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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE YEAR ENDED DECEMBER 31, 2020

000-55786

(Commission file number)

IBM CREDIT LLC

(Exact name of registrant as specified in its charter)

Delaware

22-2351962

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS employer identification number)


One North Castle Drive
Armonk, New York		10504
(Address of principal executive offices)		(Zip Code)

914-765-1900

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Limited Liability Company Interests

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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 ☐				Accelerated filer ☐
Non-accelerated filer ☒				Smaller reporting company ☐
				Emerging growth company ☐

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. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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

REDUCED DISCLOSURE FORMAT

IBM Credit LLC (IBM Credit), an indirect, wholly owned subsidiary of International Business Machines Corporation, meets the requirements set forth in General Instruction I(1) of Form 10-K. In accordance with published guidance from the Securities and Exchange Commission’s Division of Corporation Finance, this Annual Report on Form 10-K omits certain disclosure items that correspond to the disclosure items that IBM Credit is permitted to omit from a Form 10-K pursuant to General Instruction I(2) of Form 10-K.

Table of Contents

Table of Contents


	Page

PART I	3

Item 1. Business.	3

Item 1A. Risk Factors.	11

Item 1B. Unresolved Staff Comments.	17

Item 2. Properties.	17

Item 3. Legal Proceedings.	17

Item 4. Mine Safety Disclosures.	17

PART II	18

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	18

Item 6. Selected Financial Data.	18

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.	40

Item 8. Financial Statements and Supplementary Data.	41
Report of Independent Registered Public Accounting Firm	43
Consolidated Financial Statements	45
Notes to Consolidated Financial Statements	51

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	85

Item 9A. Controls and Procedures.	85

Item 9B. Other Information.	85

PART III	85

Item 10. Directors, Executive Officers and Corporate Governance.	85

Item 11. Executive Compensation.	85

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	86

Item 13. Certain Relationships and Related Transactions, and Director Independence.	86

Item 14. Principal Accounting Fees and Services.	86

PART IV	87

Item 15. Exhibits, Financial Statement Schedules.	87

Item 16. Form 10-K Summary.	90

Table of Contents

PART I

Item 1. Business.

Overview

IBM Credit LLC (IBM Credit or the company), a Delaware limited liability company, is an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM). All of the limited liability company interests in IBM Credit are owned by IBM GF International Holdings LLC, a Delaware limited liability company (the Member), which is also an indirect, wholly owned subsidiary of IBM. IBM Credit is engaged in providing financing solutions for information technology (IT) hardware, software and services.

IBM Credit was originally established as a subsidiary of IBM to provide financing solutions and remanufacturing and remarketing operations, in each case primarily for IBM products sold in the United States. Today, the company maintains a global organizational structure aligned with its operating segments, Client Financing and Commercial Financing.

Client Financing provides financing to end-user clients, which consists of large, medium-sized and small corporations and other businesses, primarily for their purchases of IBM products and services. Client Financing also provides loans to IBM to finance the acquisition of IT assets used in client services contracts. The company believes the financing arrangements are predominantly for products and services that are critical to the end-user clients’ business operations.

Commercial Financing provides working capital financing to suppliers, distributors, and resellers primarily of IBM products and services. In 2019, the company wound down the original equipment manufacturers’ (OEM) IT portion of its Commercial Financing operations. In the fourth quarter of 2020, the company expanded its financial flexibility within the Commercial Financing segment. The company entered into an agreement with a third-party investor to sell up to $3 billion of IBM Commercial Financing receivables, at any one time, on a revolving basis. The transfers of these receivables under this agreement are expected to qualify as true sales when they occur. These sales began in December in the United States and Canada and are expected to expand to certain other countries through the first half of 2021. The initial term of the agreement is three years. In the fourth quarter of 2020, the company sold $515 million of IBM Commercial Financing receivables under the agreement.

IBM Credit has the benefit of both deep knowledge of the company’s and IBM’s client base and insight into the hardware, software and services traditionally financed. These factors allow the company to effectively manage two of the major risks associated with financing: credit and residual value. These risks and others are discussed more fully in Item 1A, “Risk Factors.” The company also maintains long-term relationships with its clients through various stages of the IT asset life cycle — including initial purchase, technology upgrades and end-of-lease asset disposition.

Organizational Structure

IBM Credit was incorporated in Delaware in 1981 as IBM Credit Corporation and was subsequently converted to a limited liability company and renamed IBM Credit LLC in 2003.

IBM Credit operates as part of IBM’s Global Financing (IGF) business segment. The IGF business segment encompasses two primary activities: IBM Credit’s financing business and IBM’s remanufacturing and remarketing business. The remanufacturing and remarketing business includes sales, marketing and inventory management of used IBM and OEM IT products, and is conducted by IBM subsidiaries that are not part of IBM Credit.

In 2016, IGF established new entities to separate certain assets and liabilities related to IBM Credit’s financing business from IBM in the majority of countries where IGF operates. In most countries in which IBM Credit’s financing business operated as a division of the IBM legal entity, a subsidiary was formed that acquired the assets and liabilities related to the financing business from the existing IBM legal entity. The remanufacturing and remarketing business and related assets and liabilities remained in the existing IBM legal entity. In the few countries where the financing business was not considered material to IBM Credit on a consolidated basis, such operations remained in the existing IBM legal entity.

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These countries’ operating results are not reported as part of IBM Credit. In countries in which the financing business already operated in a separate legal entity and included the remanufacturing and remarketing business, such legal entity was transferred to IBM Credit. In connection with each such transfer, the legal entity divested its assets and liabilities related to the remanufacturing and remarketing business to IBM prior to its transfer to IBM Credit. In 2017, IBM Credit directly or indirectly acquired all of the foreign legal entities that operate the financing business, as referenced above, as part of a strategy to drive operational benefits by consolidating the financing business under IBM Credit.

Business Segments

The company’s two operating segments, Client Financing and Commercial Financing, are business units that offer financing solutions based upon the needs of the company’s clients. The segments represent components of the company for which separate financial information is available and utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance.

Each segment’s business and the financing solutions that generate the segment’s revenue, results of operations and asset portfolio are discussed further in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in note N, “Segment Information,” to the Consolidated Financial Statements.

Client Financing

The company provides leases and loan financing to end-user clients and acquires installment payment plans offered to end-user clients by IBM. End-user clients are primarily IBM clients who elect to finance their acquisition of IBM’s hardware, software, and services to meet their total solution requirements. In addition, the company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT assets, which IBM uses in external, revenue-producing services contracts.

Client Financing solutions are typically delivered as follows:

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Leases, Loans and Installment Payment Plans: Leases are primarily sales-type, direct financing and operating leases for IBM’s hardware. Loans are made to end-user clients primarily to finance purchases of IBM software and services, and are generally unsecured. These leases and loans are typically documented in contracts between IBM Credit and the end-user client.

In certain countries, the leases and loans are originated by IBM directly to the end-user client, and the company purchases the receivables and related equipment from IBM. In addition, IBM Credit supports IBM’s client offerings of installment payment plans for hardware, software and services to the end-user by purchasing receivables related to such payment plans from IBM.

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IBM Total Solution Offerings that include Financing: For certain IBM offerings, IBM Credit’s financing contract is bundled with IBM’s product and service contract to create a combined periodic payment schedule for the entire offering (Total Solution Offering). For Total Solution Offerings, the financing and non-financing amounts due are provided in a single, combined periodic invoice for the IBM end-user client, such that each amount due to IBM Credit for the financing payment is collected by IBM along with the amounts due to IBM for the non-financing items. In these cases, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit.

For IBM Total Solution Offerings in certain countries, as well as for certain government and other contracts, IBM Credit is not a party to IBM’s contract with the end-user client. Instead, IBM directly provides the end-user client with the financing. IBM Credit acquires a participation interest from IBM that represents the financing portion of such payments and assumes the associated credit risk of IBM’s end-user client from IBM. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

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Other Financing to IBM: The company provides loans to IBM, primarily in support of IBM’s Global Technology Services segment’s acquisition of IT, which IBM uses in external, revenue-producing client services contracts. The loan portfolio balance is renewed and repriced periodically with a net settlement for advances on new equipment acquisitions or repayments of principal on prior acquisitions. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Client Financing solutions are typically marketed and sold by IBM Credit employees, primarily in cooperation with IBM and business partner sales teams during the product and services sales cycle. Client Financing solutions are generally offered at market rates that are competitive with what individual clients could obtain from other lenders. Client Financing solutions may also be offered at discounted rates, resulting from financing incentives primarily provided by IBM or business partners through various financing incentive programs, allowing IBM Credit to realize a market yield. For additional information, see the “Financing Incentive Programs” section.

The company recovers the residual value of leased equipment by selling assets to IBM that have been returned from lease at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a 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. For additional information on the residual value of leased assets and the sale of equipment returned from lease to IBM, see note A, “Significant Accounting Policies,” and note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Commercial Financing

IBM Credit provides working capital financing to suppliers (primarily consisting of IBM products and services), distributors (typically third parties that purchase IT products from suppliers and provide those products to resellers) and resellers. This financing may take the form of loans to distributors and resellers, which are generally unsecured obligations of the client, but may be collateralized by inventory or accounts receivable. This financing may also include factoring, in which IBM Credit purchases receivables from suppliers, distributors or resellers.

IBM Credit generally extends payment terms in the range of 30 to 90 days to distributors and resellers in respect of their inventory purchases, while providing early settlement to suppliers at the supplier’s election. Suppliers generally provide financing incentives to reduce their distributors’ or resellers’ cost of financing for this term. The extended payment terms and early settlement provide liquidity to these clients. Commercial Financing is also important to suppliers and distributors because it enables them to shed credit risk, which is assumed by IBM Credit. For certain creditworthy distributors or resellers, IBM Credit may, at its discretion, allow a further extension of the repayment period for an additional financing charge.

In 2019, the company wound down the OEM IT portion of its Commercial Financing operations. In the fourth quarter of 2020, the company expanded its financial flexibility within the segment by entering into an agreement with a third-party investor to sell up to $3 billion of its IBM Commercial Financing receivables, at any one time, on a revolving basis over the agreement’s three-year term.

Financial Regulation and Supervision

IBM Credit’s operations are subject to financial regulation, including licensing requirements and supervision, within and outside the U.S. Although IBM Credit operates in all 50 states and in certain U.S. territories, the company is only required to be licensed for the type of financing it provides in a very limited number of states or territories. The company believes it is in material compliance with all licensing requirements in these states and territories. None of the company’s lender licenses are consumer finance licenses, as the company does not extend credit to consumers. In certain of these jurisdictions, as a result of being licensed as a non-bank lender, the company is, or may be subject to compliance examinations, audits or information requests, including with respect to client complaints, by the relevant licensing agency. With respect to the type of commercial financing activities conducted by IBM Credit, state and local laws in the

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U.S. generally regulate debt collection practices and creditors’ rights, establish maximum interest rates and other charges and prohibit discrimination in the extension of credit and related activities.

In addition to state and local laws, IBM Credit is subject to certain federal financial laws and regulations, including, for example, the Equal Credit Opportunity Act which, among other things, prohibits discrimination in the extension of credit and related activities.

IBM Credit’s financing business outside the U.S. is generally conducted through subsidiaries and is subject to local financial laws and regulations, including, in certain jurisdictions, reporting requirements and the requirement to maintain an anti-money laundering program. A limited number of IBM Credit’s foreign subsidiaries are authorized or licensed as banks, credit institutions or non-bank lenders that are subject to heightened regulation, including, for example, capital requirements and prudential supervision by local authorities. The company’s regulated subsidiaries in these countries are subject to periodic examinations related to their financing business.

IBM Credit monitors its financing operations for compliance with applicable laws and regulations. The company believes it is in material compliance with all licensing requirements as are necessary to conduct its financing business both within and outside the United States and is in material compliance with all laws and regulations applicable to its financing operations.

Portfolio Risk Management

IBM Credit conducts a credit evaluation of its clients prior to extending financing. The credit evaluation takes into account current information about the client, such as published credit ratings, financial statements, news reports and current market implied credit analysis, as well as the current economic environment, outstanding obligations to the company and prior collection history. In some cases, commercial factors, including IBM’s relationship with a client, are also considered in making origination and other business decisions. Counterparty risks are managed at an overall IBM level and all subsidiaries, including IBM Credit, operate within those policies, principles and delegations. When appropriate, actions are taken to mitigate credit risk, such as requiring the inclusion of covenants from the client to protect against credit deterioration during the life of the obligation and obtaining credit enhancements, such as payment guarantees and letters of credit. The company performs additional credit evaluations of its clients on a regular basis. These evaluations have required enhanced focus in this unprecedented environment of the novel coronavirus (COVID-19) pandemic. For additional information, see note F, “Financing Receivables, Receivables Purchased/Participated from IBM,” to the Consolidated Financial Statements.

IBM Credit employs a rigorous process to optimize portfolio risk and to obtain additional credit capacity in support of new business opportunities. IBM Credit engages in portfolio risk mitigation by entering into various non-recourse and limited recourse agreements with third parties consisting primarily of domestic and foreign financial institutions including banks, commercial and vendor finance companies, equipment lessors, credit insurers and other specialty finance companies. Third party arrangements may be funded or unfunded and include participations, sales and assignments, factoring, credit insurance, and other credit risk mitigation structures under discretionary or committed facilities. The company also sells financing receivables and operating leases (and related assets) to third parties.

Financing Incentive Programs

From time to time, IBM sponsors financing incentive programs that allow the company to offer waived or reduced rate financing for marketing program offerings and sales promotions. Pursuant to these programs, IBM offers a discount to IBM Credit that enables the company to realize a market yield on any Client Financing agreements entered into either directly or indirectly under these incentive programs. Market yield is based on the credit quality of the client and the length of the contract.

The volume of financing incentive programs sponsored by IBM and the split of those programs between leases and loans may vary over time depending upon the marketing strategies.

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In addition, the company provides financing which includes an interest free period to suppliers, distributors and resellers of IBM products and services, which is funded by IBM. These fees are included in the Commercial Financing segment as financing revenue. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Client Services

Once a financing arrangement is in place, the company provides its clients with timely direct settlement of financial obligations with such clients’ suppliers. The company provides account management and client service and support throughout the financing relationship, including reminders for payment, processing of payments and handling of client billing questions. The company also provides end-of-lease options, including purchase, extension or return of leased equipment.

Relationship with IBM

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 arm’s-length basis, subject in certain cases, particularly with respect to originations, to commercial factors, including IBM’s relationship with a client. The following is a description of certain material relationships between IBM and IBM Credit regarding support, borrowing, licensing, service and other arrangements. For additional information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

IBM Support Agreement

IBM Credit and IBM are parties to a support agreement, which became effective on May 2, 2017 (Support Agreement). Pursuant to the Support Agreement, IBM has agreed with IBM Credit that IBM will:

●

retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in IBM Credit at all times;

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cause IBM Credit to, on the last day of each of IBM Credit’s fiscal years, have a consolidated tangible net worth of at least $50 million (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 subsidiary companies less (b) the intangible assets and total liabilities of IBM Credit and its subsidiary companies); and

●

cause the leverage ratio of IBM Credit to be no more than 11 to 1 for each of IBM Credit’s fiscal quarters (with leverage ratio for purposes of this discussion of the Support Agreement understood to mean, for any calendar quarter, IBM Credit’s debt-to-equity ratio as reported in, and calculated in the manner set forth in, IBM Credit’s periodic report covering such fiscal quarter).

In the event that IBM Credit’s leverage ratio as of the end of any fiscal quarter is higher than 11 to 1, then, upon demand by IBM Credit, IBM has agreed to make or cause to be made a capital contribution to IBM Credit in an amount sufficient to cause the 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.

IBM or IBM Credit may each terminate the Support Agreement upon giving the other party 30 days prior written notice, with a copy of such notice to each rating agency that is then rating any outstanding debt (with debt for purposes of this discussion defined as IBM Credit’s indebtedness for borrowed money that either (i) is rated by one or more rating agencies or (ii) is designated by the board of managers of IBM Credit as constituting debt for purposes of the Support Agreement). The Support Agreement may be modified or amended only by the written agreement of IBM and IBM

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Credit and upon 30 days prior written notice to each rating agency rating any outstanding debt. However, such termination, modification or amendment will not be effective with respect to any debt outstanding at the time of such termination, modification or amendment unless (a) such termination, modification or amendment is permitted under the documentation governing such debt, (b) all affected holders of such debt (or, in the case of debt incurred pursuant to documentation that permits the Support Agreement to be terminated, modified, or amended with the consent of less than all of the holders of such debt, the requisite holders of such debt) otherwise consent in writing or (c) with respect to debt that is rated by one or more rating agencies at the request of IBM or IBM Credit, each such rating agency confirms in writing that the rating assigned to such debt by such rating agency will not be withdrawn or reduced because of the proposed action.

Under the terms of the Support Agreement, the Support Agreement is not enforceable against IBM by anyone other than (a) IBM Credit or (b) if any case is commenced under the United States Bankruptcy Code (11 U.S.C. §§ 101 et seq.), or any successor statutory provisions (the Bankruptcy Code), in respect of IBM Credit, the debtor in possession or trustee appointed by the court having jurisdiction over such proceeding. In the event of (1) a breach by IBM in performing a provision of the Support Agreement and (2) the commencement of such a case under the Bankruptcy Code with respect to IBM Credit while any debt is outstanding, the remedies of a holder of debt shall include the right, if no proceeding on behalf of IBM Credit has already been commenced in such case, to file a petition in respect of IBM Credit thereunder with a view to the debtor in possession, or the trustee appointed by the court having jurisdiction over such proceeding, pursuing IBM Credit’s rights under the Support Agreement.

The Support Agreement is governed by and construed in accordance with the laws of the State of New York.

Borrowing Relationship

The company has credit facilities with IBM that allow the company to obtain short- and long-term funding on an as-needed basis and the company seeks to substantially match-fund the term, currency and interest rate variability of its debt against its underlying financing assets. The general terms of the loans under these credit facilities are set forth in standard intercompany loan agreements, which include standard default clauses (including failure to pay interest or principal when due, bankruptcy and ceasing to be a wholly owned subsidiary). IBM Credit is entitled to prepay loans issued under these credit facilities from time to time, subject to payment of any agreed penalty or premium. Loans with IBM under such agreements are included in the Consolidated Balance Sheet as debt payable to IBM. Interest expense incurred on these borrowings from IBM is included in financing cost in the Consolidated Income Statement. For additional information on short- and long-term funding, see note H, “Borrowings,” to the Consolidated Financial Statements.

Services and Other Arrangements

The company sources a number of services from IBM, including functional support for treasury, accounting, legal, tax, human resources, marketing and IT services. In certain instances, IBM acts as IBM Credit’s billing and collection agent and forwards the financing payments to IBM Credit. The company also has the right to use certain IBM intangibles in its business. Where practical, charges of the expenses incurred by IBM in the provision of these functional support services are based upon direct usage. For the remainder, where possible, expenses are charged based on measurable non-financial drivers, such as number of employees. When a clear and measurable non-financial driver cannot be established, these expenses are charged based on a measurable financial driver, such as net margin. Management believes that these methods are reasonable. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities for which IBM charges the company for occupancy expenses based on square footage space usage with no fixed term commitment. For additional information regarding the historical allocation of expenses by IBM to the company, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

The company participates in various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

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The company participates in certain multiemployer retirement-related plans that are sponsored by IBM. Charges from IBM to the company in relation to these multiemployer plans (including non-pension, post-retirement benefits) are limited to service costs. The company is charged by IBM based on the number of employees. Contributions and any other types of costs for these multiemployer plans are the responsibility of IBM. In certain countries, the company participates in plans that are accounted for as multiple-employer plans. For these plans, the retirement-related plan obligation is owned by the company and is generally calculated using actuarial valuations. Under these plans, IBM manages the assets and allocates them to the company based on the company’s obligation. The company also participates in certain defined contribution plans and is charged by IBM based on the number of employees. For additional information, see note M, “Retirement-Related Benefits,” to the Consolidated Financial Statements.

Expenses related to the services discussed above are included in Selling, General and Administrative (SG&A) expense in the Consolidated Income Statement. It is not practical to estimate the actual costs that would have been incurred had IBM Credit been a separate company during the periods presented. These costs also 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 company also invests a portion of its excess cash in short-term interest-bearing accounts with IBM, which can be withdrawn upon demand. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Tax Sharing Agreement

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a tax sharing agreement for any operations included in an IBM consolidated tax return (Tax Sharing Agreement). Pursuant to the Tax Sharing Agreement, 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 company’s relevant pro forma stand-alone tax return. For additional information, see note L, “Taxes,” to the Consolidated Financial Statements.

Competition

The company operates in a highly competitive environment, where financing for users of IBM hardware, software and services is available through a variety of sources. The company’s strong relationship with IBM provides the company with access to capital and the ability to manage increased exposures, each of which generates a competitive advantage. The key competitive factors in Client Financing and Commercial Financing include interest rates charged, IT product experience, client service, contract flexibility, ease of doing business, global capabilities and residual values. In providing financing solutions to clients, the company primarily competes with non-captive financing entities and financial institutions.

Human Capital

IBM develops and delivers innovative technologies including hybrid cloud, AI, and quantum, for clients whose businesses the world relies on. IBM Credit generally draws from IBM’s overall talent pool, while also attracting and developing its own workforce. IBM Credit employees have specific skills and experience to support the company’s financing operations, such as portfolio risk management, account management and client services skills, combined with a deep knowledge of IBM’s client base and offerings.

IBM Credit’s workforce benefits from a wide array of IBM human capital initiatives while developing its own programs tailored to the specific development needs of its workforce. The company supports a diverse and inclusive workplace which leads to greater innovation, agility, performance and engagement, enabling both business growth and societal impact.

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Like IBM, IBM Credit is committed to the health, safety and well-being of its employees. Never has this been more important than in 2020 as the company faced the COVID-19 pandemic. The company has supported the health, safety, and well-being of its employees by restricting travel, cancelling in-person meetings and events and transitioning the entire workforce to work remotely. Employees are supported with 24/7 access to IBM’s world-class Health and Safety team, education, timely updates and forums to ask questions and raise concerns.

At December 31, 2020, IBM Credit and its subsidiaries employed approximately 2,100 people globally.

Geographic Results

The company reports revenue on a geographic basis within Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations.” The geographies include the Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific. The company also provides information regarding total revenue and earning assets in the U.S. and foreign countries in note N, “Segment Information,” to the Consolidated Financial Statements.

Available Information

IBM Credit files reports with the Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. In addition, IBM’s website (www.ibm.com/investor) contains a significant amount of information about IBM Credit, including the company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. These materials are available free of charge on or through IBM’s website.

Forward-looking and Cautionary Statements

Certain statements contained in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements by their nature address matters that are uncertain to different degrees. The company may also make forward-looking statements in other reports filed with the SEC and in materials delivered to lenders and in press releases. In addition, the company’s and IBM representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects” and similar expressions, may identify such forward-looking statements. Any forward-looking statement in this Form 10-K speaks only as of the date on which it is made, except as required by law. The company assumes no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, set forth under Item 1A, “Risk Factors” in this Form 10-K are cautionary statements that accompany those forward-looking statements. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in the company’s filings with the SEC or in materials incorporated therein by reference.

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Item 1A. Risk Factors.

Risks Related to Our Business

The Company’s Financial Condition is in Large Part Dependent upon IBM: A significant portion of IBM Credit’s financing business consists of financing associated with the sale of IBM’s products and services. Financing originations, which determine the company’s financing asset base, are impacted by IBM’s product and services sales volumes and IBM Credit’s participation rates in those sales. Participation rates reflect the propensity of IBM’s clients to finance their transactions through IBM Credit in lieu of paying IBM up-front cash or financing through a third party. As discussed on page 6 under “Financing Incentive Programs,” IBM Credit participates in certain marketing programs in conjunction with IBM that allow the company to offer financing to end-user clients, which provides IBM Credit with a competitive advantage in financing IBM’s offerings. Any change in these marketing programs or IBM’s distribution methods, or any reduction in the company’s ability to offer competitively priced financing to IBM end-user clients, could reduce the company’s participation rates in IBM’s product and service offerings, which could have a material adverse effect on the business, financial condition, results of operations and cash flows of the company. IBM also provides IBM Credit with other types of operational and administrative support, which are integral to the conduct of the company’s business. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements. Any changes in the levels of support from IBM could also negatively impact the company’s results. Further, if there were significant changes in IBM’s liquidity or capital position, the quality of IBM’s offerings, transfers of ownership of IBM’s products or services, or other factors impacting IBM or its products, such changes could significantly affect IBM Credit’s financial condition and results of operations. In addition, IBM has one of the strongest brand names in the world, and its brand and overall reputation could be negatively impacted by many factors, including if IBM does not continue to be recognized for its industry-leading technology and solutions and as a hybrid cloud and AI leader. If negative perceptions tarnish IBM’s or IBM Credit’s brand image and reputation, IBM Credit’s ability to attract and retain customers and talent could be impacted. The success of IBM’s business and operations and demand for IBM products and services are subject to a number of risks, including, among others:

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IBM’s ability to reach its growth and productivity objectives under its long-term business strategy;

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IBM’s ability to continue its cutting-edge innovation and ability to commercialize such innovations;

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Risks from IBM’s investments in key strategic areas to drive revenue growth and market share;

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IBM’s relationship with its critical suppliers;

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Quality issues with IBM products;

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IBM’s reliance on third party distribution channels and ecosystems; and

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Risks from IBM’s acquisitions, alliances, dispositions and other strategic transactions, including IBM’s proposed separation of the Managed Infrastructure Services Unit of its Global Technology Services segment, as well as integration challenges.

Additionally, the company’s credit ratings depend, in part, on the existence of the Support Agreement with IBM. If this arrangement, or replacement arrangements, if any, are modified, or if a credit rating of IBM is lowered, the company’s credit ratings could be negatively impacted, potentially leading to higher borrowing costs and negatively impacting the company’s ability to offer competitively priced financing to its clients, which could have a material adverse effect on the business, financial condition, results of operations and cash flows of the company.

Downturn in Economic Environment Could Impact the Company’s Business: If there is a downturn in the economic environment, generally or specific to certain industries in which IBM Credit’s clients operate, including downturns associated with the COVID-19 pandemic, clients may be unable to meet their debt obligations and they may not enter into new financing arrangements, which could negatively impact the company’s financial results.

Technology Sector Innovation Initiatives Could Impact Clients’ Propensity to Enter into Financing Arrangements: As IBM and other suppliers of technology transform their offerings and enter new market segments, some new offerings and delivery models may be less conducive to traditional financing than the historical offerings. While the company

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makes efforts to adapt IBM Credit’s financing business and offerings to these changes, the company may not be successful and this could have negative impacts on the company’s financial results and long-term success.

The Company’s Reliance on Partner Relationships Could Impact Its Business: The company offers its solutions directly and through a variety of business partners, including suppliers, distributors and resellers of IT hardware, software and services. Changes in the business condition, financial or otherwise, of these parties could negatively impact the company and affect its ability to bring its solutions to market. If the company moves into new areas, partners may be unable to keep up with changes in IBM Credit’s offerings, and the company may be unable to recruit and enable appropriate partners. In addition, the failure of partners to comply with all applicable laws and regulations may prevent the company from working with them, which could negatively impact the company and affect its ability to bring solutions to market.

Changes to Residual Value Could Adversely Affect the Profitability of the Company’s Lease Transactions: The recorded residual values of lease assets are estimated at the inception of a lease to be the expected fair value of the assets at the end of the lease term. The estimated residual value of leased equipment is based on a number of factors, including historical market sales prices, past remarketing experience, known significant market or product trends and IBM’s remarketing plans. If residual values significantly decline or are incorrectly estimated, due to economic factors, product quality issues, market or client behavior changes, fraud or misconduct by end-user clients or other third parties, unforeseen technology innovations or any other circumstances, it may lower financing margin and income or result in losses.

Due to the Company’s Global Presence, Its Business and Operations Could Be Impacted by Local Legal, Economic, Political, Health and Other Conditions, including the COVID-19 Pandemic: The company is a global business, so changes in the laws or policies of the countries in which the company operates, or inadequate development or enforcement of laws or policies, could affect the company’s business and overall results of operations. Further, the company may be impacted directly or indirectly by the development and enforcement of laws and regulations in the U.S. and globally that are specifically targeted at the technology industry. Substantial revisions that U.S. and foreign governments are undertaking or considering in areas such as the regulation and supervision of financial institutions, including financing and leasing companies, may have an effect on the company’s structure, operations, sales, liquidity, capital requirements, effective tax rate and performance. The company’s results of operations could also be affected by economic and political changes around the world and by macroeconomic changes, including recessions, inflation, currency fluctuations between the U.S. dollar and foreign currencies and adverse changes in trade relationships between countries. Further, if the company expands its client base and the scope of its offerings, both within the U.S. and globally, the company may be impacted by additional regulatory or other risks, including compliance with U.S. and foreign financial industry laws and regulations, data privacy requirements, enforcement of intellectual property protection, anti-money laundering laws, tax laws, anti-competition regulations, anti-corruption laws, and import, export and trade restrictions. Further, uncertainty has been created by international trade disputes. Tariffs and sanctions resulting from these disputes could affect IBM’s ability to move goods and services across borders, or could impose added costs to those activities, which could impact the company’s operations. Measures taken to date by IBM and the company to mitigate these impacts could be made less effective should trade sanctions or tariffs change. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue, natural disasters, climate change impacts, or uncertain political climates, international hostilities, or any terrorist activities, could negatively affect customer demand and the company’s operations. For example, on March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global pandemic. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. In the current macroeconomic environment, clients continue to balance short-term challenges and opportunities for transformation. Their short-term priorities continue to be focused on operational stability, flexibility and cash preservation, and as such, we may experience some disruptions in transactional performance. Additionally, clients’ short-term priorities, as well as quarantines, limitations on travel and other factors associated with the COVID-19 pandemic may result in delays in some services projects. Another example, the U.K.’s withdrawal from the E.U., commonly referred to as “Brexit”, has caused global economic, trade and regulatory uncertainty. The company is actively monitoring and planning for possible impacts from Brexit.

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Item 1A. Risk Factors – (continued)

The Company Could Be Impacted by Its Business with Government Clients: The company’s clients include numerous governmental entities and clients whose primary customers are government-owned entities. Some of the company’s agreements with these clients may be subject to periodic funding approval. Funding reductions or delays could negatively impact public sector demand for IBM’s products and services, and therefore, demand for the company’s financing offerings could be negatively impacted. Also, some agreements may contain provisions allowing the client to terminate without cause or may provide for higher liability limits for certain losses. In addition, the company could be suspended or debarred as a governmental contractor and could incur civil and criminal fines and penalties, which could negatively impact the company’s results of operations, financial results and reputation.

The Company’s Use of Accounting Estimates Involves Judgment and Could Impact the Company’s Financial Results: The application of generally accepted accounting principles requires the company to make estimates and assumptions about certain items and future events that directly affect the company’s reported financial condition, including considering financial implications of the macroeconomic impacts of the COVID-19 pandemic. In addition, adopting new accounting standards can also pose challenges to the company. The company’s most critical accounting estimates including the methods used by management to estimate the amount of uncollectible receivables are described in note A, “Significant Accounting Policies,” to the Consolidated Financial Statements. In addition, as discussed in note K, “Contingencies and Commitments,” to the Consolidated Financial Statements, the company makes certain estimates including decisions related to legal proceedings and reserves. These estimates and assumptions involve the use of judgment. As a result, actual financial results may differ.

Ineffective Internal Controls Could Impact the Company’s Business and Operating Results: The company’s internal controls over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of the financial statements. If the company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the company experiences difficulties in its implementation, the company’s business and operating results could be harmed and the company could fail to meet its financial reporting obligations.

Risks Related to Financing Activity

The Company’s Financial Performance Could be Impacted by Its Ability to Collect Receivables in a Timely Manner and Result in Incurring Potential Unexpected Credit Losses: Changes in the concentration of credit and the credit risk of IBM Credit’s clients can be impacted by global, country, industry and client specific economic conditions, including sudden shifts in regional or global economic activity such as those associated with the COVID-19 pandemic, which in turn may impact clients’ working capital and their ability to make scheduled payments on the company’s financing receivables. In addition, client disputes regarding product quality, service delivery, amounts due to the company under Total Solution Offerings or other circumstances, may cause clients to delay scheduled payments when due. IBM Credit’s ability to collect receivables and generate sufficient cash to meet its business obligations, including servicing its debt, can have a significant impact on the company’s business operations.

Additionally, the company’s client base includes a variety of enterprises, from small and medium businesses to the world’s largest organizations and governmental entities. The company performs regular credit evaluations of its clients’ financial conditions. These credit evaluations rely in part on third party information, including information provided by the company’s clients, and may not successfully predict client financial conditions and detect and prevent fraud or misconduct by the company’s end-user clients or other third parties. Any such fraud or misconduct could have a significant impact on the company’s ability to collect receivables. If the company becomes aware of information related to the creditworthiness of a client, or if actual default rates on receivables in the future differ from those currently anticipated, the company may have to adjust its allowance for credit losses, which could affect the company’s financial position and results of operations.

The Company’s Financial Performance Could be Impacted by Exposure to Currency and Financing Risks and Changes in Market Liquidity Conditions: The company derives a significant percentage of its revenues and costs from its

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Item 1A. Risk Factors – (continued)

operations in local currency environments, which are affected by changes in the relative values of the U.S. dollar and foreign currencies. Further, inherent in the company’s business are risks related to the interest rate and currency fluctuations on the associated debt and liabilities. Changes in interest rates or changes in the global economy (including currency fluctuations and sudden shifts in regional or global economic activity such as those associated with the COVID-19 pandemic) could have a negative impact on both revenue and net margin. 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 employs several strategies to manage these risks, including the use of derivative financial instruments. However, there can be no assurance that the company’s efforts to manage its currency and financing risks will be successful. The company’s financial performance is exposed to a wide variety of industry sector dynamics worldwide that could impact IBM Credit’s ability to generate sufficient cash to service its debt. The company’s earnings and cash flows, as well as its access to funding, could be negatively impacted by changes in market liquidity conditions. For more information about the company’s liquidity position, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-K.

IBM Credit’s ability to fund the company’s operations depends on its ability to generate cash. This is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other conditions that are beyond the company’s control.

Risks Related to Laws and Regulations

Certain of the Company’s Operations Are Subject to Financial Regulation, Supervision and Licensing under Various Laws and Regulations: The company is required to comply with a range of financial laws and regulations within and outside the U.S., which may be costly to adhere to and may affect both the results of its operations and its ability to service its earning assets. Compliance with these laws and regulations requires that the company maintain certain licenses and be subject to examinations or audits by supervisory authorities in certain jurisdictions in which it operates. Failure to comply with such laws and regulations in any particular jurisdiction could result in significant civil penalties and other sanctions, such as a revocation of the company’s license to do business in that jurisdiction. In the event the company were to become subject to any such sanctions, its business in the affected jurisdiction could be adversely affected, which in turn could have a material adverse effect on IBM Credit’s business prospects, results of operations or financial condition.

The Company Is Subject to Legal Proceedings and Investigatory Risks: As a global company with business operations, employees and clients in many countries, the company is or may become involved as a party and/or may be subject to a variety of claims, demands, suits, investigations, tax matters and other proceedings that arise from time to time in the ordinary course of its business. The company believes that it has adopted appropriate risk management and compliance programs. Legal and compliance risks, however, will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, may arise from time to time. Additional information on legal matters is included in note K, “Contingencies and Commitments,” to the Consolidated Financial Statements.

Tax Matters Could Impact the Company’s Results of Operations and Financial Condition: The company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. The company’s provision for income taxes and cash tax liability in the future could be negatively affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could negatively impact the company’s results of operations and financial condition in future periods. The Organization for Economic Cooperation and Development (OECD) is issuing guidelines that are different, in some respects, than long-standing international tax principles. As countries unilaterally amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may negatively impact the company’s income taxes. Local country, state, provincial or municipal

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Item 1A. Risk Factors – (continued)

taxation may also be subject to review and potential override by regional, federal, national or similar forms of government.

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns and therefore are not directly subject to corporate income taxes but instead settle their tax liabilities with IBM. Any subsequent tax assessments or benefits resulting from tax examinations are the responsibility of IBM. For separate income tax return filings for jurisdictions that are not included in IBM’s tax return, the company is subject to the continuous examination of such income tax returns by tax authorities in those jurisdictions. The company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on the company’s provision for income taxes and cash tax liability.

Risks Related to Cybersecurity and Data Privacy

Cybersecurity and Privacy Considerations Could Impact the Company’s Business: There are numerous and evolving risks to cybersecurity and privacy, including risks originating from intentional acts of criminal hackers, hacktivists, nation states, and competitors; from intentional and unintentional acts of customers, contractors, business partners, vendors, employees and other third parties; and from errors in processes or technologies, as well as the risks associated with an increase in the number of customers, contractors, business partners, vendors, employees and other third parties working remotely as a result of the COVID-19 pandemic. Computer hackers and others routinely attack the security of the company’s technology systems and networks using a wide variety of methods, including malicious software and attempts to exploit vulnerabilities in hardware, software, and infrastructure. Attacks also include social engineering to fraudulently induce customers, contractors, business partners, vendors, employees, and other third parties to disclose information, transfer funds, or unwittingly provide access to systems or data. The company is at risk of security breaches not only of its own systems and networks, but also those of its clients, contractors, business partners, vendors, employees and other third parties. Cyber threats are continually evolving, making it difficult to defend against such threats and vulnerabilities that can persist undetected over extended periods of time. The systems utilized by the company involve the storage, processing and transmission of sensitive data, including proprietary or confidential data, regulated data, and personal information of employees, clients and others. Successful cybersecurity attacks or other security incidents could result in, for example, one or more of the following: unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, client, or other third party data or systems; theft or import or export of sensitive, regulated, or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware, crypto mining, destructive attacks or other means; and business delays, service or system disruptions or denial of service. In the event of such actions, the company, its clients, and other third parties could be exposed to liability, litigation, and regulatory or other government action, as well as the loss of existing or potential clients, damage to brand and reputation, and other financial loss. In addition, the cost and operational consequences of responding to cybersecurity incidents and implementing remediation measures could be significant. Although the company continuously takes significant steps to mitigate cybersecurity risk across a range of functions, such measures can never eliminate the risk entirely or provide absolute security. To date, while the company continues to monitor for, identify, investigate, respond to and remediate cybersecurity incidents, there have not been cybersecurity incidents that have had a material adverse effect on the company, though there is no assurance that there will not be cybersecurity incidents that will have a material adverse effect in the future.

The global regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and will continue to impact the company’s business, including through increased risk, increased costs and expanded or otherwise altered compliance obligations. The enactment and expansion of data protection and privacy laws and regulations around the globe, including an increased focus on international data transfer mechanisms driven by the European Court of Justice decision in the Schrems II matter; the lack of harmonization of such laws and regulations; the increase in associated litigation and enforcement activity; the potential for damages, fines and penalties; and the potential regulation of new and emerging technologies will continue to result in increased compliance costs and risks.

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Item 1A. Risk Factors – (continued)

Risks Related to Ownership of the Company’s Securities

Risks Related to the Company’s Securities: The company has issued debt securities in the capital markets, with a variety of different maturities. The value of the company’s debt securities fluctuates based on many factors, including the methods employed for calculating principal and interest, the maturity of the securities, the aggregate principal amount of securities outstanding, the redemption features for the securities, the level, direction and volatility of interest rates, changes in exchange rates, exchange controls, governmental regulations and other factors over which the company has little or no control. The company’s ability to pay interest and repay the principal for its debt securities is dependent upon its ability to manage its business operations, as well as the other risks described under this Item 1A, “Risk Factors.” There can be no assurance that the company will be able to manage any of these risks successfully. In addition, changes by any rating agency to the company’s outlook or credit ratings can negatively impact the value and liquidity of the company’s debt securities. The company does not make a market in its debt securities and cannot provide any assurances with respect to the liquidity or value of such securities. Further, a secondary market may never develop or be maintained for any series of the debt securities. If a secondary market does develop, it may not continue or it may not be sufficiently liquid to allow bondholders to resell debt securities if or when desired or at a price that bondholders consider acceptable.

On February 24, 2021, the company issued notices to redeem $1.75 billion of outstanding debt securities. Following this redemption and the maturities of other debt securities which occurred earlier in the first quarter of 2021, the company will not have any outstanding debt securities in the capital market.

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Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

IBM Credit’s principal executive offices are located in an office building owned by IBM in Armonk, New York. The company is globally located and conducts its business primarily from IBM leased or IBM owned facilities around the world. IBM charges the company for the use of these facilities based on square footage space usage with no fixed term commitment. For additional information regarding the company’s shared facilities, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Item 3. Legal Proceedings.

See note K, “Contingencies and Commitments,” to the Consolidated Financial Statements.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

IBM Credit is a Delaware limited liability company and an indirect, wholly owned subsidiary of IBM. At December 31, 2020, all limited liability company interests in IBM Credit were owned by the Member, which is also an indirect, wholly owned subsidiary of IBM. The company has no other class of equity securities issued and outstanding. Dividends are declared and paid by IBM Credit as determined by its Board of Managers. The company paid $894 million in cash distributions to IBM during 2020.

Item 6. Selected Financial Data.

IBM Credit has omitted this section pursuant to General Instruction I(2)(a) of Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The “Management Discussion and Analysis of Financial Condition and Results of Operations” (Management Discussion and Analysis) is designed to provide readers with an overview of the business and a narrative on the company’s financial results and certain factors that may affect its future prospects from the perspective of the company’s management. The Management Discussion and Analysis presents an overview of the key performance drivers in 2020.

The Management Discussion and Analysis contains the results of operations for each reportable segment of the business and a discussion of the company’s financial position and cash flows. The summary of key financial information presented within the Management Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Item 1A, “Risk Factors,” and “Forward-Looking and Cautionary Statements” included herein. Other key sections within the Management Discussion and Analysis include: “Liquidity and Capital Resources” and “Looking Forward.”

Overview

IBM Credit generates revenue from the financing activities of its two operating segments, Client Financing and Commercial Financing.

Client Financing generates revenue by providing leases and loan financing to end-user clients and IBM, as well as purchasing installment payment plans, leases, loans and participated receivables from IBM.

Lease and loan contracts between IBM Credit and end-user clients are included in the Consolidated Balance Sheet as financing receivables or equipment under operating leases, and the revenue is included as financing revenue or operating lease revenue in the Consolidated Income Statement.

In certain countries, IBM originates leases, loans and installment payment plans with its end-user clients and IBM Credit acquires the related receivables (and related assets underlying the leases) at a discounted purchase price under certain financing incentive programs. IBM Credit accounts for the acquisition of these receivables as a purchase of receivables. These receivables are included within financing receivables in the Consolidated Balance Sheet. Income is recognized by the company over the term of the financing, and the income is recorded as financing revenue in the Consolidated Income Statement.

For IBM Total Solution Offerings in certain countries, as well as for certain government and other contracts, IBM Credit is not a party to IBM’s contract with the end-user client. Instead, IBM directly provides the end-user client with the lease, loan or installment payment plan. IBM Credit acquires a participation interest in IBM receivables that represents the financing portion of such transactions and assumes the associated credit risk of the IBM end-user client from IBM. These participation interests are included in the Consolidated Balance Sheet as receivables purchased/participated from

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

IBM and the financing income earned from these receivables is included in financing revenue in the Consolidated Income Statement.

The company also provides loans to IBM, primarily in support of its Global Technology Services segment’s acquisition of IT assets which IBM uses in external, revenue-producing client services contracts. This financing is included in the Consolidated Balance Sheet as financing receivables from IBM. The financing income earned from these receivables is included in financing revenue in the Consolidated Income Statement.

The company sells to IBM equipment returned from lease at cost, which approximates fair value. In addition, IBM may migrate a client to new technology. In the event this migration results in an early termination of a 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. These sales are recorded net within the Client Financing segment in other (income) and expense in the Consolidated Income Statement.

Commercial Financing provides working capital financing to suppliers, distributors and resellers of IT products and services where the company generally extends payment terms in the range of 30 to 90 days. A portion of the interest cost may include financing incentives from IBM to cover an interest-free period. Financing may take the form of loans to distributors and resellers, which are generally unsecured obligations of the clients, but may be collateralized by inventory or accounts receivable. These financing transactions are included in the Consolidated Balance Sheet as financing receivables and the financing income is included in financing revenue in the Consolidated Income Statement. Income earned from financing incentives related to Commercial Financing is included in financing revenue in the Consolidated Income Statement and is recognized over the term of the financing. In 2019, the company wound down the OEM IT portion of its Commercial Financing operations. In the fourth quarter of 2020, the company expanded its financial flexibility within the Commercial Financing segment by entering into an agreement with a third-party investor to sell up to $3 billion of its IBM Commercial Financing receivables, at any one time, on a revolving basis over the agreement’s three-year term.

The company also purchases interests in certain of IBM’s other accounts receivable at a discount and assumes the credit risk of IBM’s clients. These transactions are included in receivables purchased/participated from IBM in the Consolidated Balance Sheet and the financing income is included in financing revenue in the Consolidated Income Statement. The discount is recognized as financing revenue over the term of the financing.

The company allocates interest expense and SG&A expense to each of its operating segments. Interest expense is allocated based on average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.

Key drivers of the company’s financial results include the overall health of the economy and its impact on corporate IT budgets, interest rates and originations. Financing originations, which determine the asset base of the annuity-like business, are also dependent upon the demand for IT products and services, IBM’s product cycles and services offerings and client participation rates. Participation rates reflect the propensity of clients to finance their transactions through the company in lieu of paying the supplier up-front with cash or financing through a third party. The COVID-19 pandemic was an unprecedented global challenge in 2020 and IBM experienced some disruptions in transactional performance, shorter duration software transactions and delays in some services projects, which impacted the company’s financing originations. Product cycle dynamics within IBM’s Systems segment also impacted financing originations. The economy can also impact the credit quality of the company’s receivables portfolio and therefore the level of provision for expected credit losses. Interest rates and the overall economy (including currency fluctuations) can affect both revenue and net margin. Interest rates directly impact the company by increasing or decreasing financing revenue and associated borrowing costs.

Within the Management Discussion and Analysis, certain columns and rows and other figures may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Year in Review

The following section provides a summary of the company’s consolidated financial results for 2020 as compared to 2019:


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the year ended December 31:	2020			2019			Change
Revenue	$	1,128		$	1,600		(29.5)	%
Net margin	$	714		$	913		(21.9)	%
Net margin percentage		63.2	%		57.1	%	6.2	pts.
Total expense and other (income)	$	247		$	295		(16.1)	%
Income before income taxes	$	466		$	619		(24.6)	%
Provision for income taxes	$	54		$	188		(71.5)	%
Net income	$	413		$	430		(4.1)	%
Net income margin		36.6	%		26.9	%	9.7	pts.


					Yr.-to-Date
(Dollars in millions)					Percent
At December 31:	2020		2019		Change
Assets	$	23,953	$	28,412	(15.7)	%
Liabilities	$	21,731	$	25,726	(15.5)	%
Member’s interest	$	2,222	$	2,686	(17.3)	%


At December 31:	2020		2019
Debt-to-equity ratio*	8.9	x	9.0	x

*	The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of Member’s interest in the company at the end of the reporting period presented.

Return on Equity


(Dollars in millions)
At December 31:	2020			2019
Net income (1)	$	413		$	430
Average equity (2)*	$	2,394		$	2,899
Return on equity (1)/(2)		17.2	%		14.8	%

*	Average of the ending balance of Member’s interest for the last five quarters.

In 2020, the company delivered revenue of $1,128 million and net income of $413 million. In 2019, the company had revenue of $1,600 million and net income of $430 million.

Total revenue declined $471 million, or 29.5 percent, in 2020 as compared to 2019, driven by a decrease in financing revenue of $405 million, or 30.6 percent, and by a decline in operating lease revenue of $66 million, or 23.9 percent. The decrease in financing revenue primarily reflects the company’s wind down of OEM IT Commercial Financing operations and lower yields within Client Financing. The decline in operating lease revenue was due to lower average asset balances in 2020 compared to 2019.

In 2020, net margin, which is calculated as revenue less financing cost and depreciation of equipment under operating lease, was $714 million, a decrease of $200 million, or 21.9 percent, as compared to 2019. The decline in revenue was partially offset by decreases in financing cost and depreciation expense of $217 million and $54 million, respectively,

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

when compared to the prior year. The decrease in financing cost was due to lower interest rates and a lower average debt balance. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin percentage of 63.2 percent in 2020 increased by 6.2 points compared to the prior year.

Total expense and other (income) of $247 million decreased $47 million, or 16.1 percent, in 2020 compared to $295 million in 2019.

Pre-tax income of $466 million in 2020 decreased 24.6 percent as compared to the prior year. The pre-tax income margin percentage of 41.3 percent in 2020 increased on a year-to-year basis by 2.7 points.

The effective tax rate for 2020 was 11.5 percent, a decrease of 19.0 points, as compared to 2019. The year-to-year change in the effective tax rate was primarily driven by additional tax expense of $116 million in the first quarter of 2019 related to U.S. tax reform. For additional information, see note L, “Taxes,” to the Consolidated Financial Statements.

Net income of $413 million decreased $18 million, or 4.1 percent, in 2020 as compared to 2019. In 2020, net income margin was 36.6 percent, an increase of 9.7 points on a year-to-year basis.

Net cash from operating activities was a use of cash of $136 million in 2020 as compared to a source of cash of $231 million in 2019, primarily driven by a net use of cash of $293 million related to cash settled with IBM in relation to Commercial Financing receivables classified as held for sale in the fourth quarter of 2020. Net cash provided by investing activities of $5,752 million was $1,560 million lower than the prior year, primarily driven by a decrease in cash provided by short term financing receivables, which reflects the wind down of OEM IT Commercial Financing operations in 2019, and a reduction to other receivables with IBM in 2019. This was partially offset by proceeds from the sales of Client Financing receivables and a decline in originations of financing receivables in the current year. Net cash used in financing activities of $5,554 million was $2,125 million lower than the prior year, primarily driven by lower net settlements of debt. For additional information relating to the sale of financing receivables, see note F, “Financing Receivables, Receivables Purchased/Participated from IBM,” to the Consolidated Financial Statements.

Business Segments and Capabilities

IBM Credit and its subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business. The company’s operating segments, Client Financing and Commercial Financing, are business units that offer financing solutions based upon the needs of the company’s clients. The Client Financing and Commercial Financing business segments are described in more detail in Item 1, “Business.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Results of Operations

Segment Details

The following is an analysis of the reportable segment results for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The table below presents each reportable segment’s revenue, net margin, and pre-tax income results.



							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the year ended December 31:	2020			2019			Change
Client Financing
Revenue	$	976		$	1,187		(17.7)	%
Net margin		596			624		(4.4)	%
Net margin percentage		61.1	%		52.6	%	8.5	pts.
Pre-tax income	$	388		$	434		(10.6)	%
Pre-tax margin		39.8	%		36.6	%	3.2	pts.
Commercial Financing
Revenue	$	152		$	413		(63.2)	%
Net margin		117			289		(59.4)	%
Net margin percentage		77.2	%		70.1	%	7.2	pts.
Pre-tax income	$	78		$	184		(57.6)	%
Pre-tax margin		51.4	%		44.6	%	6.7	pts.
Total Segments
Revenue	$	1,128		$	1,600		(29.5)	%
Net margin		714			913		(21.9)	%
Net margin percentage		63.2	%		57.1	%	6.2	pts.
Pre-tax income	$	466		$	619		(24.6)	%
Pre-tax margin		41.3	%		38.7	%	2.7	pts.

Client Financing

Client Financing revenue of $976 million in 2020 decreased by $210 million, or 17.7 percent, as compared to 2019, driven by lower yields, a lower average asset balance and a decline in operating lease revenue of $66 million.

Net margin decreased $28 million, or 4.4 percent, as compared to 2019, driven by a decline in revenue, partially offset by a decrease in interest expense of $129 million, and a decrease in depreciation expense of $54 million. The decrease in interest expense was mainly due to lower interest rates compared to the prior year.

Pre-tax income decreased $46 million, or 10.6 percent, in 2020 as compared to 2019, driven by a higher provision for expected credit losses of $44 million and a decline in net margin, partially offset by an increase in gains on sales of equipment of $21 million and gains on sales of financing receivables of $20 million.

Commercial Financing

Commercial Financing revenue of $152 million in 2020 declined $261 million, or 63.2 percent, as compared to 2019, primarily reflecting the wind down of OEM IT Commercial Financing operations.

Net margin decreased $172 million, or 59.4 percent, as compared to 2019, driven by a decline in revenue, partially offset by a decrease in interest expense of $89 million. The decrease in interest expense was due to a lower average debt balance and lower interest rates, when compared to the prior year.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Pre-tax income decreased $106 million, or 57.6 percent, as compared to 2019. The year-to-year decrease was driven by a lower net margin and a prior-year divestiture gain, partially offset by lower SG&A expenses of $68 million, which was in line with the wind down of OEM IT Commercial Financing operations.

Geographic Revenue


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the year ended December 31:	2020		2019		Change
Revenue	$	1,128	$	1,600	(29.5)	%
Geographies
Americas	$	678	$	958	(29.2)	%
Europe/Middle East/Africa (EMEA)		256		375	(31.7)
Asia Pacific		195		267	(27.1)

Americas revenue of $678 million decreased $280 million, or 29.2 percent, in 2020 as compared to 2019, driven by a decline in financing revenue of $265 million. EMEA revenue of $256 million decreased $119 million, or 31.7 percent, driven by a decline in financing revenue of $92 million. Asia Pacific revenue of $195 million decreased $72 million, or 27.1 percent, driven by a decline in financing revenue of $49 million, as well as a decline in operating lease revenue of $24 million.

The declines in financing revenue across all geographies primarily reflects the wind down of OEM IT Commercial Financing operations and includes lower yields in Americas.

Total Expense and Other (Income)


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the year ended December 31:	2020			2019			Change
Total expense and other (income)
Selling, general and administrative	$	314		$	372		(15.6)	%
Provision for/(benefit from) expected credit loss expense		41			(5)		nm
Other (income) and expense		(107)			(72)		48.8
Total expense and other (income)	$	247		$	295		(16.1)	%
Total expense-to-revenue ratio		21.9	%		18.4	%	3.5	pts.

nm - not meaningful

Total expense and other (income) of $247 million decreased $47 million, or 16.1 percent, in 2020 as compared to 2019. For additional information regarding total expense and other (income), see the following analysis by category.

Selling, General and Administrative


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the year ended December 31:	2020		2019		Change
Selling, general and administrative expense:
Selling, general and administrative - other	$	143	$	159	(9.6)	%
Contracted services		19		18	4.6
Functional support services and other related party expenses		151		195	(22.4)
Total selling, general and administrative expense	$	314	$	372	(15.6)	%

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Total SG&A expense decreased $58 million, or 15.6 percent, as compared to 2019, driven by a decline in functional support services and other SG&A of $44 million and $15 million, respectively, which primarily reflects the wind down of OEM IT Commercial Financing operations. For additional information on support expenses charged by IBM, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

Provision for Expected Credit Loss

The provision for expected credit loss expense was an addition of $41 million in 2020 as compared to a release of $5 million in 2019. The increase was primarily driven by higher unallocated and specific reserves in Americas and EMEA. Refer to note A, “Significant Accounting Policies,” for additional information on allowances for credit losses.

Other (Income) and Expense


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the year ended December 31:	2020		2019		Change
Other (income) and expense
Foreign currency transaction (gains)/losses	$	(1)	$	1		nm
(Gains)/losses on sale of equipment		(99)		(78)		26.4	%
Other expense and (income)		(7)		5		nm
Total other (income) and expense	$	(107)	$	(72)		48.8	%

nm - not meaningful

Total other (income) and expense was $107 million of income in 2020, as compared to $72 million in 2019, driven primarily by higher gains from sales of equipment of $21 million and an increase in other income of $13 million. The increase in other income reflects gains on sales of financing receivables of $20 million, partially offset by a prior-year divestiture gain.

Income Taxes

The effective tax rate for 2020 was 11.5 percent, a decrease of 19.0 points, as compared to 2019. The decrease in the effective tax rate was primarily driven by additional tax expense of $116 million in the first quarter of 2019 related to U.S. tax reform. For additional information, see note L, “Taxes,” to the Consolidated Financial Statements.

Financial Position Summary

The company’s primary use of funds is to originate financing receivables and operating leases with end-users, suppliers, distributors, resellers and IBM. Financing receivables consist of sales-type 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 receivables that have been participated to IBM Credit and purchased interests in certain of IBM’s short-term receivables. Financing receivables from IBM include loan financing to IBM’s Global Technology Services segment. For additional information relating to financing activities with IBM, see note C, “Relationship with IBM and Related Party Transactions.”

Total assets of $23,953 million at December 31, 2020, decreased $4,459 million (including an increase of $465 million from currency) as compared to year-end 2019, driven by a decline in total financing receivables of $4,826 million (including an increase of $424 million from currency), primarily driven by a decline in Client Financing and Commercial Financing receivables of $3,197 million and $1,629 million, respectively. The declines reflect sales of Client Financing and Commercial Financing receivables of $2,471 million, and $515 million, respectively. For

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

additional information relating to the sale of financing receivables, see note F, “Financing Receivables, Receivables Purchased/Participated from IBM,” to the Consolidated Financial Statements.

At December 31, 2020, approximately 62 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, a decrease of 4 points year to year and an increase of 4 points when compared to September 30, 2020. The reduction in investment grade year to year was driven primarily by rating changes within the existing portfolio of clients, partially offset by the wind down of OEM IT Commercial Financing operations. The company continues to apply its rigorous credit policies, particularly in industries and countries disrupted by COVID-19, as it relates to the origination of new business. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflect mitigating credit enhancement actions taken by the customer, which reduces the risk to the company.

The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, with enhanced focus in this unprecedented environment of the COVID-19 pandemic. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sales of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.

Total liabilities of $21,731 million at December 31, 2020, decreased $3,995 million (including an increase of $349 million from currency) as compared to year-end 2019 primarily driven by a decrease in total debt of $4,275 million (including an increase of $337 million from currency), including a decrease in debt with third parties of $2,300 million and a decrease in debt payable to IBM of $1,975 million. These declines were driven by lower funding requirements associated with financing receivables.

Total Member’s interest of $2,222 million at December 31, 2020 decreased $464 million as compared to December 31, 2019, primarily as a result of:

●

Cash distributions to IBM of $894 million;

●

Adoption of the guidance on current expected credit losses of $41 million; partially offset by

●

Net income of $413 million; and

●

Foreign currency translation loss of $37 million.

Originations of Financing Receivables and Operating Leases

Originations are management’s 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. The company 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. This insight is used by management as a tool to monitor business performance and is viewed as useful decision-making information for users of the financial statements.

The Client Financing origination values presented below include participations and exclude the company’s loans to IBM’s Global Technology Services segment, which are executed under a loan facility and are not considered originations. In addition, assets originated with the intent to sell to a third party and assets originated and sold in the same quarter are excluded from Client Financing and Commercial Financing originations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Originations


(Dollars in millions)					Percent
For the year ended December 31:	2020		2019		Change
Client Financing	$	13,343	$	14,252	(6.4)	%
Commercial Financing		12,465		35,627	(65.0)	%
Total originations	$	25,808	$	49,878	(48.3)	%

For the year ended December 31, 2020, the company originated $13,343 million of Client Financing leases and loans, as compared to $14,252 million for the year ending December 31, 2019. The year-to-year decrease of $909 million was primarily driven by a decrease in OEM volumes. For the year ending December 31, 2020, the company originated $12,465 million of Commercial Financing receivables as compared to $35,627 million for the year ending December 31, 2019. The decrease of $23,162 million as compared to the prior year primarily reflects the wind down of OEM IT Commercial Financing operations.

Segment Assets


	Client Financing						Commercial Financing
					Yr.-to-Yr.						Yr.-to-Yr.
(Dollars in millions)					Percent						Percent
For the year ended December 31:	2020		2019		Change		2020		2019		Change
Financing receivables, net	$	10,462	$	13,978	(25.2)	%	$	1,760	$	3,387	(48.0)	%
Equipment under operating leases, net		95		212	(55.1)			—		—	—
Financing receivables from IBM		3,959		3,870	2.3			—		—	—
Receivables purchased and participated from IBM, net		4,532		4,303	5.3			54		56	(4.1)
Total assets	$	19,048	$	22,362	(14.8)	%	$	1,814	$	3,443	(47.3)	%

Total Client Financing assets of $19,048 million at December 31, 2020 decreased $3,313 million as compared to year-end 2019, primarily driven by the sale of financing receivables in the current year.

The Client Financing receivables portfolio at December 31, 2020 represented the following industry profile: Financial (38 percent), Manufacturing (15 percent), Government (14 percent), Services (11 percent), Retail (7 percent), Communications (5 percent), Healthcare (5 percent) and Other (6 percent). The receivables portfolio at December 31, 2019 represented the following industry profile: Financial (36 percent), Manufacturing (15 percent), Government (13 percent), Services (11 percent), Retail (7 percent), Communications (6 percent), Healthcare (6 percent) and Other (5 percent).

The decrease in Commercial Financing assets of $1,629 million at December 31, 2020, as compared to December 31, 2019, reflects sales of financing receivables in the current year and the wind down of OEM IT Commercial Financing operations. For additional information on financing receivables see note F, "Financing Receivables, Receivables Purchased/Participated from IBM."

The financing assets of the company were funded with $19,820 million of total debt at December 31, 2020, as compared to $24,095 million of debt at December 31, 2019. The decline of $4,275 million was primarily driven by lower funding requirements associated with financing receivables.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Financing Receivables and Allowances

The following table presents net financing receivables (excluding miscellaneous receivables and loan financing to IBM’s Global Technology Services segment, which the company considers collectible and without third party risk).


(Dollars in millions)
At December 31:	2020			2019
Amortized cost/Recorded investment (1)(2)	$	17,008		$	21,301
Specific allowance for credit losses		126			114
Unallocated allowance for credit losses		75			42
Total allowance for credit losses		201			155
Net financing receivables	$	16,808		$	21,145
Allowance for credit losses coverage		1.2	%		0.7	%

(1)Prior to the January 1, 2020 adoption of the guidance on current expected credit losses, presentation was recorded investment, subsequent to adoption presentation is amortized cost.

(2)The amortized cost basis of a financial asset represents the original amount of the financing receivable (including residual value), adjusted for unearned income, deferred initial direct costs, cash collected, write-offs and any foreign exchange adjustments. Recorded investment excluded residual value.

Upon the adoption of the guidance on current expected credit losses, the percentage of financing receivables reserved increased from 0.7 percent at December 31, 2019, to 0.9 percent at January 1, 2020, primarily driven by a 75.3 percent increase in unallocated reserves. The percentage of financing receivables reserved increased from 0.9 percent at January 1, 2020, to 1.2 percent at December 31, 2020, which includes an increase in unallocated and specific reserves and an overall decline in financing receivables.

Roll Forward of Financing Receivables Allowance for Credit Losses

(Dollars in millions)


January 1, 2020 *		Additions / (Releases) **		Write-offs ***		Other +		December 31, 2020
$	193	$	35	$	(30)	$	3	$	201

*	Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance on current expected credit losses. Refer to note B, “Accounting Changes,” for additional information.

** Additions/(Releases) for Allowance for Credit Losses are charged to expense.

***	Refer to note A, “Significant Accounting Policies,” for additional information regarding allowance for credit loss write-offs.

+	Primarily represents recoveries of amounts previously written off and translation adjustments.

The provision for expected credit loss expense (including impacts from off-balance sheet commitments which are recorded in other liabilities) was an addition of $41 million in 2020, compared to a release of $5 million in 2019. The increase was primarily driven by higher unallocated and specific reserves in Americas and EMEA.

Residual Value

Residual value is a risk of the company’s 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. In the event this migration results in an early termination of a lease, IBM will purchase the returned

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

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 sales-type and direct financing leases, as well as operating leases at December 31, 2020 and 2019. 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 December 31, 2020 is expected to be returned to the company.

Unguaranteed Residual Value


	Total						Estimated Run Out of 2020 Balance
(Dollars in millions)													2024 and
At December 31:	2019			2020			2021		2022		2023		Beyond
Sales-type and direct financing leases	$	531		$	358		$	65	$	118	$	113	$	61
Operating leases		84			51			38		8		1		3
Total unguaranteed residual value	$	615		$	408		$	104	$	127	$	114	$	63
Related original amount financed	$	9,048		$	6,383
Percentage		6.8	%		6.4	%

Consolidated Fourth-Quarter Financial Results


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the fourth quarter ended December 31:	2020			2019			Change
Revenue	$	247		$	335		(26.4)	%
Net margin	$	162		$	194		(16.7)	%
Net margin percentage		65.6	%		58.0	%	7.6	pts.
Total expense and other (income)	$	35		$	36		(3.3)	%
Income before income taxes	$	127		$	158		(19.7)	%
Provision for income taxes	$	30		$	(7)		nm
Net income	$	97		$	165		(41.4)	%
Net income margin		39.2	%		49.3	%	(10.1)	pts.

nm - not meaningful

Fourth Quarter Financial Performance Summary:

In the fourth quarter of 2020, the company delivered revenue of $247 million and net income of $97 million compared to revenue of $335 million and net income of $165 million in the fourth quarter of 2019.

Total revenue decreased $88 million, or 26.4 percent, in the fourth quarter of 2020 as compared to the fourth quarter of 2019, driven by a decrease in financing revenue of $74 million, or 26.8 percent, and a decline in operating lease revenue of $15 million, or 24.3 percent. The decrease in financing revenue was due to a lower average asset balance and lower yields.

Net margin was $162 million in the fourth quarter of 2020, a decline of $32 million, or 16.7 percent, as compared to the fourth quarter of 2019. The decline in revenue was partially offset by decreases in financing cost and depreciation expense of $42 million and $14 million, respectively, when compared to the same period in the prior year. The decrease in financing cost was due to lower interest rates and a lower average debt balance. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin percentage of 65.6 percent in the fourth quarter of 2020 increased by 7.6 points compared to the same period in the prior year.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Total expense and other (income) of $35 million decreased $1 million, or 3.3 percent, in the fourth quarter of 2020 when compared to the fourth quarter of 2019.

Pre-tax income in the fourth quarter of 2020 of $127 million decreased 19.7 percent when compared to the fourth quarter of 2019. The pre-tax income margin percentage of 51.5 percent in the fourth quarter of 2020 increased on a year-to-year basis by 4.3 points.

The provision for income taxes was $30 million in the fourth quarter of 2020 compared to a benefit from income taxes of $7 million in the fourth quarter of 2019, primarily driven by prior year foreign tax credits.

Net income decreased $68 million in the fourth quarter of 2020 as compared to the fourth quarter of 2019. In the fourth quarter of 2020, net income margin was 39.2 percent, a decrease of 10.1 points on a year-to-year basis.

Results of Operations

Segment Details

The following is an analysis of the reportable segment results for the fourth quarter ended December 31, 2020, as compared to the fourth quarter ended December 31, 2019. The table below presents each reportable segment’s revenue, net margin, and pre-tax income results.


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the fourth quarter ended December 31:	2020			2019			Change
Client Financing
Revenue	$	220		$	281		(21.8)	%
Net margin		141			152		(7.8)	%
Net margin percentage		64.0	%		54.3	%	9.7	pts.
Pre-tax income	$	114		$	131		(12.7)	%
Pre-tax margin		51.9	%		46.5	%	5.4	pts.
Commercial Financing
Revenue	$	27		$	54		(50.1)	%
Net margin		21			42		(49.1)	%
Net margin percentage		78.4	%		76.9	%	1.5	pts.
Pre-tax income	$	13		$	28		(52.6)	%
Pre-tax margin		48.4	%		51.0	%	(2.6)	pts.
Total Segments
Total revenue	$	247		$	335		(26.4)	%
Net margin		162			194		(16.7)	%
Net margin percentage		65.6	%		58.0	%	7.6	pts.
Pre-tax income	$	127		$	158		(19.7)	%
Pre-tax margin		51.5	%		47.2	%	4.3	pts.

Client Financing

Client Financing revenue of $220 million in the fourth quarter of 2020 decreased by $61 million, or 21.8 percent, as compared to the same period in 2019, driven by a lower average asset balance and lower yields.

Net margin decreased $12 million, or 7.8 percent, in the fourth quarter of 2020 as compared to the same period in 2019, driven by a decline in revenue, partially offset by a decrease in interest expense of $39 million and a decrease in depreciation expense of $14 million. The decrease in interest expense was due to lower interest rates and a lower average debt balance compared to the same period in the prior year.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Pre-tax income in the fourth quarter of 2020 decreased $17 million, or 12.7 percent, as compared to the fourth quarter of 2019, primarily driven by a decline in net margin.

Commercial Financing

Commercial Financing revenue of $27 million in the fourth quarter of 2020 decreased $27 million, or 50.1 percent, as compared to the same period in 2019.

Net margin decreased $21 million, or 49.1 percent, in the fourth quarter of 2020 as compared to the same period in 2019.

Pre-tax income in the fourth quarter of 2020 decreased $15 million, or 52.6 percent, as compared to the fourth quarter of 2019.

The declines in revenue, net margin and pre-tax income primarily reflect a lower average asset balance.

Geographic Revenue


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the fourth quarter ended December 31:	2020		2019		Change
Revenue	$	247	$	335	(26.4)	%
Geographies
Americas	$	147	$	209	(29.7)	%
Europe/Middle East/Africa (EMEA)		59		68	(12.6)
Asia Pacific		41		58	(30.4)

Americas revenue of $147 million decreased $62 million, or 29.7 percent, in the fourth quarter of 2020 as compared to the same period in 2019, driven by a decline in financing revenue of $58 million. EMEA revenue of $59 million decreased $9 million, or 12.6 percent, driven by a decline in operating lease revenue of $6 million. Asia Pacific revenue of $41 million decreased $18 million, or 30.4 percent, driven by a decline in financing revenue of $13 million, as well as a decline in operating lease revenue of $4 million.

Total Expense and Other (Income)


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the fourth quarter ended December 31:	2020			2019			Change
Total expense and other (income)
Selling, general and administrative	$	82		$	90		(9.5)	%
Provision for/(benefit from) expected credit loss expense		(8)			(1)		nm
Other (income) and expense		(39)			(54)		(28.1)
Total expense and other (income)	$	35		$	36		(3.3)	%
Total expense-to-revenue ratio		14.1	%		10.7	%	3.4	pts.

nm - not meaningful

Total expense and other (income) of $35 million in expense decreased $1 million, or 3.3 percent, in the fourth quarter of 2020 as compared to the prior-year period. For additional information regarding total expense and other (income), see the following analysis by category.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Selling, General and Administrative


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the fourth quarter ended December 31:	2020		2019		Change
Selling, general and administrative expense:
Selling, general and administrative - other	$	33	$	36	(7.5)	%
Contracted services		7		6	17.1
Functional support services and other related party expenses		42		49	(14.2)
Total selling, general and administrative expense	$	82	$	90	(9.5)	%

Provision for Expected Credit Loss

The provision for expected credit loss expense was a release of $8 million in the fourth quarter of 2020 as compared to a release of $1 million in the fourth quarter of 2019, primarily driven by an overall decline in financing receivables in the current-year period.

Other (Income) and Expense


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the fourth quarter ended December 31:	2020		2019		Change
Other (income) and expense:
Foreign currency transaction (gains)/losses	$	8	$	(1)	nm
(Gains)/losses on sale of equipment		(42)		(50)	(15.6)	%
Other expense and (income)		(5)		(2)	98.6
Total other (income) and expense	$	(39)	$	(54)	(28.1)	%

nm - not meaningful

Income Taxes

The effective tax rate for the fourth quarter of 2020 was 23.8 percent as compared to negative 4.4 percent in the fourth quarter of 2019. The year-to-year change in the effective tax rate was primarily driven by prior year foreign tax credits.

Cash Flow

Net cash from operating activities was a use of cash of $133 million in the fourth quarter of 2020 compared to a source of cash of $135 million in the fourth quarter of 2019. The year-to-year change of $269 million was primarily driven by a net use of cash of $293 million related to cash settled with IBM in relation to Commercial Financing receivables classified as held for sale in the fourth quarter of 2020. Investing activities were a net source of cash of $1,251 million in the fourth quarter of 2020 compared to a net use of cash of $2,063 million in the fourth quarter of 2019. The year-to-year change of $3,314 million was primarily driven by lower net originations of long-term and short-term financing receivables, and proceeds on the sale of Client Financing receivables in the current year. Financing activities were a net use of cash of $1,107 million in the fourth quarter of 2020 compared to a net source of cash of $1,519 million in the fourth quarter of 2019. The year-to-year change of $2,627 million was primarily driven by higher net settlements of debt.

Prior Year in Review

Refer to pages 19 to 28 of IBM Credit’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020, for a discussion on the company’s financial performance for 2019 as compared to 2018.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Other Information

Liquidity and Capital Resources

IBM Credit funds its current and future obligations through the generation of cash flows from operations and its access to the capital markets, as well as through the support provided by IBM’s overall liquidity position and access to capital markets. The debt used to fund the company’s financing assets as of December 31, 2020 was primarily comprised of loans from IBM.

The company's debt-to-equity ratio was 8.9 to 1 and 9.0 to 1 for the periods ending at December 31, 2020 and 2019, respectively. Refer to the company’s debt-to-equity ratio on page 35 for additional information.

In 2020, the company made cash distributions to IBM of $894 million. 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. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.

The company’s net cash from operating activities was a use of cash of $136 million in 2020. The company had balances of $1,781 million in cash and cash equivalents and $354 million in cash invested with IBM as of December 31, 2020. Refer to the company’s cash flow and liquidity trends on page 34 for additional information.

The consolidated tangible net worth of the company was $2,143 million and $2,577 million as of December 31, 2020 and 2019, respectively, with consolidated tangible net worth calculated as total assets less intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries.

On July 2, 2020, IBM and the company (the Borrowers) entered into a new $2.5 billion 364-day Credit Agreement to replace the existing $2.5 billion 364-day Credit Agreement, and also extended the maturity date of the existing $2.5 billion Three-Year Credit Agreement (together, the Credit Agreements). The size of each facility remains unchanged. The new maturity dates for the 364-day and Three-Year Credit Agreements are July 1, 2021 and July 20, 2023, respectively. As of December 31, 2020, the company had no borrowings outstanding against these Credit Agreements.

The company’s 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 IBM’s 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) IBM will not permit the consolidated net interest expense ratio, for any period of four consecutive fiscal quarters taken as a single accounting period, to be less than 2.20 to 1.0; (ii) the company will not permit its tangible net worth to be less than $50 million as of the end of the fiscal year and (iii) the company’s leverage ratio cannot be greater than 11 to 1 as of the last day of the fiscal quarter. The Credit Agreements each contain a cross default provision with respect to other defaulted indebtedness of at least $500 million. The company’s 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 company’s consolidated net tangible assets, and restrict the company’s 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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Support Agreement in any manner materially adverse to the lenders. For additional information regarding the Support Agreement, see note C, “Relationship with IBM and Related Party Transactions.”

As part of the company’s cash and liquidity management, IBM Credit sold $2,471 million of Client Financing receivables which qualified as true sales for the year ended December 31, 2020, resulting in a benefit to cash flows from investing activities of $2,492 million.

In addition, on December 24, 2020, the company entered into an agreement with a third-party investor to sell up to $3 billion of IBM Commercial Financing receivables, at any one time, on a revolving basis. The company sold $515 million of Commercial Financing receivables under this agreement in the fourth quarter of 2020. In addition, the company classified $383 million of Commercial Financing receivables expected to be sold under this agreement as held for sale at December 31, 2020, of which $293 million was settled in cash with IBM and is presented in cash flows from operating activities.

IBM Credit’s commercial paper program allows the company to issue unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any one time of $5 billion. As of December 31, 2020, the company had no commercial paper outstanding.

The major rating agencies’ ratings on the company’s debt securities at December 31, 2020 appear in the table below and remain unchanged from December 31, 2019.


	STANDARD	MOODY’S
	AND	INVESTORS
	POOR’S	SERVICE
Long-term debt	A	A2
Commercial paper	A-1	Prime-1

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.

In July 2017, the UK's Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced that it intends to phase out LIBOR by the end of 2021. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. The use of LIBOR is primarily within the company's Commercial Financing segment where agreements are short term in nature and generally range from 30 to 90 days. The company continues to evaluate the potential impact of the replacement of the LIBOR benchmark interest rate, including risk management, internal operational readiness and monitoring the FASB standard-setting process for additional updates to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. However, it is not expected to have a material impact in the consolidated financial results.

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 P, “Derivative Financial Instruments,” to the Consolidated Financial Statements, as well as the section entitled “Portfolio Risk Management” in Item 1, “Business,” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Cash Flow and Liquidity Trends


(Dollars in millions)
For the year ended December 31:	2020		2019		2018
Net cash provided by/(used in) operating activities	$	(136)	$	231	$	1,099
Net cash provided by/(used in) investing activities		5,752		7,312		(1,903)
Net cash provided by/(used in) financing activities		(5,554)		(7,679)		(30)

At December 31:	2020		2019		2018
Cash and cash equivalents	$	1,781	$	1,687	$	1,828
Cash invested with IBM, available on-demand (1)		354		509		2,014
Committed credit facilities (2)		5,000		5,000		5,000

(1)Excess cash is periodically invested in interest bearing, on-demand accounts with IBM and is presented as other receivables from IBM in the Consolidated Balance Sheet and the Consolidated Statement of Cash Flows. For additional information, see note C, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.

(2)The Credit Agreements were entered into and/or amended on July 2, 2020.

Net cash from operating activities was a use of cash of $136 million in 2020 as compared to a source of cash of $231 million in 2019. The year-to-year change of $367 million was primarily driven by a net use of cash of $293 million related to cash settled with IBM in relation to Commercial Financing receivables classified as held for sale in the fourth quarter of 2020. For further information related to transfers of financial assets see note A, “Significant Accounting Policies,” and note F, “Financing Receivables, Receivables Purchased/Participated from IBM.”

Net cash provided by investing activities in 2020 decreased by $1,560 million driven primarily by:

●

A decrease in cash provided by short-term financing receivables of $4,889 million which reflects higher net collections in the prior year as a result of the wind down of OEM IT Commercial Financing operations; and

●

Lower cash provided by other receivables with IBM of $1,321 million, driven by a reduction to other receivables with IBM in 2019; partially offset by

●

Lower originations of long-term financing receivables of $2,772 million; and

●

Proceeds from the sale of Client Financing receivables of $2,492 million in the current year.

Net cash used in financing activities in 2020 decreased $2,125 million as compared to 2019, driven by:

●

Higher net debt settlements in the prior year of $1,788 million, driven by lower funding requirements associated with financing receivables, and

●

A decrease in net cash distributions to IBM of $337 million, which reflects the company's objective of achieving a target debt-to-equity ratio of 9 to 1.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

Debt


(Dollars in millions)
At December 31:	2020		2019
Short-term debt
Debt	$	26	$	633
Debt payable to IBM		7,880		8,194
Total short-term debt	$	7,906	$	8,827

Long-term debt
Debt	$	4,824	$	6,517
Debt payable to IBM		7,090		8,751
Total long-term debt	$	11,914	$	15,268
Total debt	$	19,820	$	24,095

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 decrease in total debt during the year of 2020 was primarily due to lower funding requirements associated with financing receivables.

The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for these borrowings were $482 million in 2020 and $1,062 million in 2019.

For additional information on the company’s debt and debt payable to IBM, see note H, “Borrowings,” to the Consolidated Financial Statements.

The company’s interest rate and foreign currency rate risk management policies and procedures are discussed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” as well as note A, “Significant Accounting Policies” and note P, “Derivative Financial Instruments,” to the Consolidated Financial Statements.

Interest on Debt

The company recognized interest expense of $281 million and $499 million in 2020 and 2019, respectively, of which $146 million and $242 million was interest expense on debt payable to IBM in 2020 and 2019, respectively. For additional information on interest expense, see note H, “Borrowings,” to the Consolidated Financial Statements.

Pre-swap annual contractual obligations of long-term debt and long-term debt payable to IBM outstanding at December 31, 2020, are as follows:


(Dollars in millions)											2026 and
At December 31:	2021		2022		2023		2024		2025		Beyond		Total
Long-term debt	$	3,132	$	670	$	887	$	83	$	0	$	0	$	4,772
Debt payable to IBM		2,053		1,897		899		757		746		738		7,090
Total	$	5,185	$	2,567	$	1,786	$	840	$	747	$	738	$	11,863

Debt-to-Equity

The debt-to-equity ratio, as reported in the table below, is, at any given time, the ratio of total debt to total Member’s interest.


At December 31:	2020		2019
Debt-to-equity ratio	8.9	x	9.0	x

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

The debt-to-equity ratio is calculated by dividing the total amount of debt outstanding by the total amount of member’s interest in the company at the end of the reporting period presented.

The company’s debt-to-equity ratio was 8.9 to 1 at December 31, 2020 as compared to 9.0 to 1 at year-end 2019. Total Member’s interest of $2,222 million declined by $464 million, or 17.3 percent, and total debt of $19,820 million decreased $4,275 million, or 17.7 percent. The debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations.

Contractual Obligations


(Dollars in millions)	Total Contractual		Payments Due In
At December 31, 2020:	Payment Stream		2021		2022-23		2024-25		After 2025
Long-term debt obligations	$	11,863	$	5,185	$	4,353	$	1,586	$	738
Interest on long-term debt obligations		624		232		293		97		2
Total	$	12,487	$	5,417	$	4,646	$	1,683	$	740

Total contractual obligations, as reported in the table above, reflect the principal carrying value of the company’s long-term debt and discounted value for the debt interest payments. Interest on floating-rate debt obligations is calculated using the effective interest rate at December 31, 2020, plus the interest rate spread associated with that debt, if any.

Off-Balance Sheet Arrangements

From time to time, the company may enter into off-balance sheet arrangements as defined by SEC Financial Reporting Release 67, “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”

At December 31, 2020 and 2019, the company had no such off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See the previous table for the company’s contractual obligations, and note K, “Contingencies and Commitments,” to the Consolidated Financial Statements for additional information about the company’s guarantees, financial commitments and indemnification arrangements. The company does not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.

Critical Accounting Estimates

The application of accounting principles generally accepted in the U.S. (GAAP) requires the company to make estimates and assumptions about certain items and future events that directly affect its reported financial condition. The accounting estimates and assumptions discussed in this section are those that the company considers to be the most critical to its financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to the company’s financial condition. The company’s significant accounting policies are described in note A, “Significant Accounting Policies,” to the Consolidated Financial Statements.

The inputs into certain of the company’s critical accounting estimates considered the macroeconomic impacts of the COVID-19 pandemic. These estimates included but were not limited to the allowances for credit losses and the company’s net investments in sales-type or direct financing leases. The COVID-19 pandemic did not have a material impact on the company’s critical accounting estimates reflected in the 2020 results. Given the inherent uncertainty of the magnitude of future impacts from and/or the duration of the pandemic, the company’s estimates may change materially in future periods.

A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.)

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

are included to allow users of this report to understand a general direction of cause and effect of changes in the estimates and do not represent management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.

Credit Losses

The company reviews its financing receivables portfolio on a regular basis in order to assess collectibility and records adjustments to the allowance for credit losses at least quarterly. A description of the methods used by management to estimate the amount of uncollectible receivables is included in note A, “Significant Accounting Policies,” to the Consolidated Financial Statements. Factors that could result in actual receivable losses that are materially different from the estimated reserve include significant changes in the economy or a sudden change in the economic health of a significant client in the company’s financing and operating lease receivables portfolio.

At December 31, 2020, to the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, the company’s pre-tax income would be higher or lower by an estimated $20 million, depending upon whether the actual collectibility was better or worse, respectively, than the estimates.

Determination of Residual Value

Residual value represents the estimated fair value of equipment under lease as of the end of the lease. Residual value estimates can impact the determination of whether a lease is classified as sales-type, direct financing or operating. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically reviewed and “other than temporary” declines in estimated future residual values are recognized upon identification.

Factors that could cause actual results to materially differ from the estimates include significant changes in the used-equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.

To the extent that actual residual value recovery is lower than management’s estimates by 10 percent, the company’s pre-tax income for December 31, 2020 would have been lower by an estimated $41 million.

Income Taxes

The company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.

For the company’s U.S. federal and certain state and foreign operations included in various IBM consolidated tax returns (and therefore not directly subject to corporate income taxes), IBM makes payments to tax authorities on the company’s behalf. In such cases, 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 company’s relevant pro forma stand-alone tax return in which the company records the initial income tax benefits associated with an uncertain tax position using its best estimate at the time the position originates and makes a final settlement of the position with IBM for the recorded amounts. Consequently, any recognition and subsequent changes in assessment about the sustainability of tax positions, including valuation allowances and interest and penalties, are the responsibility of IBM. Because the company bears no risk associated with the sustainability of uncertain tax positions, no uncertain tax liabilities are recorded in the Consolidated Financial Statements for entities that file as part of IBM’s consolidated tax filings.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

For separate income tax return filings for jurisdictions that are not included in an IBM consolidated tax return, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the company’s belief that its tax return positions are supportable, the company believes that certain positions may not be fully sustained upon review by tax authorities. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions, and may involve a series of complex judgments about future events. To the extent that new information becomes available that causes the company to change its judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets for separate income tax return filing jurisdictions. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction, including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. In the event that the company changes its determination as to the amount of deferred tax assets that can be realized, the company will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

The consolidated provision for income taxes will change period to period based on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors, including the geographic mix of income before taxes, state and local taxes and the effects of various global income tax strategies. To the extent that the provision for income taxes increased/decreased by 1 percent of income before income taxes, consolidated net income would have decreased/improved by $4.7 million in 2020.

Cybersecurity

While cybersecurity risk can never be completely eliminated, the company’s approach draws on the depth and breadth of IBM’s global capabilities in security services and its internal approaches to risk management.

From an enterprise perspective, IBM implements a multi-faceted risk-management approach to identify and address cybersecurity risks. IBM has established policies and procedures that provide the foundation upon which IBM Credit’s infrastructure and data are managed. IBM Credit performs ongoing assessments regarding its technical controls and adheres to IBM’s established methods for identifying emerging risks related to cybersecurity. IBM uses a layered approach with overlapping controls to defend against cybersecurity attacks and threats on networks, end-user devices, servers, applications and cloud solutions. Through IBM, the company also has a global incident response process to respond to cybersecurity threats. In addition, through IBM, the company utilizes a combination of online training, educational tools, social media, and other awareness initiatives to foster a culture of security awareness and responsibility among its workforce.

Looking Forward

IBM Global Financing’s legal entity structure is organized to drive operational benefits by consolidating Client Financing and Commercial Financing under IBM Credit. In 2020, the company made distributions to IBM of $894 million and continues to target a debt-to-equity ratio of 9.0 to 1. The company’s actual debt-to-equity ratio may vary based on several factors, including differences between management’s expectations and actual results of operations. The future amount of total debt and contributions from and distributions to IBM may vary as the company continues to manage leverage to the targeted debt-to-equity ratio.

On October 8, 2020, IBM announced a plan to separate the managed infrastructure services unit of its Global Technology Services segment into a new public company, NewCo, with an estimated completion date by the end of 2021. For additional information on the company’s relationship with the Global Technology Services segment, see note C, “Relationship with IBM and Related Party Transactions.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)

On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic. This resulted in significant governmental measures being initiated around the globe, including travel bans and border closings, shelter-in-place orders, closures of non-essential businesses and social distancing requirements in efforts to slow down and control the spread of the virus.

The health of the company’s employees, clients, business partners and community remain its primary focus. The company is actively engaged to ensure its preparedness plans and response activities are aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention and governmental regulations.

The COVID-19 pandemic is an unprecedented, global challenge and it has placed every company in uncharted waters. The long-term economic effects of the pandemic remain unknown.

The company’s financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. Financing originations, which determine the company’s financing asset base, are impacted by IBM’s product and services sales volumes and IBM Credit’s participation rates in those sales. IBM and IBM Credit’s client profile and annuity base provide some level of stability, not only in revenue, but also in profit and cash as the company manages through these challenging times. In 2020, IBM experienced some disruptions in transactional performance, shorter duration software transactions and delays in some services projects which impacted the company’s financing originations. Product cycle dynamics within IBM’s Systems segment also impacted financing originations.

The current environment and macroeconomic uncertainty also impacts the credit quality of the company’s receivables portfolio and the level of provision for expected credit loss expense. IBM Credit has applied, and will continue to apply its rigorous credit policies, particularly in industries and countries disrupted by COVID-19 as it relates to the origination of new business and the evaluation of the existing portfolio.

IBM Credit has policies in place designed to manage the risks involved in financing, including credit losses, residual values, liquidity, currency and interest rates, with enhanced focus in this unprecedented environment of the COVID-19 pandemic. These policies may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sales of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.

The company will continue to take risk mitigation actions when necessary and take actions to enhance its balance sheet strength, financial flexibility and liquidity as the company is focused on supporting IBM’s hybrid cloud and AI offerings. The company wound down it’s OEM IT Commercial Financing operations in 2019 and sold certain Commercial and Client Financing receivables in 2020.

On December 24, 2020, the company entered into an agreement with a third-party investor to sell up to $3 billion of its IBM Commercial Financing receivables, at any one time, on a revolving basis over the agreement’s three-year term. In the fourth quarter, sales were executed in the United States and Canada in the amount of $515 million. The IBM Commercial Financing receivables balance and its associated revenues and costs are expected to continue to decline with the expansion of the agreement to certain other countries through the first half of 2021.

For the year ended December 31, 2020, the company sold $2,471 million of Client Financing receivables which qualified as true sales.

Consistent with IBM’s refocused Global Financing strategy and expected capital needs, IBM Credit will no longer require direct access to the public capital markets. As part of IBM's overall 2021 debt pay down strategy, in the first half of the year IBM Credit will redeem $1.75 billion of outstanding debt and deregister with the SEC.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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 from 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 financing assets, risks may arise from a mismatch 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 currency derivatives. For additional information on the company’s access to capital markets, refer to note Q, “Subsequent Events.”

In addition, the company performs a sensitivity analysis to determine the effects that market risk exposure may have on the fair values of the company’s debt and other financial instruments.

The financial instruments that are included in the sensitivity analysis are comprised of the company’s cash and cash equivalents, marketable securities, short-term and long-term loans, installment payment receivables, participated interests in IBM financing receivables, Commercial Financing receivables, and purchased interest in certain of IBM’s trade and other receivables, investments, short- and long-term debt and derivative financial instruments. The company’s derivative financial instruments generally include interest rate swaps and foreign exchange forward contracts.

To perform the sensitivity analysis, the company assesses the risk of loss from hypothetical changes in interest rates and foreign currency exchange rates in the fair values of market-sensitive instruments. The market values for interest and foreign currency exchange rate risk are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at December 31, 2020 and 2019. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that the company would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant.

The results of the sensitivity analysis at December 31, 2020 and 2019, are as follows:

Interest Rate Risk

A hypothetical 10 percent adverse change in the levels of interest rates with all other variables held constant would result in a decrease in the fair value of the company’s financial instruments of approximately $9 million and $6 million at December 31, 2020 and 2019, respectively. Changes in the relative sensitivity of the fair value of the company’s financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in debt maturities, interest rate profile and amount.

Foreign Currency Exchange Rate Risk

A hypothetical 10 percent adverse change in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of the company’s financial instruments of approximately $300 million and $377 million at December 31, 2020 and 2019, respectively. The decrease in the sensitivity of these theoretical changes from the prior year is primarily driven by a decrease in the notional value of the company’s assets and liabilities and a decrease in the derivatives portfolio.

Financing Risks

See Item 1, “Business” for a discussion of the financing risks associated with the Client Financing and Commercial Financing business and management’s actions to mitigate such risks.

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Item 8. Financial Statements and Supplemental Data.

(a) Audited consolidated financial statements of IBM Credit and its subsidiaries for the years ended December 31, 2020, 2019 and 2018.

(b) See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Annual Report on Form 10-K.

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INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

		Page
Audited Annual Financial Statements
Report of Independent Registered Public Accounting Firm		43
Consolidated Income Statement for the Years Ended December 31, 2020, 2019 and 2018		45
Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018		46
Consolidated Balance Sheet as of December 31, 2020 and 2019		47
Consolidated Statement of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018		48
Consolidated Statement of Changes in Member’s Interest for the Years Ended December 31, 2020, 2019 and 2018		49
Notes to Consolidated Financial Statements		51
Schedule II — Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 2020, 2019 and 2018		92

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Report of Independent Registered Public Accounting Firm

To the Board of Managers and the Member of IBM Credit LLC

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of IBM Credit LLC and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of changes in member's interest and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the board of managers and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses – Collectively Evaluated Client Financing Receivables

As described in Notes A and F to the consolidated financial statements, the Company’s allowance for credit losses on client financing receivables was $194 million as of December 31, 2020. When determining the allowance for credit losses, client financing receivables are evaluated by management either on an individual or a collective basis. Management estimates its allowance for credit losses for collectively evaluated client financing receivables using a

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credit loss model to calculate the allowance based on its internal loss experience and current conditions and forecasts by class of financing receivable. Management calculates the allowance for credit losses on collectively evaluated client financing receivables by applying a reserve rate to its portfolio, excluding accounts that have been individually evaluated and specifically reserved. This reserve rate is based upon credit rating, probability of default, term and loss history. Management also qualitatively considers the impact of current conditions and economic forecasts relating to specific industries and geographical areas on the portfolio. In addition to this qualitative review of credit risk factors across the portfolio, management considers forward-looking macroeconomic variables related to gross domestic product, unemployment rates, equity prices and corporate profits.

The principal considerations for our determination that performing procedures relating to the allowance for credit losses on collectively evaluated client financing receivables is a critical audit matter are the significant judgment by management in determining the allowance for credit losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to credit risk factors and forward-looking macroeconomic variables. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls related to management’s allowance for credit losses on collectively evaluated client financing receivables, which included controls related to management’s consideration of credit risk factors and forward-looking macroeconomic variables. These procedures also included, among others, testing management’s process for estimating the allowance for credit losses on collectively evaluated client financing receivables by (i) evaluating the appropriateness of the methodology and models used for estimating the allowance for credit losses; (ii) testing the completeness and accuracy of certain data used in the estimate; and (iii) evaluating the reasonableness of management’s consideration of credit risk factors and forward-looking macroeconomic variables used in the estimate. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the methodology and models used and the reasonableness of management’s consideration of forward-looking macroeconomic variables.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 26, 2021

We have served as the Company’s auditor since 2016.

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IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT


(Dollars in millions)
For the year ended December 31:	Notes	2020		2019		2018
Revenue
Financing revenue	C	$	918	$	1,323	$	1,446
Operating lease revenue			211		277		333
Total revenue	N	$	1,128	$	1,600	$	1,779
Financing cost (related party cost of $146 in 2020, $242 in 2019 and $298 in 2018)	C,H	$	309	$	526	$	503
Depreciation of equipment under operating lease			106		160		193
Net margin		$	714	$	913	$	1,083
Expense and other (income)
Selling, general and administrative		$	314	$	372	$	375
Provision for/(benefit from) expected credit loss expense			41		(5)		9
Other (income) and expense			(107)		(72)		(31)
Total expense and other (income)	C	$	247	$	295	$	352
Income before income taxes		$	466	$	619	$	731
Provision for income taxes	C,L		54		188		133
Net income		$	413	$	430	$	597

Amounts may not add due to rounding.

The accompanying notes on pages 51 through 84 are an integral part of the financial statements.

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IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



(Dollars in millions)
For the year ended December 31:	Notes	2020		2019		2018
Net income		$	413	$	430	$	597
Other comprehensive income/(loss), before tax:
Foreign currency translation	J		37		14		(151)
Retirement-related benefit plans (1)	J,M		4		(12)		(4)
Other comprehensive income/(loss), before tax	J		41		1		(155)
Income tax (expense)/benefit related to items of other comprehensive income	J		17		1		(31)
Other comprehensive income/(loss), net of tax	J	$	58	$	2	$	(186)
Total comprehensive income/(loss)		$	471	$	432	$	411

(1)	Amounts represented relate to multiple-employer plans.

Amounts may not add due to rounding.

The accompanying notes on pages 51 through 84 are an integral part of the financial statements.

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IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET


(Dollars in millions)
At December 31:	Notes	2020		2019
Assets:
Cash and cash equivalents	D	$	1,781	$	1,687
Financing receivables (net of allowances of $179 in 2020 and $148 in 2019)	F		12,222		17,365
Equipment under operating leases (net of accumulated depreciation of $129 in 2020 and $238 in 2019)			95		212
Financing receivables from IBM	C,F		3,959		3,870
Receivables purchased/participated from IBM (net of allowances of $21 in 2020 and $8 in 2019)	C,F		4,586		4,359
Other receivables from IBM	C		359		513
Other assets	G		951		406
Total assets		$	23,953	$	28,412

Liabilities:
Accounts payable		$	229	$	434
Accounts payable to IBM	C		843		336
Debt	H		4,850		7,150
Debt payable to IBM	C,H		14,970		16,945
Taxes	L		523		637
Other liabilities	I		317		224
Total liabilities		$	21,731	$	25,726
Contingencies and commitments	K
Member’s interest:
Member's interest			2,195		2,601
Retained earnings			—		116
Accumulated other comprehensive income/(loss)			27		(31)
Total member's interest		$	2,222	$	2,686
Total liabilities and member’s interest		$	23,953	$	28,412

Amounts may not add due to rounding.

The accompanying notes on pages 51 through 84 are an integral part of the financial statements.

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IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS


(Dollars in millions)
For the year ended December 31:	2020		2019		2018
Cash flows from operating activities:
Net income	$	413	$	430	$	597
Adjustments to reconcile net income to cash provided by operating activities:
Provision for/(benefit from) expected credit loss expense		41		(5)		9
Depreciation		106		160		193
Deferred taxes		(166)		84		51
Net (gain)/loss on asset sales and other		(131)		(118)		(104)
Change in operating assets and liabilities:
Financing receivables held-for-sale (1)		(293)		—		—
Other assets/other liabilities		(105)		(321)		353
Net cash provided by/(used in) operating activities	$	(136)	$	231	$	1,099

Cash flows from investing activities:
Originations of financing receivables	$	(12,568)	$	(15,340)	$	(14,456)
Collection of financing receivables		14,007		14,478		13,833
Proceeds from sales of Client Financing receivables		2,492		—		—
Short-term financing receivables - net (2)		1,675		6,564		(110)
Purchase of equipment under operating leases		(40)		(55)		(243)
Proceeds from disposition of equipment under operating lease		88		69		67
Other receivables from IBM - net		185		1,506		(1,200)
Other investing activities - net		(88)		88		206
Net cash provided by/(used in) investing activities	$	5,752	$	7,312	$	(1,903)

Cash flows from financing activities:
Proceeds from issuance of debt from IBM	$	5,351	$	8,950	$	8,603
Principal payments on debt from IBM		(7,857)		(9,339)		(8,213)
Proceeds from issuance of debt		703		1,067		4,713
Principal payments on debt		(2,637)		(2,243)		(894)
Short-term borrowings from/(repayments to) IBM - net (2)		101		(2,205)		(5,119)
Short-term borrowings/(repayments) - net (2)		(322)		(2,678)		1,433
Contributions from IBM		—		—		148
Distributions to IBM		(894)		(1,231)		(700)
Net cash provided by/(used in) financing activities	$	(5,554)	$	(7,679)	$	(30)

Effect of exchange rate changes on cash and cash equivalents	$	32	$	(4)	$	(18)
Net change in cash and cash equivalents	$	94	$	(141)	$	(852)

Cash and cash equivalents at January 1		1,687		1,828		2,680
Cash and cash equivalents at December 31	$	1,781	$	1,687	$	1,828
Supplemental data
Income taxes paid - net of refunds received	$	61	$	117	$	(5)
Interest paid on debt	$	326	$	525	$	493

(1)	Refer to note A, "Significant Accounting Policies."

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

Amounts may not add due to rounding.

The accompanying notes on pages 51 through 84 are an integral part of the financial statements.

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IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST


					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member's
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2018	$	3,101	$	302	$	158	$	3,562
Cumulative effect of change in accounting principle (1)				5		(5)		—
Net income plus other comprehensive income/(loss):
Net income				597				597
Other comprehensive income/(loss), net of tax						(186)		(186)
Total comprehensive income/(loss)							$	411
Contributions from IBM		148						148
Distributions to IBM		(34)		(666)				(700)
Member’s Interest, December 31, 2018	$	3,216	$	238	$	(33)	$	3,420

(1)	Reflects the adoption of the FASB guidance on stranded tax effects. Refer to note B, "Accounting Changes."

Amounts may not add due to rounding.

The accompanying notes on pages 51 through 84 are an integral part of the financial statements.


					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member’s
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2019	$	3,216	$	238	$	(33)	$	3,420
Net income plus other comprehensive income/(loss):
Net income				430				430
Other comprehensive income/(loss), net of tax						2		2
Total comprehensive income/(loss)

IBM CREDIT LLC 10-K