon an estimated tax rate principally based on IBM Credits geographic mix of earnings as IBMs provision for income taxes is determined on a consolidated basis.
** Average of the ending members interest for the last two quarters and four quarters on a continuing operations basis, for the three and nine months ended September 30, respectively.
Financial Performance Summary Nine Months Ended September 30:
In the first nine months of 2017, the company delivered revenue of $1,274 million and net income from continuing operations of $376 million. In the first nine months of 2016, the company had revenue of $1,401 million, income from continuing operations, net of tax, of $361 million and income from discontinued operations, net of tax, of $70 million, resulting in net income of $431 million. In the first nine months of 2017 and 2016, return on equity was 15.1 percent and 12.9 percent, respectively.
Total revenue decreased $127 million, or 9.0 percent, in the first nine months of 2017 as compared to the first nine months of 2016, driven by a decrease in operating lease revenue of $86 million, or 23.1 percent, and a decrease in financing revenue of $40 million, or 3.9 percent. The decrease in operating lease revenue was mainly due to a decline in originations during 2016 and asset sales to third parties in the current year. The decrease in financing revenue was primarily due to a decline in yields.
From a segment perspective, Client Financing revenue of $945 million in the first nine months of 2017 declined 15.0 percent as compared to the first nine months of 2016. The decline in revenue in 2017 was driven by a decrease in operating leases, as well as a decrease in financing average assets and yields. Commercial Financing revenue of $330 million in the first nine months of 2017 increased 13.6 percent as compared to the first nine months of 2016. The increase in revenue in 2017 was driven by an increase in average asset balances.
From a geographic perspective, revenue declined in the first nine months of 2017 as compared to the first nine months of 2016 in each of the three geographies, primarily due to a decline in revenue from operating leases. Americas revenue of $701 million in the first nine months of 2017 declined 8.0 percent as compared to the first nine months of 2016. Within EMEA, revenue of $349 million declined 7.1 percent. Asia Pacific revenue of $224 million declined 14.9 percent in the first nine months of 2017 as compared to the same period in 2016.
Net margin in the first nine months of 2017 and 2016 was $829 million and $888 million, respectively. In the first nine months of 2017, net margin decreased $59 million or 6.7 percent, as compared to the first nine months of 2016. The decline was driven by the decreases in revenue noted above, partially offset by a decrease in financing cost and depreciation expense. Financing cost decreased $11 million, or 3.8 percent, in 2017 primarily due to declining interest rates, partially offset by an increase in average borrowings as compared to 2016. Depreciation expense decreased $57 million or 24.2 percent in the first nine months of 2017 as compared to the same period in 2016. The decrease in depreciation expense in 2017 was due to declines in the average net investment in operating leases in 2017 as compared to the prior year. Net margin percentage of 65.1 percent increased 1.7 points compared to the prior year period.
Total expense and other (income) was $341 million in the first nine months of 2017 as compared to $360 million in the first nine months of 2016. Total expense and other (income) decreased $19 million, or 5.2 percent, primarily due to a decrease in provisions for credit losses, partially offset by increases in selling, general and administrative expenses and net losses resulting from derivative instruments and foreign currency.
Pre-tax income from continuing operations of $488 million decreased 7.6 percent as compared to the first nine months of 2016. The decrease in pre-tax income in 2017 was primarily driven by the decline in revenue, partially offset by a decrease in depreciation expense and lower provisions for credit losses. Pre-tax income from continuing operations margin percentage of 38.3 percent increased 0.6 points on a year to year basis.
Income from continuing operations, after tax, increased $14 million, or 4.0 percent, in the first nine months of 2017 as compared to the first nine months of 2016. Income from continuing operations margin of 29.5 percent increased 3.7 points on a year to year basis. The continuing operations effective tax rate was 23.0 percent as compared to 31.6 percent in 2016, driven by a more favorable geographic mix of earnings.
Net income decreased by $55 million in the first nine months of 2017 as compared to the first nine months of 2016. Net income in the first nine months of 2016 includes a net profit from discontinued operations of $70 million related to the companys divested U.S. remanufacturing and remarketing business. For additional information, see note 10, Discontinued Operations.
Return on equity from continuing operations increased 2.1 points compared to the prior year, primarily driven by a lower average equity balance year to year and an increase in net income from continuing operations.
Total assets of $35,002 million at September 30, 2017 declined $278 million as compared to December 31, 2016, driven primarily by a decline in total receivables of $1,725 million, partially offset by an increase in other assets of $1,402 million, mainly due to excess cash invested with IBM.
Third Quarter and First Nine Months in Review
Results of Continuing Operations
Segment Details
The following is an analysis of the reportable segment results for the third quarter and first nine months of 2017 versus the third quarter and first nine months of 2016. The table below presents each reportable segments revenue and net margin results. Segment pre-tax income is on a continuing operations basis.
|
|
|
|
Yr. to Yr. |
|
|
|
Yr. to Yr. |
| ||||||||
|
|
Three Months Ended |
|
Percent/ |
|
Nine Months Ended |
|
Percent/ |
| ||||||||
|
|
September 30, |
|
Margin |
|
September 30, |
|
Margin |
| ||||||||
(Dollars in millions) |
|
2017 |
|
2016 |
|
Change |
|
2017 |
|
2016 |
|
Change |
| ||||
Client Financing |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
309 |
|
$ |
360 |
|
(14.4 |
)% |
$ |
945 |
|
$ |
1,111 |
|
(15.0 |
)% |
Net margin |
|
184 |
|
215 |
|
(14.6 |
)% |
582 |
|
672 |
|
(13.4 |
)% | ||||
Net margin percentage |
|
59.6 |
% |
59.8 |
% |
(0.2 |
)pts. |
61.6 |
% |
60.5 |
% |
1.1 |
pts. | ||||
Pre-tax income |
|
$ |
123 |
|
$ |
151 |
|
(18.7 |
)% |
$ |
363 |
|
$ |
402 |
|
(9.6 |
)% |
Pre-tax margin |
|
39.9 |
% |
42.0 |
% |
(2.1 |
)pts. |
38.5 |
% |
36.2 |
% |
2.3 |
pts. | ||||
Commercial Financing |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
109 |
|
$ |
99 |
|
10.2 |
% |
$ |
330 |
|
$ |
290 |
|
13.6 |
% |
Net margin |
|
80 |
|
75 |
|
6.9 |
% |
247 |
|
216 |
|
14.2 |
% | ||||
Net margin percentage |
|
73.3 |
% |
75.5 |
% |
(2.2 |
)pts. |
74.9 |
% |
74.5 |
% |
0.4 |
pts. | ||||
Pre-tax income |
|
$ |
42 |
|
$ |
43 |
|
(3.8 |
)% |
$ |
125 |
|
$ |
126 |
|
(1.4 |
)% |
Pre-tax margin |
|
38.3 |
% |
43.8 |
% |
(5.5 |
)pts. |
37.8 |
% |
43.6 |
% |
(5.8 |
)pts. | ||||
Total Segments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
$ |
418 |
|
$ |
459 |
|
(9.1 |
)% |
$ |
1,274 |
|
$ |
1,401 |
|
(9.0 |
)% |
Net margin |
|
264 |
|
290 |
|
(9.1 |
)% |
829 |
|
888 |
|
(6.7 |
)% | ||||
Net margin percentage |
|
63.2 |
% |
63.2 |
% |
0.0 |
pts. |
65.1 |
% |
63.4 |
% |
1.7 |
pts. | ||||
Pre-tax income |
|
$ |
165 |
|
$ |
195 |
|
(15.4 |
)% |
$ |
488 |
|
$ |
528 |
|
(7.6 |
)% |
Pre-tax margin |
|
39.5 |
% |
42.4 |
% |
(2.9 |
)pts. |
38.3 |
% |
37.7 |
% |
0.6 |
pts. |
Client Financing
Client Financing revenue of $309 million in the third quarter of 2017 decreased $52 million, or 14.4 percent, as compared to the same period in 2016. The decrease in revenue was driven by a decline in financing average assets and yields of $32 million, as well as a decline in operating leases. For the first nine months of 2017, Client Financing revenue decreased $166 million, or 15.0 percent, as compared to the same period in 2016. The decrease in revenue was driven by a decline in operating leases of $86 million, as well as a decline in financing average assets and yields.
Net margin in the third quarter of 2017 decreased $32 million, or 14.6 percent, as compared to the same period in 2016. The decrease was primarily driven by the year-to-year revenue decline in the quarter, partially offset by a decrease in depreciation expense of $17 million and a decrease in interest expense of $3 million. The decrease in depreciation expense was due to the decline in average assets during the period as previously noted. The decrease in interest expense was due to a lower asset base in 2017. For the first nine months of the year, net margin decreased $90 million, or 13.4 percent, as compared to 2016. The decrease was primarily driven by the year-to-year revenue decline, partially offset by a decrease in depreciation expense of $57 million and a decrease in interest expense of $19 million.
Pre-tax income in the third quarter of 2017 decreased $28 million, or 18.7 percent, as compared to the same period in 2016. The decrease was primarily driven by a decline in financing revenue of $29 million and a decline in operating lease net margin of $6 million. For the first nine months of the year, pre-tax income decreased $39 million, or 9.6 percent, as compared to the same period in 2016. The decrease was primarily driven by a decline in revenue of $166 million, partially offset by a decrease in provision for credit losses of $62 million and a decrease in depreciation expense of $57 million.
Commercial Financing
Commercial Financing revenue of $109 million in the third quarter of 2017 increased $10 million, or 10.2 percent, as compared to the same period in 2016. The growth in revenue was driven by an increase in average assets with Commercial Financing clients due to an expansion with OEM IT suppliers. For the first nine months of the year, Commercial Financing revenue increased $39 million, or 13.6 percent, as compared to the same period in 2016.
Net margin in the third quarter of 2017 increased $5 million, or 6.9 percent, as compared to the same period in 2016. The increase was primarily driven by the growth in revenue, partially offset by an increase in financing cost during the period. For the first nine months of 2017, net margin increased $31 million, or 14.2 percent, as compared to the same period in 2016.
Pre-tax income in the third quarter of 2017 decreased $2 million, or 3.8 percent, as compared to the same period in 2016, driven by an increase in credit insurance fees, partially offset by a decrease in provision for credit losses. For the first nine months of 2017, pre-tax income decreased $2 million, or 1.4 percent, as compared to the same period in 2016.
Geographic Revenue
The following provides revenue performance by geography.
(Dollars in millions) |
|
|
|
|
|
Yr.-to-Yr. |
| ||
For the three months ended September 30: |
|
2017 |
|
2016 |
|
Change |
| ||
Total revenue |
|
$ |
418 |
|
$ |
459 |
|
(9.1 |
)% |
Geographies |
|
|
|
|
|
|
| ||
Americas |
|
$ |
227 |
|
$ |
254 |
|
(10.3 |
)% |
Europe/Middle East/Africa |
|
116 |
|
117 |
|
(0.4 |
)% | ||
Asia Pacific |
|
74 |
|
89 |
|
(17.0 |
)% |
(Dollars in millions) |
|
|
|
|
|
Yr.-to-Yr. |
| ||
For the nine months ended September 30: |
|
2017 |
|
2016 |
|
Change |
| ||
Total revenue |
|
$ |
1,274 |
|
$ |
1,401 |
|
(9.0 |
)% |
Geographies |
|
|
|
|
|
|
| ||
Americas |
|
$ |
701 |
|
$ |
762 |
|
(8.0 |
)% |
Europe/Middle East/Africa |
|
349 |
|
375 |
|
(7.1 |
)% | ||
Asia Pacific |
|
224 |
|
263 |
|
(14.9 |
)% |
Total geographic revenue of $418 million decreased $42 million, or 9.1 percent, in the third quarter of 2017 compared to the same period in 2016 with the declines in the Americas and Asia Pacific due to lower operating lease revenue.
Americas revenue of $227 million decreased $26 million, or 10.3 percent, in the third quarter of 2017 compared to the same period in 2016, primarily driven by a decline in operating lease revenue of $11 million and a decrease in capital lease average assets.
EMEA revenue of $116 million was essentially flat on a year-to-year third quarter basis, with declines in Client Financing revenues offset by improvements in Commercial Financing due to higher asset balances.
Asia Pacific revenue of $74 million decreased $15 million, or 17.0 percent, in the third quarter of 2017 compared to the same period in 2016, primarily driven by a decline in operating lease revenue of $9 million.
Total geographic revenue of $1,274 million decreased $127 million, or 9.0 percent, in the first nine months of 2017 compared to the same period in 2016, with declines across each of the geographies due to lower operating lease revenue.
Americas revenue of $701 million decreased $61 million, or 8.0 percent, in the first nine months of 2017 compared to the first nine months of the prior year, primarily driven by a decline in operating lease revenue of $46 million. EMEA revenue of $349 million decreased $27 million, or 7.1 percent, with a decline in operating lease revenue of $15 million. Asia Pacific revenue of $224 million decreased $39 million, or 14.9 percent, with a decline in operating lease revenue of $25 million.
Expense
Total Expense and Other (Income)
(Dollars in millions) |
|
|
|
|
|
Yr.-to-Yr. |
| ||
For the three months ended September 30: |
|
2017 |
|
2016 |
|
Change |
| ||
Total expense and other (income) |
|
|
|
|
|
|
| ||
Selling, general and administrative |
|
$ |
94 |
|
$ |
91 |
|
3.2 |
% |
Provisions for credit losses |
|
2 |
|
2 |
|
(2.4 |
) | ||
Other (income) and expense |
|
3 |
|
2 |
|
35.7 |
| ||
Total expense and other (income) |
|
$ |
99 |
|
$ |
95 |
|
3.8 |
% |
Total expense-to-revenue ratio |
|
23.7 |
% |
20.7 |
% |
2.9 |
pts. |
(Dollars in millions) |
|
2017 |
|
2016 |
|
Yr.-to-Yr. |
| ||
Total expense and other (income) |
|
|
|
|
|
|
| ||
Selling, general and administrative |
|
$ |
303 |
|
$ |
287 |
|
5.5 |
% |
Provisions for credit losses |
|
11 |
|
82 |
|
(86.9 |
) | ||
Other (income) and expense |
|
28 |
|
(9 |
) |
NM |
| ||
Total expense and other (income) |
|
$ |
341 |
|
$ |
360 |
|
(5.2 |
)% |
Total expense-to-revenue ratio |
|
26.8 |
% |
25.7 |
% |
1.1 |
pts. |
NM - Not Meaningful
Total expense and other (income) of $99 million increased $4 million, or 3.8 percent, in the third-quarter of 2017 as compared to the same period in 2016. For the nine months ended September 30, 2017, total expense and other (income) of $341 million decreased $19 million, or 5.2 percent, as compared to the prior year period.
Total expense excluding provision for credit losses increased $4 million, or 3.9 percent, in the third quarter of 2017 as compared to 2016, and increased $52 million, or 18.8 percent, in the first nine months of 2017 as compared to the same period in 2016. The increase in expense in the first nine months of 2017 versus 2016 was primarily driven by losses from currency, net of derivative transactions and an increase in total selling, general and administrative (SG&A) expenses.
SG&A expense increased $3 million in the third quarter of 2017 as compared to the third quarter of 2016. SG&A expense increased $16 million in the first nine months of 2017 as compared to the first nine months of 2016 driven primarily by higher contracted services fees and employee related compensation.
Other (income) and expense was $3 million of expense in the third quarter of 2017 as compared to $2 million in the same period of 2016. The increase in expense in the third quarter of 2017 was mainly driven by foreign exchange forward contract derivative losses of $4 million, partially offset by income from the sale of returned equipment to IBM. Other (income) and expense was $28 million of expense in the first nine months of 2017 as compared to $9 million of income in the first nine months of 2016. The increase in expense in the first nine months of 2017 was mainly driven by foreign exchange forward contract derivative losses of $245 million, partially offset by foreign currency transaction gains of $211 million, in the current
year. Foreign currency transaction losses and foreign exchange forward contract derivative gains in the first nine months of 2016 were not material.
Provisions for credit losses were $2 million in the third quarter of 2017, which was flat compared to the prior year period. Provisions for credit losses decreased $71 million, or 86.9 percent, in the first nine months of 2017 as compared to the first nine months of 2016 due to higher general reserve requirements in Brazil in the prior year. For additional information on provisions for credit losses, see note 4, Financing Receivables, Receivables Purchased/Participated From IBM.
Taxes
The continuing operations effective tax rate for the third quarter and first nine months of 2017 was 23.0 percent, a decline for each period of 8.6 points compared to the same periods in 2016, primarily due to a more favorable geographic mix of earnings.
The company is subject to taxation in the U.S. and various state and foreign jurisdictions. With respect to the companys U.S. federal and certain state and foreign operations that are included in applicable IBM consolidated tax returns, pursuant to the Tax Sharing Agreement, any subsequent changes to the companys income tax liability as a result of valuation allowances and tax examinations are the responsibility of IBM. Therefore, any recognition and subsequent changes in assessment about the sustainability of related tax positions, including interest and penalties, are the responsibility of IBM. As such, there have been no uncertain tax liabilities recorded in the Consolidated Financial Statements as the company bears no risk associated with any subsequent change in the sustainability of uncertain tax positions.
For the companys separate income tax return filings, the company is generally no longer subject to tax examinations for years prior to 2012. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax have been provided for. As such, there are no uncertain tax positions recorded in the companys Consolidated Financial Statements related to separate income tax return filers.
If the companys provision for income taxes had been prepared using the separate return method without modification for the benefits-for-loss approach, there would be no material difference in the total taxes included in net income reported in each of the periods above. For additional information, see Note 1, Basis of Presentation in the Notes to Consolidated Financial Statements.
Results of Discontinued Operations
The company divested its U.S. remanufacturing and remarketing business to IBM at December 31, 2016, and therefore, it is reflected as discontinued operations in the first nine months of the prior year. For additional information, see note 10, Discontinued Operations.
Net income from discontinued operations was $8 million in the third quarter of 2016 and $70 million for the first nine months of 2016.
Financial Position Summary
The companys primary use of funds is to originate financing receivables and operating leases with end-users, suppliers, distributors, resellers and IBM. Financing receivables consist of direct financing leases and loans to end-user clients, purchases of installment payment plans from IBM and working capital financing to suppliers, distributors and resellers. Operating leases are for IBM and OEM IT products. Receivables purchased/participated from IBM include purchased interests in certain of IBMs trade accounts receivable and IBM receivables that have been participated to IBM Credit. Financing receivables from IBM include loan financing to IBMs Technology Services & Cloud Platforms segment. For additional information relating to financing activities with IBM, see note 9, Relationship with IBM and Related Party Transactions.
Total assets of $35,002 million at September 30, 2017 declined $278 million as compared to year-end 2016, primarily driven by:
· A decline in financing receivables of $2,651 million primarily driven by a decline in Commercial Financing receivables of $1,248 million, a decline in direct financing leases of $780 million, and a decline in Client Financing loans and installment payment receivables of $623 million; partially offset by
· An increase in other assets of $1,402 million primarily driven by an increase in excess cash invested with IBM of $1,419 million; and
· An increase in purchased/participated receivables from IBM of $779 million.
At September 30, 2017, substantially all client and commercial financing assets were IT related assets, and approximately 53 percent of the total portfolio, excluding financing receivables from IBM and receivables purchased from IBM, was with investment grade clients with no direct exposure to consumers. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 15 points to 68 percent.
For additional information relating to excess cash invested with IBM, see note 9, Relationship with IBM and Related Party Transactions.
Total liabilities of $31,781 million at September 30, 2017 increased $205 million as compared to year-end 2016, primarily driven by:
· An increase in total debt of $1,477 million, including an increase in debt with third parties of $3,434 million and a decrease in debt payable to IBM of $1,957 million; partially offset by
· A decline in accounts payable to IBM of $880 million driven by settlement of fourth-quarter 2016 originations;
· A decline in other liabilities of $273 million, primarily driven by accounts payable to vendors which decreased $252 million; and
· A decrease in tax liabilities of $119 million.
Originations of Financing Receivables and Operating Leases
Originations are managements estimate of the gross additions for Client Financing and Commercial Financing assets. There are no industry standards or requirements governing the reporting of financing asset originations. Management believes that the estimated values of financing asset originations disclosed in the table below provide insight into the potential future cash flows and earnings of the company.
The Client Financing origination values presented below exclude the companys loans to IBMs Technology Services & Cloud Platforms segment, which are executed under a loan facility and are not considered originations.
Originations
|
|
Three Months Ended |
|
Yr.-to-Yr. |
|
Nine Months Ended |
|
Yr.-to-Yr. |
| ||||||||
|
|
September 30, |
|
Percent |
|
September 30, |
|
Percent |
| ||||||||
(Dollars in millions) |
|
2017 |
|
2016 |
|
Change |
|
2017 |
|
2016 |
|
Change |
| ||||
Client Financing |
|
$ |
3,110 |
|
$ |
2,512 |
|
23.8 |
% |
$ |
8,277 |
|
$ |
7,795 |
|
6.2 |
% |
Commercial Financing |
|
15,497 |
|
12,549 |
|
23.5 |
% |
43,951 |
|
37,201 |
|
18.1 |
% | ||||
Total originations |
|
$ |
18,608 |
|
$ |
15,061 |
|
23.5 |
% |
$ |
52,229 |
|
$ |
44,995 |
|
16.1 |
% |
In the third quarter of 2017, the company originated $3,110 million of Client Financing receivables as compared to $2,512 million in the third quarter of 2016. The year-to-year increase of $598 million was driven by higher originations across all geographies. The increase in Client Financing originations of $482 million in the first nine months of 2017 as compared to the first nine months of 2016 was driven by higher originations in the Americas partially offset by lower originations in EMEA and Asia Pacific.
In the third quarter of 2017, the company originated $15,497 million of Commercial Financing receivables as compared to $12,549 million in the third quarter of 2016. The company originated $43,951 million of Commercial Financing receivables in the first nine months of 2017 as compared to $37,201 million in the first nine months of 2016. The increases of $2,949 million and $6,751 million in the third quarter and first nine months of 2017, respectively, as compared to the same periods in the prior year were primarily driven by higher OEM IT originations and an increase in purchased receivables from IBM.
Segment Assets
|
|
|
|
|
|
Yr.-to-Date |
| ||
(Dollars in millions) |
|
At September 30, |
|
At December 31, |
|
Percent |
| ||
Client Financing |
|
2017 |
|
2016 |
|
Change |
| ||
Financing receivables, net |
|
$ |
13,841 |
|
$ |
15,244 |
|
(9.2 |
)% |
Equipment under operating leases - net |
|
431 |
|
506 |
|
(14.8 |
) | ||
Financing receivables from IBM |
|
3,661 |
|
3,513 |
|
4.2 |
| ||
Receivables participated from IBM, net |
|
3,340 |
|
2,423 |
|
37.8 |
| ||
Total assets |
|
$ |
21,273 |
|
$ |
21,687 |
|
(1.9 |
)% |
|
|
|
|
|
|
Yr.-to-Date |
| ||
(Dollars in millions) |
|
At September 30, |
|
At December 31, |
|
Percent |
| ||
Commercial Financing |
|
2017 |
|
2016 |
|
Change |
| ||
Financing receivables, net |
|
$ |
8,189 |
|
$ |
9,436 |
|
(13.2 |
)% |
Receivables purchased from IBM, net |
|
1,336 |
|
1,474 |
|
(9.4 |
) | ||
Total assets |
|
$ |
9,525 |
|
$ |
10,911 |
|
(12.7 |
)% |
The decline in Client Financing assets of $414 million at September 30, 2017 as compared to December 31, 2016 was primarily driven by cash collections of financing receivables in excess of new originations, partially offset by increases in receivables participated from IBM and loan financing with IBMs Technology Services & Cloud Platforms segment in the first nine months of 2017.
The decrease in Commercial Financing assets of $1,386 million at September 30, 2017 as compared to December 31, 2016 was driven by cash collections exceeding new originations, primarily due to a cyclical trend of higher originations during the second half of the prior year.
The companys receivables portfolio at September 30, 2017 represented the following industry profile: Financial (33 percent), Government (14 percent), Manufacturing (14 percent), Services (13 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
The companys receivables portfolio at December 31, 2016 represented the following industry profile: Financial (34 percent), Government (14 percent), Manufacturing (13 percent), Services (12 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
The assets of the company were financed with $28,507 million of total debt at September 30, 2017, as compared to $27,030 million of debt at December 31, 2016.
For additional information relating to financing receivables with IBM, see note 9, Relationship with IBM and Related Party Transactions. For additional information on the companys debt, see note 11, Borrowings.
Financing Receivables and Allowances
The following table presents financing and other receivables excluding residual values, as well as loan financing to IBMs Technology Services & Cloud Platforms segment which the company considers collectable and without third party risk.
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2017 |
|
2016 |
| ||
Gross financing receivables |
|
$ |
26,493 |
|
$ |
28,387 |
|
Specific allowance for credit losses |
|
104 |
|
148 |
| ||
Unallocated allowance for credit losses |
|
118 |
|
130 |
| ||
Total allowance for credit losses |
|
222 |
|
277 |
| ||
Net financing receivables |
|
$ |
26,272 |
|
$ |
28,109 |
|
Allowance for credit losses coverage |
|
0.8 |
% |
1.0 |
% |
Roll Forward of Financing Receivables Allowance for Credit Losses
(Dollars in millions) |
|
Additions |
|
Write-offs* |
|
Other** |
|
At September 30, 2017 |
| ||||
$ |
277 |
|
$ |
11 |
|
$ |
(74 |
) |
8 |
|
$ |
222 |
|
* |
|
Represents reserved receivables, net of recoveries, that were written off during the period. |
** |
|
Represents primarily translation adjustments. |
The allowance for credit losses on financing receivables at September 30, 2017 was $222 million, or 0.8 percent of gross financing receivables. At December 31, 2016, the allowance for credit losses on financing receivables was $277 million, or 1.0 percent of gross financing receivables. The decline was driven by the 2017 write-offs of $74 million of receivables previously reserved, partially offset by the overall decline in gross receivables. Specific reserves were $104 million at September 30, 2017, a decrease of $44 million as compared to December 31, 2016. Unallocated reserves were $118 million at September 30, 2017, a decrease of $12 million as compared to December 31, 2016.
Bad debt expense was $2 million for the three months ended September 30, 2017 and 2016. Bad debt expense was $11 million for the nine months ended September 30, 2017, compared to $82 million for the same period in 2016. The year-to-year decrease of $71 million in bad debt expense was due to higher general reserve requirements in Brazil during 2016.
Residual Value
Residual value is a risk of the companys business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. The company has insight into product plans and cycles for IBM products and closely monitors OEM IT product announcements. Based upon this product information, the company continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
The company optimizes the recovery of residual values by extending lease arrangements with current clients. Assets returned from lease are sold to IBM at cost, which approximates fair value. In addition, IBM may migrate a client to new technology through an early lease termination. Upon early termination of the lease, IBM will purchase the returned equipment from the company at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value.
The following table presents the recorded amount of unguaranteed residual value for direct financing and operating leases at September 30, 2017 and December 31, 2016. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at September 30, 2017 and December 31, 2016, is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, IBM Credit will obtain guarantees from a third party for the future value of the equipment to be returned at end of lease. While primarily focused on IBM products, guarantees are also obtained for certain OEM IT products. These third-party guarantees are included in minimum lease payments as provided for by accounting standards in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets.
The residual value guarantee increases the minimum lease payments that are utilized in determining the classification of a lease as a direct financing lease or operating lease. The aggregate incremental asset value of direct financing leases of IBM
equipment with residual value guarantees was $68 million and $43 million in the third quarter of 2017 and 2016, respectively, and $167 million and $193 million for the first nine months of 2017 and 2016, respectively. The increase in the third quarter of 2017 and the decline in the first nine months of 2017 versus the same period in 2016 was a result of IBM product announcement cycles. In addition, the company obtains guarantees from third parties for direct financing leases of OEM IT products. The aggregate incremental asset value of these leases was $38 million and $43 million in the third quarter of 2017 and 2016, respectively. The aggregate incremental asset value of these leases was $115 million and $128 million in the first nine months of 2017 and 2016, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $5 million and $4 million for the financing transactions originated during the third quarter of 2017 and 2016, respectively, and were $12 million and $11 million for the financing transactions originated in the first nine months of 2017 and 2016, respectively. The cost of guarantees was $0.5 million and $0.4 million for the third quarter of 2017 and 2016, respectively, and $1.2 million and $1.1 million for the first nine months of 2017 and 2016, respectively.
Unguaranteed Residual Value
|
|
At |
|
At |
|
Estimated Run Out of September 30, 2017 Balance |
| ||||||||||||
|
|
January 1, |
|
September 30, |
|
|
|
|
|
|
|
2020 and |
| ||||||
(Dollars in millions) |
|
2017 |
|
2017 |
|
2017 |
|
2018 |
|
2019 |
|
Beyond |
| ||||||
Direct financing leases |
|
$ |
532 |
|
$ |
484 |
|
$ |
39 |
|
$ |
136 |
|
$ |
164 |
|
$ |
145 |
|
Operating leases |
|
100 |
|
82 |
|
20 |
|
22 |
|
23 |
|
17 |
| ||||||
Total unguaranteed residual value |
|
$ |
632 |
|
$ |
566 |
|
$ |
60 |
|
$ |
158 |
|
$ |
187 |
|
162 |
| |
Related original amount financed |
|
$ |
11,510 |
|
$ |
10,577 |
|
|
|
|
|
|
|
|
| ||||
Percentage |
|
5.5 |
% |
5.4 |
% |
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Liquidity and Capital Resources
IBM Credit funds current and future obligations through the generation of cash flows from operations and its access to the short-term and long-term capital markets, as well as the support given by IBMs overall liquidity position and access to capital markets. The debt used to fund the companys financing assets as of September 30, 2017 was primarily comprised of loans from IBM.
On July 20, 2017, IBM and the company (the Borrowers) entered into a $2.5 billion 364-Day Credit Agreement, and a $2.5 billion Three-Year Credit Agreement (the Credit Agreements). The Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the Credit Agreements. Subject to certain conditions stated in the Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of the Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions. As of September 30, 2017, there were no borrowings under the Credit Agreements.
In August 2017, IBM Credit established a commercial paper program under which the company is permitted to issue unsecured commercial paper notes from time to time, up to a maximum aggregate amount outstanding at any one time of $5 billion. The proceeds of the commercial paper may be used for general corporate purposes, including, among other items, the repayment of indebtedness and other short-term liquidity needs. The maturity of the commercial paper notes issued may vary but may not exceed 364 days from the date of issuance. The notes are sold under customary terms in the commercial paper marketplace, and can be issued either at a discount from par, or at par, and bear interest rates as agreed upon under the terms and conditions of the agreements between the company and each commercial paper dealer. At September 30, 2017, there was no commercial paper balance outstanding.
Prior to 2017, the company managed its debt-to-equity ratio at approximately 7 to 1. In January 2017, the company increased its debt payable to IBM and made distributions to IBM, which resulted in an increase in the debt-to-equity ratio to approximately 9 to 1. In the third quarter of 2017, the company filed a shelf registration statement with the SEC allowing it to offer for sale public debt securities. In September 2017, the company issued fixed and floating rate debt securities in the aggregate amount of $3 billion and made distributions to IBM of $365 million, including a return of profit, while maintaining the targeted debt-to-equity ratio of 9 to 1. The future amount of third-party debt and contributions from and distributions to
IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio of 9 to 1, which may vary based on several factors, including differences between managements expectations and actual results of operations.
The companys Credit Agreements each contain significant debt covenants, which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of IBMs consolidated net tangible assets, and restrict the ability of the company or IBM to merge or consolidate with a third party, unless certain conditions are met. The Credit Agreements also include several financial covenants, including that (i) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (ii) the companys leverage ratio cannot be greater than 11 to 1 as of the last day of the each fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million. The companys indenture governing its debt securities contains significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of liens (other than permitted liens) to 15 percent of the companys consolidated net tangible assets, and restrict the companys ability to merge or consolidate unless certain conditions are met.
The company is in compliance with all of its significant debt covenants and is obligated to provide periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default. If certain events of default were to occur, the principal and interest on the debt to which any event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. See Support Agreement in note 9, Relationship with IBM and Related Party Transactions, for additional information.
The major rating agencies ratings on the companys debt securities appear in the table below. IBM Credit is a strong investment grade company with significant financial flexibility to execute its strategy.
The company does not have ratings trigger provisions in its debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating.
|
|
STANDARD |
|
MOODYS |
|
|
|
|
|
AND |
|
INVESTORS |
|
FITCH |
|
|
|
POORS |
|
SERVICE |
|
RATINGS |
|
Long-term debt |
|
A+ |
|
A1 |
|
A+ |
|
Commercial paper |
|
A-1 |
|
Prime-1 |
|
F1 |
|
In the normal course of business, the company may be exposed to the impact of foreign currency fluctuations and interest rate changes. Although the company seeks to substantially match fund the term, currency and interest rate variability of its debt against its underlying financing assets, risks may arise from a mismatch between assets and the related liabilities used for funding. The company also employs a rigorous process to optimize portfolio risk management. Portfolio risks include credit and residual value risk. For additional information on the management of these risks by the company, see note A, Significant Accounting Policies and note D, Financial Instruments, within Exhibit 99.1 to the Form 8-K and the sections entitled Portfolio Risk Management and Quantitative and Qualitative Market Risks within the Management Discussion and Analysis, in the Form 10/A.
Cash Flow and Liquidity Trends
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2017 |
|
2016 |
| ||
Net cash provided by operating activities |
|
$ |
607 |
|
$ |
604 |
|
Net cash (used in) investing activities |
|
(26 |
) |
(2,468 |
) | ||
Net cash (used in)/provided by financing activities |
|
(504 |
) |
2,102 |
| ||
Cash and cash equivalents |
|
$ |
1,892 |
|
$ |
1,727 |
|
Net cash provided by operating activities in the first nine months of 2017 increased $3 million as compared to the first nine months of 2016 driven by the following factors:
· Overall change in cash provided by operating net income, partially offset by lower operating cash provided from the discontinued U.S. remanufacturing and remarketing business.
Net cash used in investing activities in the first nine months of 2017 decreased $2,443 million as compared to the first nine months of 2016 driven by:
· A decrease in cash invested with IBM of $4,505 million; partially offset by
· Lower net collections of financing receivables of $2,112 million,
· Higher cash payments relating to derivative contracts of $225 million, and
· Prior year proceeds from the divestiture of the U.S. remanufacturing and remarketing business of $121 million.
Net cash used in financing activities in the first nine months of 2017 increased $2,606 million as compared to the first nine months of 2016 driven by:
· An increase in net cash used to pay debt outstanding with IBM of $5,781 million, and
· An increase in cash distributions to IBM of $365 million; partially offset by
· An increase in net cash provided from debt with third parties of $3,385 million.
The company invests a portion of its excess cash in short-term interest-bearing accounts with IBM, which can be withdrawn upon demand. The companys investment with IBM was $1,869 million at September 30, 2017 and $450 million at December 31, 2016. The higher cash position in 2017 provided additional liquidity to certain IBM Credit subsidiaries. In the third quarter of 2016, $5.7 billion was invested with IBM and was subsequently borrowed by the company in the form of short-term debt in multiple currencies. These amounts were settled early in the fourth quarter of 2016 and are presented as separate cash flows with the cash invested with IBM reflected within other investing activities-net within investing activities and the subsequent borrowing from IBM reflected within short-term borrowings from/(repayments to) IBM-net within financing activities in the Consolidated Statement of Cash Flows for the nine months as of September 30, 2016. The excess cash on deposit with IBM is presented in other assets in the Consolidated Statement of Financial Position, and in other investing activities-net in the Consolidated Statement of Cash Flows. For additional information, see note 9, Relationship with IBM and Related Party Transactions.
Debt
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2017 |
|
2016 |
| ||
Short-term debt |
|
|
|
|
| ||
Debt* |
|
$ |
69 |
|
$ |
44 |
|
Debt payable to IBM |
|
14,808 |
|
16,481 |
| ||
Total |
|
$ |
14,877 |
|
$ |
16,525 |
|
|
|
|
|
|
| ||
Long-term debt |
|
|
|
|
| ||
Debt* |
|
$ |
4,090 |
|
$ |
681 |
|
Debt payable to IBM |
|
9,541 |
|
9,824 |
| ||
Total |
|
$ |
13,631 |
|
$ |
10,505 |
|
Total debt |
|
$ |
28,507 |
|
$ |
27,030 |
|
* Includes notes, bank loans and secured borrowings.
Total debt was $28,507 million at September 30, 2017, an increase of $1,477 million from year-end 2016. Total debt payable to IBM was $24,349 million at September 30, 2017, a decrease of $1,957 million from December 31, 2016. Total third party debt was $4,158 million at September 30, 2017, an increase of $3,434 million from December 31, 2016. During the third quarter of 2017, the company filed a shelf registration statement with the SEC allowing it to offer for sale public debt securities. In the third quarter of 2017, the company issued fixed and floating rate debt securities in the aggregate amount of $3 billion with maturity dates ranging from 2019 to 2022.
Additional information relating to the $3 billion in debt securities can be found in the following documents filed with the SEC: (i) the companys shelf registration statement on Form S-3 dated August 4, 2017, (ii) the prospectus dated August 17, 2017, (iii) the related prospectus supplement dated September 5, 2017, (iv) the Indenture dated September 8, 2017 between the company and the Bank of New York Mellon Trust Company, N.A., as indenture trustee, and (v) each of the forms of notes filed by the company on September 8, 2017.
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for these borrowings was $640 million at September 30, 2017 and $689 million at December 31, 2016.
The companys interest rate and foreign currency rate risk management policies and procedures are discussed in note 3, Financial Instruments.
Interest on Debt
The company recognized interest expense of $95 million and $267 million in the three and nine months ended September 30, 2017, respectively, of which $66 million and $201 million was interest expense on debt payable to IBM in each of those periods, respectively. The company recognized interest expense of $94 million and $277 million in the three and nine months ended September 30, 2016, respectively, of which $77 million and $240 million was interest expense on debt payable to IBM in each of those periods, respectively.
The increase in interest expense in the third quarter of 2017 when compared to the prior year period was driven by a higher average debt balance. The decline in interest expense in the first nine months of 2017 as compared to the same period in 2016 was driven by lower average interest rates, partially offset by a higher average debt balance. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings.
For additional information on interest expense, see note 11, Borrowings.
Debt-to-Equity
The debt-to-equity ratio as reported in the following table is the ratio of total debt to total members interest.
|
|
At September 30, |
|
At December 31, |
|
|
|
2017 |
|
2016 |
|
Debt-to-Equity Ratio * |
|
8.9x |
|
7.3x |
|
* The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of members interest in the company at the end of the reporting period presented.
Total debt changes generally correspond with the level of Client Financing and Commercial Financing receivables, the level of cash and cash equivalents, the change in payables to IBM and external parties and the change in net investment from IBM.
The companys debt-to-equity ratio was 8.9 to 1 at September 30, 2017 which increased as compared to the debt-to-equity ratio of 7.3 to 1 at December 31, 2016. Total members interest of $3,220 million declined by $482 million, or 13.0 percent, while debt of $28,507 million increased $1,477 million, or 5.5 percent, in support of the companys target debt-to-equity ratio of 9 to 1.
Looking Forward
In 2017, IGFs legal entity structure was reorganized globally to consolidate Client Financing and Commercial Financing under IBM Credit. This is intended to drive operational benefits by consolidating the financing business under IBM Credit. The company has access to the short-term and long-term debt markets as an issuer in the global markets and as a borrower from IBM. In the third quarter of 2017, the company issued third-party debt and made distributions to IBM including a return of profit. The company will continue to target a debt-to-equity ratio of 9 to 1, which may vary based on several factors, including differences between managements expectations and actual results of operations. The future amount of third-party debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio. Absent other funding alternatives, a protracted period where the company or IBM could not access the capital markets would likely lead to a slowdown in originations. Financing originations, which determine the asset base of the annuity-like business, are also dependent upon the demand for IT products and services as well as client participation rates.
The companys financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. The companys financing assets and new originations result from the financing of IBM and OEM IT products and services to the companys and IBMs clients. Substantially all financing assets are IT related assets which provide a stable base of business for future growth. The companys financing offerings are competitive and available to clients as a result of factors including the companys borrowing cost, financing incentive programs and access to the capital markets.
IBM Credit has policies in place designed to manage each of the key risks involved in financing, including credit losses, residual values, liquidity, currency and interest rates.
The economy could impact the credit quality of the companys receivables portfolio and therefore the level of provision for credit losses. IBM Credit will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio and will take risk mitigation actions when necessary.
The company has historically been able to manage residual value risk both through insight into IBMs product cycles and monitoring of OEM IT product announcements.
Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and net margin. Interest rates directly impact the company by increasing or decreasing financing revenue and associated borrowing costs. The companys interest rate risk management policy, combined with its pricing strategy should mitigate margin erosion due to changes in interest rates.
The companys geographically diverse client base, product and client knowledge, and strategy to substantially match fund should enable prudent management of the business going forward, even during periods of uncertainty with respect to the global economy.
Forward-looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the companys current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: the companys financial condition being in large part dependent upon IBM; a downturn in the economic environment; innovations in the technology sector impacting clients propensity to enter in financing arrangements; the companys reliance on partner relationships; client credit risk and an inability to collect receivables in a timely manner, which could impact financial results; changes to residual value, which could affect the profitability of lease transactions; impact of exposure to currency and financing risks and changes in market liquidity conditions; changes in financial regulation, supervision and licensing laws and regulations; changes in local legal, economic, political and health conditions; cybersecurity and data privacy considerations; risks from legal proceedings and investigatory risks; adverse effects from tax matters; impacts of business with government clients; the companys use of accounting estimates; ineffective internal controls; and other risks, uncertainties and factors discussed in Item 1A. Risk Factors in the companys Form 10/A filing with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.
Item 4. Controls and Procedures
The companys management evaluated, with the participation of the Chairman and President, and the Vice President of Finance, the effectiveness of the companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chairman and President, and the Vice President of Finance have concluded that the companys disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the companys internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting.
Refer to note 12, Contingencies, on page 28 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities.
Not applicable.
Exhibit Number |
|
Description |
|
|
|
12 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of Section 12 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 LLC | ||
|
(Registrant) | ||
|
| ||
Date: November 2, 2017 |
|
| |
|
| ||
|
By: |
/s/ Adam Wilson | |
|
|
Adam Wilson | |
|
|
Vice President, Finance | |