Attached files
file | filename |
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EX-32.2 - EX-32.2 - IBM CREDIT LLC | a18-8698_1ex32d2.htm |
EX-32.1 - EX-32.1 - IBM CREDIT LLC | a18-8698_1ex32d1.htm |
EX-31.2 - EX-31.2 - IBM CREDIT LLC | a18-8698_1ex31d2.htm |
EX-31.1 - EX-31.1 - IBM CREDIT LLC | a18-8698_1ex31d1.htm |
EX-12 - EX-12 - IBM CREDIT LLC | a18-8698_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 MARCH 31, 2018
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 |
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10504 |
(Address of principal executive offices) |
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(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 |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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|
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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 March 31, |
| ||||
(Dollars in millions) |
|
2018 |
|
2017 |
| ||
Revenue |
|
|
|
|
| ||
Financing revenue |
|
$ |
365 |
|
$ |
342 |
|
Operating lease revenue |
|
84 |
|
102 |
| ||
Total revenue |
|
449 |
|
444 |
| ||
Financing cost (related party cost $57 in 2018 and $66 in 2017) |
|
102 |
|
83 |
| ||
Depreciation of equipment under operating lease |
|
48 |
|
62 |
| ||
Net margin |
|
300 |
|
300 |
| ||
Expense and other (income) |
|
|
|
|
| ||
Selling, general and administrative |
|
98 |
|
102 |
| ||
Provision for credit losses |
|
9 |
|
3 |
| ||
Other (income) and expense |
|
1 |
|
18 |
| ||
Total expense and other (income) |
|
109 |
|
122 |
| ||
Income before income taxes |
|
191 |
|
178 |
| ||
Provision for income taxes |
|
42 |
|
41 |
| ||
Net income |
|
$ |
149 |
|
$ |
137 |
|
(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 March 31, |
| ||||
(Dollars in millions) |
|
2018 |
|
2017 |
| ||
Net income |
|
$ |
149 |
|
$ |
137 |
|
Other comprehensive income/(loss), before tax: |
|
|
|
|
| ||
Foreign currency translation adjustments |
|
70 |
|
70 |
| ||
Retirement-related benefit plans (1) |
|
1 |
|
1 |
| ||
Other comprehensive income/(loss), before tax |
|
71 |
|
71 |
| ||
Income tax (expense)/benefit related to items of other comprehensive income |
|
11 |
|
0 |
| ||
Other comprehensive income/(loss), after tax |
|
82 |
|
71 |
| ||
Total comprehensive income/(loss) |
|
$ |
230 |
|
$ |
207 |
|
(1) Amounts represented relate to multiple-employer plans.
(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 March 31, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2018 |
|
2017 |
| ||
Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
2,170 |
|
$ |
2,680 |
|
Financing receivables |
|
24,054 |
|
26,066 |
| ||
Equipment under operating leases |
|
411 |
|
401 |
| ||
Financing receivables from IBM |
|
3,772 |
|
3,743 |
| ||
Receivables purchased/participated from IBM |
|
5,211 |
|
5,239 |
| ||
Other receivables from IBM |
|
1,247 |
|
1,024 |
| ||
Other assets |
|
423 |
|
364 |
| ||
Total assets |
|
$ |
37,287 |
|
$ |
39,516 |
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
1,308 |
|
$ |
1,776 |
|
Accounts payable to IBM |
|
760 |
|
2,903 |
| ||
Debt |
|
8,115 |
|
5,779 |
| ||
Debt payable to IBM |
|
23,077 |
|
24,698 |
| ||
Taxes |
|
505 |
|
530 |
| ||
Other liabilities |
|
220 |
|
269 |
| ||
Total liabilities |
|
33,985 |
|
35,954 |
| ||
Members interest: |
|
|
|
|
| ||
Members interest |
|
3,067 |
|
3,101 |
| ||
Retained earnings |
|
|
|
302 |
| ||
Accumulated other comprehensive income/(loss) |
|
234 |
|
158 |
| ||
Total members interest |
|
3,302 |
|
3,562 |
| ||
Total liabilities and members interest |
|
$ |
37,287 |
|
$ |
39,516 |
|
(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)
|
|
Three Months Ended March 31, |
| ||||
(Dollars in millions) |
|
2018 |
|
2017 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
149 |
|
$ |
137 |
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
| ||
Provision for credit losses |
|
9 |
|
3 |
| ||
Depreciation |
|
48 |
|
62 |
| ||
Deferred taxes |
|
(25 |
) |
(19 |
) | ||
Net (gain)/loss on asset sales and other |
|
(44 |
) |
245 |
| ||
Change in operating assets and liabilities |
|
|
|
|
| ||
Other assets/other liabilities |
|
103 |
|
(130 |
) | ||
Net cash provided by operating activities |
|
240 |
|
297 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Originations of financing receivables |
|
(4,943 |
) |
(3,160 |
) | ||
Collection of financing receivables |
|
3,751 |
|
3,376 |
| ||
Short-term financing receivables - net (1) |
|
863 |
|
685 |
| ||
Purchase of equipment under operating leases |
|
(57 |
) |
(57 |
) | ||
Proceeds from disposition of equipment under operating lease |
|
15 |
|
14 |
| ||
Other receivables from IBM - net |
|
(214 |
) |
(694 |
) | ||
Other investing activities - net |
|
(65 |
) |
(91 |
) | ||
Net cash (used in)/provided by investing activities |
|
(650 |
) |
74 |
| ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from issuance of debt from IBM |
|
4,841 |
|
2,341 |
| ||
Principal payments on debt from IBM |
|
(4,299 |
) |
(1,595 |
) | ||
Proceeds from issuance of debt |
|
2,122 |
|
84 |
| ||
Principal payments on debt |
|
(247 |
) |
(89 |
) | ||
Short-term borrowings from/(repayments to) IBM - net (1) |
|
(2,517 |
) |
(242 |
) | ||
Short-term borrowings/(repayments) - net (1) |
|
480 |
|
45 |
| ||
Net transfers (to)/from IBM |
|
|
|
(827 |
) | ||
Distributions to IBM |
|
(490 |
) |
|
| ||
Net cash used in financing activities |
|
(111 |
) |
(282 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
11 |
|
17 |
| ||
Net change in cash and cash equivalents |
|
(510 |
) |
107 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at January 1 |
|
2,680 |
|
1,772 |
| ||
Cash and cash equivalents at March 31 |
|
$ |
2,170 |
|
$ |
1,879 |
|
(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)
|
|
|
|
|
|
Accumulated |
|
|
| ||||
|
|
|
|
|
|
Other |
|
Total |
| ||||
|
|
Members |
|
Retained |
|
Comprehensive |
|
Members |
| ||||
(Dollars in millions) |
|
Interest |
|
Earnings |
|
Income/(Loss) |
|
Interest |
| ||||
Members Interest, January 1, 2018 |
|
$ |
3,101 |
|
$ |
302 |
|
$ |
158 |
|
$ |
3,562 |
|
Cumulative effect of change in accounting principle* |
|
|
|
5 |
|
(5 |
) |
|
| ||||
Net income plus other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
|
149 |
|
|
|
149 |
| ||||
Other comprehensive income/(loss), net of tax |
|
|
|
|
|
82 |
|
82 |
| ||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
$ |
230 |
| |||
Distributions to IBM |
|
(34 |
) |
(456 |
) |
|
|
(490 |
) | ||||
Members Interest, March 31, 2018 |
|
$ |
3,067 |
|
$ |
|
|
$ |
234 |
|
$ |
3,302 |
|
* Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note 2, Accounting Changes.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
|
|
Net |
|
|
|
|
|
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 |
|
|
|
|
|
|
|
137 |
| |||||
Other comprehensive income/(loss), net of tax |
|
|
|
|
|
|
|
71 |
|
71 |
| |||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
207 |
| ||||
Net transfers (to)/from IBM |
|
(827 |
) |
|
|
|
|
|
|
(827 |
) | |||||
Members Interest, March 31, 2017 |
|
$ |
3,222 |
|
$ |
|
|
$ |
|
|
$ |
(138 |
) |
$ |
3,083 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
Notes to Consolidated Financial Statements (continued)
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 pages 41 through 43 of the companys 2017 Form 10-K, filed with the Securities and Exchange Commission (SEC) on March 1, 2018, 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. All prior periods have been recast to reflect the consolidation of the financial statements and conform to the current year presentation as a result of changes to certain financial statement line items. These changes include other receivables from IBM and accounts payable, which are separately reported in the Consolidated Statement of Financial Position and were previously reported within other assets and other liabilities, respectively. Other receivables from IBM are separately reported in the Consolidated Statement of Cash Flows and were previously reported within other investing activities-net. The reporting for accounts payable within the Consolidated Statement of Cash Flows did not change.
Members Interest in the Consolidated Statement of Financial Position represents the accumulation of the companys net income over time and contributions from IBM and distributions to IBM. Prior to the consolidation of the financial statements in the second quarter of 2017, net non-trade intercompany transactions between IBM Credit and IBM (for example, contributions from IBM and distributions to IBM), were reflected as net transfers (to)/from IBM in the financing activities section of the Statement of Cash Flows. 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 Consolidated 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 Consolidated 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.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (U.S. tax reform) was enacted, resulting in the company recording a provisional net benefit of $162 million to tax expense in December 2017. A provisional charge of $4 million was recorded in January 2018 as a result of Internal Revenue Service guidance. The companys net benefit recorded due to U.S. tax reform remains provisional and any change will be recorded as an adjustment to the provision for, or benefit from, income taxes in the period the amounts are determined, not to exceed 12 months from the date of U.S. tax reform enactment.
The amount of restricted cash included in the Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows is immaterial for the periods presented.
All significant intracompany transactions between IBM Credits businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.
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 10-K.
Notes to Consolidated Financial Statements (continued)
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. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.
2. Accounting Changes:
New Standards to be Implemented
In June 2016, the Financial Accounting Standards Board (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 has established an implementation team and is evaluating the impact of the new guidance.
The FASB issued guidance in February 2016, with amendments in 2018, which 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. There are certain practical expedients that can be elected which the company is currently evaluating for application. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date.
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 on its consolidated financial results. The company is currently planning on electing the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance.
Standards Implemented
In February 2018, the FASB issued guidance that allows entities to elect an option to reclassify the stranded tax effects related to the application of U.S. tax reform from accumulated other comprehensive income/(loss) (AOCI) to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. The company adopted the guidance effective January 1, 2018, and elected not to reclassify prior periods. In accordance with its accounting policy, the company releases income tax effects from AOCI once the reason the tax effects were established ceases to exist. This guidance allows for the reclassification of stranded tax effects as a result of the change in tax rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at an actual cessation date. At adoption, $5 million was reclassified from AOCI to retained earnings.
In August 2017, the FASB issued guidance to simplify the application of current hedge accounting in certain areas, better portray the economic results of an entitys risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company adopted the guidance as of January 1, 2018, and it did not have a material impact in the consolidated financial results.
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 modified-retrospective transition method).
The company adopted the guidance on January 1, 2018 using the modified-retrospective 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 did not have an impact on the companys consolidated financial results for the quarter ended March 31, 2018. The company concluded its assessment of the data availability and
Notes to Consolidated Financial Statements (continued)
presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements and there is no material change to disclosures as a result of the adoption of the guidance.
3. Financial Instruments:
Fair Value Measurements
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.
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 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 debt securities that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a debt security, fair value is measured using a model described above.
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 March 31, 2018 and December 31, 2017.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At March 31, 2018 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
1,316 |
|
$ |
|
|
$ |
1,316 |
|
Money market funds |
|
5 |
|
|
|
|
|
5 |
| ||||
Total |
|
5 |
|
1,316 |
|
|
|
1,321 |
| ||||
Derivative assets (2) |
|
|
|
7 |
|
|
|
7 |
(4) | ||||
Total assets |
|
$ |
5 |
|
$ |
1,323 |
|
$ |
|
|
$ |
1,328 |
(4) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (3) |
|
$ |
|
|
$ |
51 |
|
$ |
|
|
$ |
51 |
(4) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Included within other assets in the Consolidated Statement of Financial Position.
(3) Included within other liabilities in the Consolidated Statement of Financial Position.
(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 $3 million.
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2017 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
1,883 |
|
$ |
|
|
$ |
1,883 |
|
Money market funds |
|
5 |
|
|
|
|
|
5 |
| ||||
Total |
|
5 |
|
1,883 |
|
|
|
1,888 |
| ||||
Derivative assets (2) |
|
|
|
3 |
|
|
|
3 |
| ||||
Total assets |
|
$ |
5 |
|
$ |
1,886 |
|
$ |
|
|
$ |
1,891 |
|
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (3) |
|
$ |
|
|
$ |
56 |
|
$ |
|
|
$ |
56 |
|
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Included within other assets in the Consolidated Statement of Financial Position.
(3) Included within other liabilities in the Consolidated Statement of Financial Position.
There were no transfers between Levels 1 and 2 for the three months ended March 31, 2018 and the year ended December 31, 2017.
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 March 31, 2018 and December 31, 2017, 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.
Notes to Consolidated Financial Statements (continued)
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 (including debt payable to IBM) was $16,133 million and $13,750 million and the estimated fair value is $15,987 million and $13,695 million at March 31, 2018 and December 31, 2017, 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 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. Although the company seeks to substantially match fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. 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 March 31, 2018, the fair value of derivative contracts with IBM that were in an asset position totaled $3 million and the fair value of derivative contracts with IBM that were in a liability position totaled $51 million. These gross exposures were reduced by $3 million due to master netting agreements with IBM. There was no derivative instruments activity impacted by master netting agreements at December 31, 2017.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the 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 March 31, 2018, the total notional amount of the companys interest rate swap contracts with IBM was $3,350 million. The weighted average remaining maturity of these instruments at March 31, 2018 was approximately 3.2 years. At December 31, 2017, the total notional amount of the companys interest rate swap contracts with IBM was $1,800 million. The weighted average remaining maturity of these instruments at December 31, 2017 was approximately 2.9 years.
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 March 31, 2018, the total notional amount of derivative contracts with IBM designated as net investment hedges was $2,045 million. The weighted average remaining maturity of these instruments was 0.2 years. At December 31, 2017, the total notional amount of derivative contracts with IBM designated as net investment hedges was $2,331 million. The weighted average remaining maturity of these instruments was 0.2 years.
Notes to Consolidated Financial Statements (continued)
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. 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 terms of these derivative contracts are generally less than one year. 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.
At March 31, 2018 and December 31, 2017, the total notional amount of foreign exchange derivative contracts with third parties was $123 million and $120 million, respectively.
The following tables provide a quantitative summary of the derivative instrument-related risk management activity at March 31, 2018 and December 31, 2017, as well as for the three months ended March 31, 2018 and 2017, respectively.
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
|
|
Fair Value of Derivative Assets |
|
Fair Value of Derivative Liabilities |
| ||||||||||||
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
| ||||
(Dollars in millions) |
|
Classification |
|
3/31/2018 |
|
12/31/2017 |
|
Classification |
|
3/31/2018 |
|
12/31/2017 |
| ||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts with IBM |
|
Other assets |
|
$ |
0 |
|
$ |
|
|
Other liabilities |
|
$ |
48 |
|
$ |
19 |
|
Foreign exchange contracts with IBM |
|
Other assets |
|
3 |
|
|
|
Other liabilities |
|
3 |
|
37 |
| ||||
|
|
Fair value of derivative assets |
|
$ |
3 |
|
$ |
|
|
Fair value of derivative liabilities |
|
$ |
51 |
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
Other assets |
|
$ |
4 |
|
$ |
3 |
|
Other liabilities |
|
$ |
|
|
$ |
|
|
|
|
Fair value of derivative assets |
|
$ |
4 |
|
$ |
3 |
|
Fair value of derivative liabilities |
|
$ |
|
|
$ |
|
|
Total |
|
|
|
$ |
7 |
|
$ |
3 |
|
|
|
$ |
51 |
|
$ |
56 |
|
As of March 31, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges.
(Dollars in millions) |
|
|
|
Cumulative Amount of |
| ||
Line Item in the |
|
Carrying Amount of the |
|
Fair Value Hedging Adjustment |
| ||
Consolidated Statement of Financial Position |
|
Hedged Item |
|
Included in the Carrying |
| ||
in which the Hedged Item is Included: |
|
Assets/(Liabilities) |
|
Amount of Assets/(Liabilities) |
| ||
Debt |
|
$ |
(3,293 |
) |
$ |
49 |
|
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
The total amounts of income and expense line items presented in the Consolidated Statement of Earnings in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items, are as follows:
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended March 31, 2018: |
|
Financing cost |
|
Other (income) and expense |
| ||
Total |
|
$ |
102 |
|
$ |
1 |
|
Gains/(losses) of total hedge activity |
|
9 |
|
1 |
| ||
|
|
Gain/(Loss) Recognized in Earnings |
| ||||||||||||
|
|
Consolidated |
|
Recognized on |
|
Attributable to Risk |
| ||||||||
(Dollars in millions) |
|
Statement of |
|
Derivatives |
|
Being Hedged(2) |
| ||||||||
For the three months ended March 31: |
|
Earnings Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
| ||||
Derivative instruments in fair value hedges (1): |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts with IBM |
|
Financing cost |
|
$ |
(21 |
) |
$ |
|
|
$ |
23 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts with IBM |
|
Other (income) and expense |
|
|
|
(222 |
) |
N/A |
|
N/A |
| ||||
Foreign exchange contracts |
|
Other (income) and expense |
|
1 |
|
(39 |
) |
N/A |
|
N/A |
| ||||
Total |
|
|
|
$ |
(20 |
) |
$ |
(261 |
) |
$ |
23 |
|
$ |
|
|
N/A - Not Applicable
|
|
Gain/(Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
Consolidated |
|
|
|
|
| ||||||||||
|
|
|
|
|
|
Statement of |
|
Reclassified |
|
Amounts Excluded from |
| ||||||||||
(Dollars in millions) |
|
Recognized in OCI |
|
Earnings |
|
from AOCI |
|
Effectiveness Testing(3) |
| ||||||||||||
For the three months ended March 31: |
|
2018 |
|
2017 |
|
Line Item |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
| ||||||
Derivative instruments in net investment hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts with IBM |
|
$ |
(43 |
) |
$ |
|
|
Financing cost |
|
$ |
|
|
$ |
|
|
$ |
7 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
(43 |
) |
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
7 |
|
$ |
|
|
Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018. Refer to note 2, Accounting Changes, for additional information.
Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Members Interest.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period.
(3) The companys policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.
For the three months ending March 31, 2018 and 2017, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.
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 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.
Notes to Consolidated Financial Statements (continued)
The company purchases interests in certain of IBMs trade accounts receivable at a discount. 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. The company participates 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 and other 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.
|
|
|
|
|
|
Client Loans and |
|
|
| ||||
|
|
Investment in |
|
Commercial |
|
Installment |
|
|
| ||||
(Dollars in millions) |
|
Direct Financing |
|
Financing |
|
Payments |
|
|
| ||||
At March 31, 2018: |
|
Leases |
|
Receivables |
|
(Loans) |
|
Total |
| ||||
Financing receivables, gross |
|
$ |
5,477 |
|
$ |
9,733 |
|
$ |
9,267 |
|
$ |
24,476 |
|
Unearned income |
|
(417 |
) |
(34 |
) |
(460 |
) |
(911 |
) | ||||
Deferred initial direct costs |
|
48 |
|
|
|
76 |
|
124 |
| ||||
Recorded investment |
|
$ |
5,108 |
|
$ |
9,699 |
|
$ |
8,883 |
|
$ |
23,690 |
|
Allowance for credit losses |
|
(76 |
) |
(15 |
) |
(101 |
) |
(192 |
) | ||||
Unguaranteed residual value |
|
477 |
|
|
|
|
|
477 |
| ||||
Guaranteed residual value |
|
80 |
|
|
|
|
|
80 |
| ||||
Total financing receivables, net |
|
$ |
5,589 |
|
$ |
9,684 |
|
$ |
8,781 |
|
$ |
24,054 |
|
|
|
Purchased and |
| |
|
|
Participated |
| |
(Dollars in millions) |
|
Receivables |
| |
At March 31, 2018: |
|
From IBM |
| |
Short-term purchased receivables from IBM |
|
$ |
1,383 |
|
Allowance for credit losses |
|
(26 |
) | |
Total short-term purchased receivables from IBM, net |
|
$ |
1,357 |
|
|
|
|
| |
Long-term participated receivables from IBM |
|
$ |
3,858 |
|
Allowance for credit losses |
|
(4 |
) | |
Total long-term participated receivables from IBM, net |
|
$ |
3,853 |
|
|
|
|
| |
Total purchased and participated receivables from IBM, net |
|
$ |
5,211 |
|
|
|
|
|
|
|
Client Loans and |
|
|
| ||||
|
|
Investment in |
|
Commercial |
|
Installment |
|
|
| ||||
(Dollars in millions) |
|
Direct Financing |
|
Financing |
|
Payments |
|
|
| ||||
At December 31, 2017: |
|
Leases |
|
Receivables |
|
(Loans) |
|
Total |
| ||||
Financing receivables, gross |
|
$ |
5,462 |
|
$ |
11,177 |
|
$ |
9,762 |
|
$ |
26,402 |
|
Unearned income |
|
(411 |
) |
(35 |
) |
(473 |
) |
(919 |
) | ||||
Deferred initial direct costs |
|
56 |
|
|
|
73 |
|
128 |
| ||||
Recorded investment |
|
$ |
5,107 |
|
$ |
11,142 |
|
$ |
9,362 |
|
$ |
25,611 |
|
Allowance for credit losses |
|
(62 |
) |
(15 |
) |
(96 |
) |
(173 |
) | ||||
Unguaranteed residual value |
|
533 |
|
|
|
|
|
533 |
| ||||
Guaranteed residual value |
|
94 |
|
|
|
|
|
94 |
| ||||
Total financing receivables, net |
|
$ |
5,672 |
|
$ |
11,127 |
|
$ |
9,267 |
|
$ |
26,066 |
|
Notes to Consolidated Financial Statements (continued)
|
|
Purchased and |
| |
|
|
Participated |
| |
(Dollars in millions) |
|
Receivables |
| |
At December 31, 2017: |
|
From IBM |
| |
Short-term purchased receivables from IBM |
|
$ |
1,466 |
|
Allowance for credit losses |
|
(25 |
) | |
Total short-term purchased receivables from IBM, net |
|
$ |
1,441 |
|
|
|
|
| |
Long-term participated receivables from IBM |
|
$ |
3,812 |
|
Allowance for credit losses |
|
(14 |
) | |
Total long-term participated receivables from IBM, net |
|
$ |
3,798 |
|
|
|
|
| |
Total purchased and participated receivables from IBM, net |
|
$ |
5,239 |
|
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $687 million and $773 million at March 31, 2018 and December 31, 2017, respectively.
The company did not have any financing receivables held for sale as of March 31, 2018 and December 31, 2017.
Financing Receivables by Portfolio Segment
The following tables present the recorded investment in financing receivables and participated receivables from IBM, by portfolio segment and by class, excluding commercial financing receivables, purchased receivables from IBM and other miscellaneous financing receivables at March 31, 2018 and December 31, 2017. 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.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At March 31, 2018: |
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Total |
| ||||
Recorded investment |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
|
$ |
3,570 |
|
$ |
725 |
|
$ |
813 |
|
$ |
5,108 |
|
Loan receivables |
|
5,728 |
|
2,212 |
|
943 |
|
8,883 |
| ||||
Participated receivables from IBM |
|
677 |
|
1,610 |
|
1,571 |
|
3,858 |
| ||||
Ending balance |
|
$ |
9,975 |
|
$ |
4,546 |
|
$ |
3,327 |
|
$ |
17,849 |
|
Recorded investment collectively evaluated for impairment |
|
$ |
9,904 |
|
$ |
4,508 |
|
$ |
3,309 |
|
$ |
17,721 |
|
Recorded investment individually evaluated for impairment |
|
$ |
71 |
|
$ |
39 |
|
$ |
18 |
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for credit losses |
|
|
|
|
|
|
|
|
| ||||
Beginning balance at January 1, 2018 |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
|
$ |
42 |
|
$ |
6 |
|
$ |
15 |
|
$ |
62 |
|
Loan receivables |
|
57 |
|
34 |
|
4 |
|
96 |
| ||||
Participated receivables from IBM |
|
9 |
|
4 |
|
2 |
|
14 |
| ||||
Total |
|
$ |
107 |
|
$ |
43 |
|
$ |
21 |
|
$ |
172 |
|
Write-offs |
|
$ |
(2 |
) |
$ |
0 |
|
$ |
0 |
|
$ |
(2 |
) |
Recoveries |
|
0 |
|
|
|
|
|
0 |
| ||||
Provision |
|
10 |
|
(2 |
) |
1 |
|
10 |
| ||||
Foreign currency translation adjustment |
|
0 |
|
1 |
|
1 |
|
2 |
| ||||
Other |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Ending balance at March 31, 2018 |
|
$ |
117 |
|
$ |
42 |
|
$ |
23 |
|
$ |
182 |
|
Lease receivables |
|
$ |
53 |
|
$ |
5 |
|
$ |
17 |
|
$ |
76 |
|
Loan receivables |
|
$ |
62 |
|
$ |
36 |
|
$ |
4 |
|
$ |
101 |
|
Participated receivables from IBM |
|
$ |
2 |
|
$ |
1 |
|
$ |
2 |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
| ||||
Related allowance, collectively evaluated for impairment |
|
$ |
47 |
|
$ |
14 |
|
$ |
5 |
|
$ |
65 |
|
Related allowance, individually evaluated for impairment |
|
$ |
70 |
|
$ |
29 |
|
$ |
18 |
|
$ |
117 |
|
Write-offs of lease and loan receivables were $1 million and $2 million, respectively, for the three months ended March 31, 2018. Provisions for credit losses recorded for lease receivables, loan receivables and participated receivables from IBM were $4 million, $4 million and $2 million, respectively, for the three months ended March 31, 2018.
The average recorded investment of impaired leases and loans for Americas, EMEA and Asia Pacific was $65 million, $39 million and $19 million, respectively, for the three months ended March 31, 2018 and $102 million, $10 million and $54 million, respectively, for the three months ended March 31, 2017. Both interest income recognized and interest income recognized on a cash basis on impaired leases and loans were immaterial for the three months ended March 31, 2018 and 2017.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2017: |
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Total |
| ||||
Recorded investment |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
|
$ |
3,593 |
|
$ |
662 |
|
$ |
852 |
|
$ |
5,107 |
|
Loan receivables |
|
6,110 |
|
2,315 |
|
937 |
|
9,362 |
| ||||
Participated receivables from IBM |
|
744 |
|
1,525 |
|
1,543 |
|
3,812 |
| ||||
Ending balance |
|
$ |
10,447 |
|
$ |
4,502 |
|
$ |
3,332 |
|
$ |
18,282 |
|
Recorded investment collectively evaluated for impairment |
|
$ |
10,388 |
|
$ |
4,463 |
|
$ |
3,312 |
|
$ |
18,163 |
|
Recorded investment individually evaluated for impairment |
|
$ |
59 |
|
$ |
39 |
|
$ |
20 |
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
| ||||
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 |
|
$ |
(42 |
) |
$ |
(2 |
) |
$ |
(33 |
) |
$ |
(77 |
) |
Recoveries |
|
1 |
|
|
|
|
|
1 |
| ||||
Provision |
|
(7 |
) |
27 |
|
(6 |
) |
14 |
| ||||
Foreign currency translation adjustment |
|
0 |
|
4 |
|
4 |
|
8 |
| ||||
Other |
|
(4 |
) |
(2 |
) |
(3 |
) |
(8 |
) | ||||
Ending balance at December 31, 2017 |
|
$ |
107 |
|
$ |
43 |
|
$ |
21 |
|
$ |
172 |
|
Lease receivables |
|
$ |
42 |
|
$ |
6 |
|
$ |
15 |
|
$ |
62 |
|
Loan receivables |
|
$ |
57 |
|
$ |
34 |
|
$ |
4 |
|
$ |
96 |
|
Participated receivables from IBM |
|
$ |
9 |
|
$ |
4 |
|
$ |
2 |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
| ||||
Related allowance, collectively evaluated for impairment |
|
$ |
49 |
|
$ |
14 |
|
$ |
5 |
|
$ |
67 |
|
Related allowance, individually evaluated for impairment |
|
$ |
59 |
|
$ |
30 |
|
$ |
17 |
|
$ |
105 |
|
Write-offs of lease receivables and loan receivables were $39 million and $37 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for loan receivables and participated receivables from IBM were $15 million and $1 million, respectively, for the year ended December 31, 2017. Provisions for credit losses recorded for lease receivables were a reduction of $2 million for the year ended December 31, 2017.
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. The company considers any receivable with an individually evaluated reserve as an impaired receivable.
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 general reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.
Past Due Financing Receivables
The company considers a clients financing receivables past due when an installment is aged over 90 days. The following table summarizes the information about the recorded investment in leases and loans receivables and participated receivables from IBM, including recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
Recorded |
|
Billed |
|
Recorded |
| |||||
|
|
Total |
|
Recorded |
|
Investment |
|
Invoices |
|
Investment |
| |||||
(Dollars in millions) |
|
Recorded |
|
Investment |
|
> 90 Days and |
|
> 90 Days and |
|
Not |
| |||||
At March 31, 2018: |
|
Investment |
|
> 90 Days (1) |
|
Accruing (1) |
|
Accruing |
|
Accruing (2) |
| |||||
Americas |
|
$ |
3,570 |
|
$ |
258 |
|
$ |
237 |
|
$ |
25 |
|
$ |
22 |
|
EMEA |
|
725 |
|
24 |
|
8 |
|
1 |
|
16 |
| |||||
Asia Pacific |
|
813 |
|
21 |
|
5 |
|
1 |
|
16 |
| |||||
Total lease receivables |
|
$ |
5,108 |
|
$ |
304 |
|
$ |
250 |
|
$ |
27 |
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Americas |
|
$ |
5,728 |
|
$ |
216 |
|
$ |
166 |
|
$ |
31 |
|
$ |
50 |
|
EMEA |
|
2,212 |
|
87 |
|
21 |
|
2 |
|
66 |
| |||||
Asia Pacific |
|
943 |
|
8 |
|
6 |
|
3 |
|
2 |
| |||||
Total loan receivables |
|
$ |
8,883 |
|
$ |
311 |
|
$ |
193 |
|
$ |
36 |
|
$ |
119 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Americas |
|
$ |
677 |
|
$ |
4 |
|
$ |
4 |
|
$ |
4 |
|
$ |
|
|
EMEA |
|
1,610 |
|
0 |
|
0 |
|
0 |
|
|
| |||||
Asia Pacific |
|
1,571 |
|
1 |
|
1 |
|
0 |
|
|
| |||||
Total participated receivables from IBM |
|
$ |
3,858 |
|
$ |
6 |
|
$ |
6 |
|
$ |
4 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
17,849 |
|
$ |
621 |
|
$ |
449 |
|
$ |
67 |
|
$ |
173 |
|
(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2) Of the recorded investment not accruing, $128 million is individually evaluated for impairment with a related allowance of $117 million.
|
|
|
|
|
|
Recorded |
|
Billed |
|
Recorded |
| |||||
|
|
Total |
|
Recorded |
|
Investment |
|
Invoices |
|
Investment |
| |||||
(Dollars in millions) |
|
Recorded |
|
Investment |
|
> 90 Days and |
|
> 90 Days and |
|
Not |
| |||||
At December 31, 2017: |
|
Investment |
|
> 90 Days (1) |
|
Accruing (1) |
|
Accruing |
|
Accruing (2)(3) |
| |||||
Americas |
|
$ |
3,593 |
|
$ |
203 |
|
$ |
185 |
|
$ |
27 |
|
$ |
20 |
|
EMEA |
|
662 |
|
21 |
|
5 |
|
3 |
|
16 |
| |||||
Asia Pacific |
|
852 |
|
22 |
|
4 |
|
1 |
|
18 |
| |||||
Total lease receivables |
|
$ |
5,107 |
|
$ |
245 |
|
$ |
194 |
|
$ |
31 |
|
$ |
54 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Americas |
|
$ |
6,110 |
|
$ |
281 |
|
$ |
237 |
|
$ |
37 |
|
$ |
41 |
|
EMEA |
|
2,315 |
|
82 |
|
17 |
|
0 |
|
66 |
| |||||
Asia Pacific |
|
937 |
|
9 |
|
4 |
|
2 |
|
5 |
| |||||
Total loan receivables |
|
$ |
9,362 |
|
$ |
372 |
|
$ |
258 |
|
$ |
39 |
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Americas |
|
$ |
744 |
|
$ |
11 |
|
$ |
11 |
|
$ |
3 |
|
$ |
|
|
EMEA |
|
1,525 |
|
1 |
|
1 |
|
1 |
|
|
| |||||
Asia Pacific |
|
1,543 |
|
0 |
|
0 |
|
0 |
|
|
| |||||
Total participated receivables from IBM |
|
$ |
3,812 |
|
$ |
12 |
|
$ |
12 |
|
$ |
4 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
18,282 |
|
$ |
629 |
|
$ |
464 |
|
$ |
74 |
|
$ |
166 |
|
(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2) Of the recorded investment not accruing, $118 million is individually evaluated for impairment with a related allowance of $105 million.
(3) Recast to conform to current period presentation, which includes billed impaired amounts.
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.
Notes to Consolidated Financial Statements (continued)
The following tables present the recorded investment, net of the allowance for credit losses, for each class of receivables, by credit quality indicator, at March 31, 2018 and December 31, 2017. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. At both March 31, 2018 and December 31, 2017, 58 percent of the portfolio was investment grade. 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.
|
|
Lease Receivables |
|
Loan Receivables |
|
Participated Receivables with IBM |
| |||||||||||||||||||||
(Dollars in millions) |
|
|
|
|
|
Asia |
|
|
|
|
|
Asia |
|
|
|
|
|
Asia |
| |||||||||
At March 31, 2018: |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
| |||||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Aaa Aa3 |
|
$ |
360 |
|
$ |
29 |
|
$ |
36 |
|
$ |
581 |
|
$ |
88 |
|
$ |
42 |
|
$ |
69 |
|
$ |
65 |
|
$ |
71 |
|
A1 A3 |
|
760 |
|
89 |
|
355 |
|
1,225 |
|
270 |
|
420 |
|
146 |
|
200 |
|
701 |
| |||||||||
Baa1 Baa3 |
|
907 |
|
204 |
|
210 |
|
1,461 |
|
617 |
|
248 |
|
174 |
|
456 |
|
414 |
| |||||||||
Ba1 Ba2 |
|
634 |
|
232 |
|
109 |
|
1,021 |
|
702 |
|
129 |
|
122 |
|
519 |
|
215 |
| |||||||||
Ba3 B1 |
|
478 |
|
108 |
|
45 |
|
770 |
|
326 |
|
53 |
|
92 |
|
241 |
|
88 |
| |||||||||
B2 B3 |
|
335 |
|
51 |
|
33 |
|
540 |
|
154 |
|
39 |
|
64 |
|
114 |
|
66 |
| |||||||||
Caa D |
|
42 |
|
6 |
|
7 |
|
68 |
|
18 |
|
9 |
|
8 |
|
13 |
|
14 |
| |||||||||
Total |
|
$ |
3,517 |
|
$ |
719 |
|
$ |
796 |
|
$ |
5,666 |
|
$ |
2,176 |
|
$ |
939 |
|
$ |
675 |
|
$ |
1,609 |
|
$ |
1,570 |
|
|
|
Lease Receivables |
|
Loan Receivables |
|
Participated Receivables with IBM |
| |||||||||||||||||||||
(Dollars in millions) |
|
|
|
|
|
Asia |
|
|
|
|
|
Asia |
|
|
|
|
|
Asia |
| |||||||||
At December 31, 2017: |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
|
Americas |
|
EMEA |
|
Pacific |
| |||||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|