UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, 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.

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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

REDUCED DISCLOSURE FORMAT

IBM Credit LLC, an indirect, wholly owned subsidiary of International Business Machines Corporation (IBM), meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

Table of Contents

Index

		Page
Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Income Statement for the three months ended March 31, 2020 and 2019		3
Consolidated Income Statement for the three and six months ended June 30, 2020 and 2019		3

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2020 and 2019		4
Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2020 and 2019		4

Consolidated Balance Sheet at March 31, 2020 and December 31, 2019		5
Consolidated Balance Sheet at June 30, 2020 and December 31, 2019		5

Consolidated Statement of Cash Flows for the three months ended March 31, 2020 and 2019		6
Consolidated Statement of Cash Flows for the six months ended June 30, 2020 and 2019		6

Consolidated Statement of Changes in Member’s Interest for the three months ended March 31, 2020 and 2019		7
Consolidated Statement of Changes in Member’s Interest for the three and six months ended June 30, 2020 and 2019		7

Notes to Consolidated Financial Statements		89

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		3031

Item 4. Controls and Procedures		4449

Part II - Other Information:

Item 1. Legal Proceedings		4549

Item 6. Exhibits		45
Item 5. Other Information		49

Item 6. Exhibits		50

Table of Contents

Part I— Financial Information

Item 1. Consolidated Financial Statements:

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)


	Three Months Ended ~~March~~June 3130,				Six Months Ended June 30,
(Dollars in millions)	2020		2019		2020		2019
Revenue
Financing revenue	$	~~278~~225	$	~~404~~339	$	503	$	743
Operating lease revenue		5854		7870		112		149
Total revenue	$	~~337~~279	$	~~482~~410	$	615	$	892
Financing cost (related party cost of $49 in 2020 and $74 in 2019)	$	105	$	160
Financing cost (related party cost for the three and six months: $35 and $84 in 2020, $58 and $131 in 2019)	$	73	$	137	$	178	$	297
Depreciation of equipment under operating lease		3128		4543		59		88
Net margin	$	~~201~~177	$	~~277~~230	$	378	$	507
Expense and other (income)
Selling, general and administrative	$	7477	$	97	$	151	$	194
Provision for credit losses		19		4
Provision for/(benefit from) credit losses		27		(8)		45		(4)
Other (income) and expense		(2131)		~~(18)~~5		(51)		(13)
Total expense and other (income)	$	7274	$	8394	$	145	$	178
Income before income taxes	$	~~128~~104	$	~~193~~136	$	232	$	330
Provision for/(benefit from) income taxes		(13)		150
Provision for income taxes		15		23		2		173
Net income	$	~~141~~89	$	43113	$	231	$	156

(Amounts may not add due to rounding.)

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

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Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended ~~March~~June 3130,				Six Months Ended June 30,
(Dollars in millions)	2020		2019		2020		2019
Net income	$	~~141~~89	$	43113	$	231	$	156
Other comprehensive income/(loss), before tax:
Foreign currency translation		~~(156)~~36		316		(120)		20
Retirement-related benefit plans (1)		1		0		2		0
Other comprehensive income/(loss), before tax		~~(155)~~37		317		(118)		20
Income tax (expense)/benefit related to items of other comprehensive income		~~(17)~~14		32		(3)		5
Other comprehensive income/(loss), net of tax	$	~~(173)~~52	$	619	$	(121)	$	25
Total comprehensive income/(loss)	$	~~(31)~~141	$	49132	$	109	$	181

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

(Amounts may not add due to rounding.)

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

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Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	At ~~March~~June 3130,		At December 31,
(Dollars in millions)	2020		2019
Assets:
Cash and cash equivalents	$	1,~~601~~717	$	1,687
Financing receivables		14,~~638~~084		17,365
(net of allowances of $158 in 2020 and $148 in 2019)
(net of allowances of $182 in 2020 and $148 in 2019)
Equipment under operating leases		~~177~~154		212
(net of accumulated depreciation of $220 in 2020 and $238 in 2019)
(net of accumulated depreciation of $216 in 2020 and $238 in 2019)
Financing receivables from IBM		3,~~771~~735		3,870
Receivables purchased/participated from IBM		4,~~258~~362		4,359
(net of allowances of $21 in 2020 and $8 in 2019)
(net of allowances of $22 in 2020 and $8 in 2019)
Other receivables from IBM		~~742~~792		513
Other assets		~~514~~544		406
Total assets	$	25,~~700~~389	$	28,412

Liabilities:
Accounts payable	$	~~142~~404	$	434
Accounts payable to IBM		~~813~~931		336
Debt		6,~~709~~557		7,150
Debt payable to IBM		14,~~727~~308		16,945
Taxes		~~633~~600		637
Other liabilities		~~231~~245		224
Total liabilities	$	23,~~255~~046	$	25,726
Member’s interest:
Member's interest		2,~~601~~496		2,601
Retained earnings		48—		116
Accumulated other comprehensive income/(loss)		(~~204~~153)		(31)
Total member's interest	$	2,~~445~~343	$	2,686
Total liabilities and member’s interest	$	25,~~700~~389	$	28,412

(Amounts may not add due to rounding.)

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

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Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	~~Three~~Six Months Ended ~~March~~June 3130,
(Dollars in millions)	2020		2019
Cash flows from operating activities:
Net income	$	~~141~~231	$	43156
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		19		4
Provision for/(benefit from) credit losses		45		(4)
Depreciation		3159		4588
Deferred taxes		(4249)		~~(2)~~27
Net (gain)/loss on asset sales and other		(1755)		(644)
Change in operating assets and liabilities:
Other assets/other liabilities		(48117)		4(198)
Net cash provided by operating activities	$	84115	$	8826

Cash flows from investing activities:
Originations of financing receivables	$	(25,~~975~~914)	$	(46,~~219~~872)
Collection of financing receivables		47,~~068~~202		47,~~023~~446
Short-term financing receivables - net (1)		1,444		46
Proceeds from sales of financing receivables		715		—
Purchase of equipment under operating leases		(13)		(20)
Short-term financing receivables - net (1)		1,575		4,884
Proceeds from disposition of equipment under operating lease		17		13
Purchase of equipment under operating leases		(23)		(29)
Other receivables from IBM - net		(304)		1,738
Proceeds from disposition of equipment under operating lease		38		32
Other investing activities - net		119		(10)
Other receivables from IBM - net		(296)		1,697
Net cash provided by investing activities	$	2,356	$	1,572
Other investing activities - net		42		39
Net cash provided by investing activities	$	3,339	$	7,197

Cash flows from financing activities:
Proceeds from issuance of debt from IBM	$	23,~~424~~801	$	25,~~545~~858
Principal payments on debt from IBM		(24,~~641~~534)		(25,~~388~~903)
Proceeds from issuance of debt		~~296~~419		~~300~~500
Principal payments on debt		(~~389~~674)		(~~196~~431)
Short-term borrowings from/(repayments to) IBM - net (1)		(1,~~711~~723)		(14,~~299~~914)
Short-term borrowings/(repayments) - net (1)		(~~315~~293)		(~~500~~1,486)
Distributions to IBM		(~~169~~411)		(~~370~~942)
Net cash used in financing activities	$	(23,~~505~~415)	$	(17,~~910~~318)

Effect of exchange rate changes on cash and cash equivalents	$	(229)	$	~~(5)~~0
Net change in cash and cash equivalents	$	~~(86)~~30	$	(~~255~~96)

Cash and cash equivalents at January 1		1,687		1,828
Cash and cash equivalents at March 31	$	1,601	$	1,573
Cash and cash equivalents at June 30	$	1,717	$	1,732

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

(Amounts may not add due to rounding.)

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

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Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST

(UNAUDITED)


					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member’s
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2020	$	2,601	$	116	$	(31)	$	2,686
Member’s Interest, April 1, 2020	$	2,601	$	48	$	(204)	$	2,445
Cumulative effect of change in accounting principle (1)				(41)				(41)
Net income plus other comprehensive income/(loss):
Net income plus other comprehensive income/(loss):
Net income				89				89
Net income				141				141
Other comprehensive income/(loss), net of tax						52		52
Other comprehensive income/(loss), net of tax						(173)		(173)
Total comprehensive income/(loss)							$	141
Total comprehensive income/(loss)							$	(31)
Contributions from IBM		—						—
Distributions to IBM		(105)		(~~169~~137)				(~~169~~242)
Member’s Interest, March 31, 2020	$	2,601	$	48	$	(204)	$	2,445
Member’s Interest, June 30, 2020	$	2,496	$	—	$	(153)	$	2,343

(Amounts may not add due to rounding.)

(The accompanying notes 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, April 1, 2019	$	3,191	$	—	$	(27)	$	3,164
Net income plus other comprehensive income/(loss):
Net income				113				113
Other comprehensive income/(loss), net of tax						19		19
Total comprehensive income/(loss)							$	132
Contributions from IBM		—						—
Distributions to IBM		(459)		(113)				(572)
Member’s Interest, June 30, 2019	$	2,733	$	—	$	(8)	$	2,724

(Amounts may not add due to rounding.)

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

Table of Contents

Consolidated Financial Statements — (continued)

IBM CREDIT LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST – (CONTINUED)

(UNAUDITED)


					Accumulated
					Other		Total
	Member's		Retained		Comprehensive		Member’s
(Dollars in millions)	Interest		Earnings		Income/(Loss)		Interest
Member’s Interest, January 1, 2020	$	2,601	$	116	$	(31)	$	2,686
Cumulative effect of change in accounting principle (1)				(41)				(41)
Net income plus other comprehensive income/(loss):
Net income				231				231
Other comprehensive income/(loss), net of tax						(121)		(121)
Total comprehensive income/(loss)							$	109
Contributions from IBM		—						—
Distributions to IBM		(105)		(306)				(411)
Member’s Interest, June 30, 2020	$	2,496	$	—	$	(153)	$	2,343

(1) Reflects the adoption of the FASB guidance on current expected credit losses. Refer to note 2, "Accounting Changes."

(Amounts may not add due to rounding.)

(The accompanying notes 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				43156				43156
Other comprehensive income/(loss), net of tax						625		625
Total comprehensive income/(loss)							$	49181
Contributions from IBM (1)		64						64
Distributions to IBM		(88547)		(~~282~~395)				(~~370~~942)
Member’s Interest, March 31, 2019	$	3,191	$	—	$	(27)	$	3,164
Member’s Interest, June 30, 2019	$	2,733	$	—	$	(8)	$	2,724

(1) In accordance with the previously executed Tax Sharing Agreement, $64 million was settled through a non-cash contribution. Refer to note 14, "Relationship with IBM and Related Party Transactions."

(Amounts may not add due to rounding.)

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

Table of Contents

Notes to Consolidated Financial Statements:

1. Basis of Presentation:

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.

Member’s interest in the Consolidated Balance Sheet represents the accumulation of the company’s net income over time and contributions from IBM and distributions to IBM. Distributions by the company to IBM are considered first to be a return of profit as reflected in retained earnings in the Consolidated Balance Sheet. Any amount distributed to IBM in excess of the company’s available balance in retained earnings is considered a return of a portion of Member’s interest as reflected in the Consolidated Balance Sheet.

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

The amount of restricted cash included in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows is immaterial for the periods presented.

All significant intracompany transactions between IBM Credit’s businesses have been eliminated. All significant intercompany transactions between IBM Credit and IBM have been included in these Consolidated Financial Statements.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2019 Form 10-K.

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

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Notes to Consolidated Financial Statements — (continued)

2. Accounting Changes:

New Standards to be Implemented

Any current pending standards to be implemented are either not applicable or not material to the company.

Standards Implemented

Reference Rate Reform

Standard/Description–Issuance date: March 2020. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.

Effective Date and Adoption Considerations–The guidance is effective as of March 12, 2020 through December 31, 2022.

Effect on Financial Statements or Other Significant Matters–The company made a policy election in the first quarter of 2020 to adopt the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference rate alternative, without any impact to the Consolidated Income Statement. ~~However, it is still uncertain when the transition from LIBOR to another reference rate will occur or whether SOFR will become the accepted market alternative to LIBOR.~~ The company is continuing to evaluate the potential impact of the replacement of the LIBOR benchmark on its interest rate risk management activities.

Financial Instruments-Credit Losses

Standard/Description–Issuance date: June 2016, with amendments in 2018, 2019 and 2020. This changes the guidance for credit losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.

Effective Date and Adoption Considerations–The guidance was effective January 1, 2020, with one-year early adoption permitted. The company adopted the guidance as of the effective date using the transition ~~option~~methodology whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements.

Effect on Financial Statements or Other Significant Matters–At January 1, 2020, an increase in the allowance for credit losses of $56 million was recorded for financing receivables (inclusive of its related off-balance sheet commitments). Additionally, net deferred taxes were reduced by $16 million in the Consolidated Balance Sheet, resulting in a cumulative-effect net decrease to retained earnings of $41 million. Refer to note 6, “Financing Receivables, Receivables Purchased/Participated from IBM,” and note 9, “Commitments,” for additional information.

3. Segments:

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

Client Financing provides leases and loan financing to end-user clients, acquires installment payment plans offered to end-user clients by IBM, and acquires participation interests in IBM financing receivables for which the company assumes the IBM client’s credit risk from IBM. End-user clients are primarily IBM clients that elect to finance their acquisition of IBM’s hardware, software, and services, as well as Original Equipment Manufacturer (OEM) IT hardware, software and services, to meet their total solution requirements. In addition, the company provides loans to IBM,

910

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Notes to Consolidated Financial Statements — (continued)

acquisition of IBM’s hardware, software, and services, as well as Original Equipment Manufacturer (OEM) IT 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.

Commercial Financing provides working capital financing for suppliers, distributors and resellers of IBM and OEM IT products and services. The ~~decline~~segment’s inperformance ~~revenue in the first quarter of 2020 primarily~~ reflects the wind down of ~~the company’s~~ OEM IT Commercial Financing operations which began in the second quarter of 2019.

The segment’s ~~expense~~pre-tax income includes an allocation of interest expense and selling, general and administrative (SG&A) expense by the company to each of its operating segments. Interest expense is allocated based on the average assets in each segment. SG&A expense is allocated based on a measurable financial driver, such as net margin.

IBM Credit and its consolidated subsidiaries are reported by the company’s parent, IBM, as part of IBM’s Global Financing segment, which also includes IBM’s remanufacturing and remarketing business.

SEGMENT INFORMATION


	Client		Commercial		Total
(Dollars in millions)	Financing		Financing		Segments
For the three months ended March 31, 2020:
For the three months ended June 30, 2020:
Total revenue	$	~~279~~244	$	5835	$	~~337~~279
Pre-tax income		9586		3318		~~128~~104
Depreciation of equipment under operating lease		3128		—		3128
Interest expense		8263		139		9472
Provision for credit losses		18		1		19
Provision for/(benefit from) credit losses		27		(1)		27

For the three months ended March 31, 2019:
For the three months ended June 30, 2019:
Total revenue	$	~~322~~292	$	~~160~~118	$	~~482~~410
Pre-tax income		~~117~~96		7640		~~193~~136
Depreciation of equipment under operating lease		4543		—		4543
Interest expense		9796		5339		~~150~~135
Provision for/(benefit from) credit losses		(15)		5(3)		4(8)

(Amounts may not add due to rounding.)

SEGMENT INFORMATION


	Client		Commercial		Total
(Dollars in millions)	Financing		Financing		Segments
For the six months ended June 30, 2020:
Total revenue	$	522	$	93	$	615
Pre-tax income		182		50		232
Depreciation of equipment under operating lease		59		—		59
Interest expense		145		21		166
Provision for/(benefit from) credit losses		45		0		45

For the six months ended June 30, 2019:
Total revenue	$	614	$	278	$	892
Pre-tax income		213		116		330
Depreciation of equipment under operating lease		88		—		88
Interest expense		193		92		285
Provision for/(benefit from) credit losses		(6)		2		(4)

(Amounts may not add due to rounding.)

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Notes to Consolidated Financial Statements — (continued)

4. Divestiture:

In the first quarter of 2019, IBM sold certain commercial financing capabilities and assigned a number of its commercial financing contracts, excluding related receivables which were collected as they became due in the normal course of business, to a third party and recorded a pre-tax gain of $16 million.

5. Financial Assets and Liabilities:

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company classifies certain assets and liabilities based on the following fair value hierarchy:

●

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

●

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

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Notes to Consolidated Financial Statements — (continued)

●

Level 3—Unobservable inputs for the asset or liability.

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

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

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

●

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

●

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

The company ~~may~~holds ~~hold~~ investments in time deposits, and certificates of deposit, ~~U.S. government and agency debt, and corporate debt securities~~ that are designated as available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in ~~short-term~~very ~~highly~~ liquid ~~securities~~and ~~with~~highly arated ~~credit rating of~~ investment grade ~~Aa2 or higher~~securities.

Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized cost basis. Effective January 1, 2020 with the adoption of the new standard on credit losses, if the fair value of the security falls below its amortized cost basis, the change in fair value is recognized in the period the impairment is identified when the loss is due to credit factors. The change in fair value due to non-credit factors is recorded in other comprehensive income when the company does not intend to sell and has the ability to hold the investment. The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. There were no impairments for credit losses or non-credit impairments for the three and six months ended

Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized cost basis. Effective January 1, 2020 with the adoption of the new standard on credit losses, if the fair value of the security falls below its amortized cost basis, the change in fair value is recognized in the period the impairment is identified when the loss is due to credit factors. The change in fair value due to non-credit factors is recorded in other comprehensive income when the company does not intend to sell and has the ability to hold the investment. The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. No impairment for credit losses and no non-credit impairment was recorded for the three months ended March 31, 2020. Prior to the adoption of the new standard, available-for-sale securities were measured for impairment using an other-than-temporary impairment model. No impairment was recorded for the three months ended March 31, 2019.12

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~The~~June ~~following~~30, ~~table~~2020. ~~presents~~Prior to the ~~company’s~~adoption ~~financial~~of ~~assets~~the ~~and~~new ~~financial~~standard, ~~liabilities~~available-for-sale ~~that~~securities ~~are~~were measured atfor ~~fair~~impairment ~~value~~using onan aother-than-temporary ~~recurring~~impairment ~~basis~~model. atNo ~~March~~impairment ~~31,~~was ~~2020~~recorded for the three and ~~December 31~~six months ended June 30, 2019.

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019.



	Fair Value
	Hierarchy	At ~~March~~June 3130, 2020				At December 31, 2019
(Dollars in millions)	Level	Assets		Liabilities		Assets		Liabilities
Cash equivalents (1)
Time deposits and certificates of deposit	2	$	576	$	N/A	$	788	$	N/A
Time deposits and certificates of deposit (2)	2	$	666	$	N/A	$	788	$	N/A
Money market funds	1		—		N/A		5		N/A
Total cash equivalents		$	~~576~~666	$	N/A	$	793	$	N/A
Derivatives designated as hedging instruments (2)
Derivatives designated as hedging instruments (3)
Interest rate contracts with IBM	2		7999		—		45		—
Foreign exchange contracts with IBM	2		—0		1426		—		18
Total		$	~~655~~765	$	1426	$	838	$	18

(1)	Included within cash and cash equivalents in the Consolidated Balance Sheet.

(2) ~~Included~~Available-for-sale ~~within~~securities ~~other~~with ~~assets~~an ~~and~~amortized ~~other~~cost ~~liabilities~~basis inthat ~~the~~approximates ~~Consolidated~~fair ~~Balance Sheet~~value.

(3)	Included within other assets and other liabilities in the Consolidated Balance Sheet.

N/A – not applicable

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

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

Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At ~~March 31~~June 30, 2020 and December 31, 2019, the difference between the carrying amount and estimated fair value for long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Long-Term Debt

Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt, which includes debt payable to IBM, for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt (including debt payable to IBM) was $14,~~956~~682 million and $15,268 million, and the estimated fair value was $14,~~757~~843 million and $15,409 million at ~~March 31~~June 30, 2020 and December 31, 2019, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

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

Financing receivables primarily consist of client loan and installment payment receivables (loans), ~~and~~ investment in sales-type and direct financing leases ~~(collectively referred to as Client Financing receivables)~~ and Commercial Financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Systems products and are for terms ranging generally from two to six years. Commercial Financing receivables relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. These receivables are included in the Client Financing segment. The company also purchases interests in certain of IBM’s short-term receivables. These receivables are included within the Commercial Financing segment. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

Effective January 1, 2020, the company adopted the new accounting standard related to credit losses, using the transition option whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements. Refer to note 2, “Accounting Changes,” for additional information. Under this new guidance, 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. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. Prior to the effective date, financing receivables were measured at recorded investment, which does not include residual value. As a result of the company’s transition option, all prior periods are presented at recorded investment, while current period information is presented at amortized cost.

A summary of the components of the company’s financing receivables is presented as follows:


					Client Loan and
					Installment
			Commercial		Payment
(Dollars in millions)	Investment in		Financing		Receivables
At March 31, 2020:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,081	$	2,008	$	8,742	$	14,831
Unearned income		(337)		(3)		(330)		(669)
Deferred initial direct costs		28		—		64		93
Residual value*		542		—		—		542
Amortized cost	$	4,314	$	2,005	$	8,476	$	14,796
Allowance for credit losses		(64)		(9)		(85)		(158)
Total financing receivables, net	$	4,250	$	1,996	$	8,391	$	14,638

* Includes guaranteed and unguaranteed residual value


					Client Loan and
					Installment
			Commercial		Payment
(Dollars in millions)	Investment in		Financing		Receivables
At December 31, 2019:	Leases		Receivables		(Loans)		Total
Financing receivables, gross	$	4,626	$	3,400	$	9,566	$	17,592
Unearned income		(384)		(4)		(373)		(761)
Deferred initial direct costs		32		—		71		103
Recorded investment	$	4,274	$	3,396	$	9,264	$	16,934
Allowance for credit losses		(56)		(9)		(82)		(148)
Unguaranteed residual value		531		—		—		531
Guaranteed residual value		47		—		—		47
Total financing receivables, net	$	4,796	$	3,387	$	9,181	$	17,365

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~Purchased~~Systems products and ~~participated~~are ~~receivables~~for terms ranging generally from two to six years. Commercial Financing receivables relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.


	At March 31,		At December 31,
(Dollars in millions)	2020		2019
Short-term purchased receivables from IBM	$	72	$	56
Allowance for credit losses		0		0
Total short-term purchased receivables from IBM, net	$	72	$	56

Long-term participated receivables from IBM	$	4,206	$	4,310
Allowance for credit losses		(21)		(7)
Total long-term participated receivables from IBM, net	$	4,186	$	4,303

Total purchased and participated receivables from IBM, net	$	4,258	$	4,359

The company purchases interests in certain of IBM’s short-term receivables. These receivables are included within the Commercial Financing segment. The company also participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all purchased and participated receivables from IBM.

~~The~~Loans, ~~company~~investment ~~utilizes~~in ~~certain~~sales-type ofand ~~its~~direct financing ~~receivables~~leases, asand ~~collateral~~participated ~~for~~receivables ~~nonrecourse~~from ~~borrowings.~~IBM ~~Financing~~are ~~receivables~~collectively ~~pledged~~referred to as ~~collateral~~Client ~~for~~Financing ~~borrowings~~receivables ~~were $914 million~~ and ~~$1,062~~are ~~million~~included atwithin ~~March~~the ~~31,~~Client ~~2020~~Financing ~~and December 31, 2019, respectively~~segment.

The company did not have any financing receivables held for sale at March 31, 2020 and December 31, 2019.

Allowance for Credit Losses - Financing Receivables

Effective January 1, 2020, the company adopted the new accounting standard related to credit losses, using the transition methodology whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements. Refer to note A2, “~~Significant~~ Accounting ~~Policies~~Changes,” infor ~~the~~additional ~~company’s~~information. ~~2019~~Under ~~Annual~~this ~~Report~~new ~~for~~guidance, the amortized cost basis of a ~~full~~financial ~~description~~asset represents the original amount of ~~its~~the ~~accounting~~financing ~~policies~~receivable (including residual value) adjusted for ~~financing~~unearned ~~receivables~~income, deferred initial direct costs, cash collected, write-offs and ~~related~~any ~~allowances~~foreign exchange adjustments. The ~~descriptions~~allowance ~~below~~for ~~include~~credit ~~any~~losses ~~changes~~represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. Prior to ~~those~~the ~~policies~~effective ~~due~~date, financing receivables were measured at recorded investment, which does not include residual value. As a result, all prior periods are presented at recorded investment, while current period information is presented at amortized cost. Additionally, current period information reflects updates to the portfolio segments, and other presentation changes within the following tables, as a result of the adoption of this new ~~standard~~guidance.

~~Effective~~A ~~with~~summary ~~the adoption~~ of the ~~new~~components ~~credit~~of ~~losses standard,~~ the company’s ~~estimates~~financing ofreceivables ~~its allowances for expected credit losses include consideration of: past events, including any historical default, historical concessions~~ and ~~resulting~~receivables ~~troubled~~purchased/participated ~~debt~~from ~~restructurings,~~IBM ~~current~~is ~~economic~~presented ~~conditions,~~as ~~taking into account any non-freestanding mitigating credit enhancements, and certain forward-looking information, including reasonable and supportable forecasts.~~ follows:

Collectively Evaluated Financing Receivables


	Client Loan and
	Installment
	Payment				Commercial
(Dollars in millions)	Receivables		Investment in		Financing
At June 30, 2020:	(Loans)		Leases		Receivables		Total
Financing receivables, gross	$	8,603	$	3,661	$	2,031	$	14,296
Unearned income		(317)		(281)		(3)		(601)
Deferred initial direct costs		63		25		—		88
Residual value*		—		483		—		483
Amortized cost	$	8,349	$	3,888	$	2,029	$	14,266
Allowance for credit losses		(101)		(72)		(9)		(182)
Total financing receivables, net	$	8,248	$	3,816	$	2,020	$	14,084

* Includes guaranteed and unguaranteed residual value

The company determines its allowance for credit losses based on two portfolio segments: Client Financing receivables and Commercial Financing receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

For Client Financing receivables, the company uses a credit loss model to calculate allowances based on its internal loss experience and current conditions and forecasts by class of financing receivable. The company records an unallocated reserve that is calculated 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. The allowance is adjusted quarterly for expected recoveries of amounts that were previously written off or are expected to be written off. Recoveries cannot exceed the aggregated amount of the previous write-off or expected write-off.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Macroeconomic variables attributed to the expected credit losses for Client Financing receivables may vary by class of financing receivables based on historical experiences, portfolio composition, and current environment. In addition to a qualitative review of credit risk factors across the portfolio, the company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its Client Financing receivables expected allowance for credit losses. The company also considers the impact of current conditions and economic forecasts relating to specific industries, geographical areas, and client-specific exposures on the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. With evolving global impacts from the COVID-19 pandemic, external economic models have been revised with increased frequency and with alternative scenarios. The company’s allowances at March 31, 2020, reflect the qualitative process described above. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.


	Client Loan and
	Installment
	Payment				Commercial
(Dollars in millions)	Receivables		Investment in		Financing
At December 31, 2019:	(Loans)		Leases		Receivables		Total
Financing receivables, gross	$	9,566	$	4,626	$	3,400	$	17,592
Unearned income		(373)		(384)		(4)		(761)
Deferred initial direct costs		71		32		—		103
Recorded investment	$	9,264	$	4,274	$	3,396	$	16,934
Allowance for credit losses		(82)		(56)		(9)		(148)
Unguaranteed residual value		—		531		—		531
Guaranteed residual value		—		47		—		47
Total financing receivables, net	$	9,181	$	4,796	$	3,387	$	17,365

The allowance for Commercial Financing receivables is estimated based on a combination of write-off history and current economic conditions, excluding any individually evaluated accounts.

At January 1, 2020, upon adoption of the new standard on credit losses, the company recorded an additional allowance for Client and Commercial Financing receivables (including related off-balance sheet commitments) of $56 million. This was primarily driven by an increase in the Client Financing receivables allowance. Refer to note 9, “Commitments,” for additional information regarding off-balance sheet commitments.


	At June 30,		At December 31,
(Dollars in millions)	2020		2019
Short-term purchased receivables from IBM	$	50	$	56
Allowance for credit losses		0		0
Total short-term purchased receivables from IBM, net	$	50	$	56

Long-term participated receivables from IBM	$	4,333	$	4,310
Allowance for credit losses		(21)		(7)
Total long-term participated receivables from IBM, net	$	4,312	$	4,303

Total receivables purchased/participated from IBM, net	$	4,362	$	4,359

~~Client~~The ~~Financing~~company ~~Receivables~~has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. 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.

~~The~~Financing ~~following~~receivables ~~tables~~pledged ~~present~~as ~~the~~collateral ~~amortized cost basis or recorded investment~~ for ~~the~~borrowings ~~Client~~were ~~Financing~~$758 ~~receivables~~million ~~portfolio~~and ~~segment~~$1,062 million at ~~March 31~~June 30, 2020 and December 31, 2019, respectively~~, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific~~. The Commercial Financing receivables portfolio segment is excluded from this presentation as it is short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results is not material.

In the second quarter of 2020, the company sold $711 million of Client Financing receivables, consisting of lease and loan receivables of $417 million and $294 million, respectively, approximately half of which were scheduled to be due within the next 12 months. The transfer of these receivables qualified as true sales and therefore reduced financing receivables and resulted in a benefit to cash flows from investing activities of $715 million. The impact to the Consolidated Income Statement, including fees and net gain associated with the transfer of these receivables was not material.

The company did not have any financing receivables held for sale at June 30, 2020 and December 31, 2019.

Allowance for Credit Losses

Refer to note A, “Significant Accounting Policies,” in the company’s 2019 Annual Report for a full description of its accounting policies for financing receivables and related allowances. The descriptions below include any changes to those policies due to the new standard.

Effective with the adoption of the new credit losses standard, the company’s estimates of its allowances for expected credit losses include consideration of: past events, including any historical default, historical concessions and resulting troubled debt restructurings, current economic conditions, taking into account any non-freestanding mitigating credit enhancements, and certain forward-looking information, including reasonable and supportable forecasts.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)
At March 31, 2020:	Americas		EMEA		Asia Pacific		Total
Amortized cost
Lease receivables	$	3,338	$	601	$	376	$	4,314
Loan receivables		5,657		2,219		600		8,476
Participated receivables from IBM		631		1,715		1,860		4,206
Ending balance	$	9,626	$	4,534	$	2,836	$	16,997

Allowance for credit losses
Beginning balance at December 31, 2019	$	98	$	36	$	11	$	146
Adjustment for adoption of new standard		21		13		4		39
Beginning balance at January 1, 2020
Lease receivables	$	38	$	22	$	9	$	69
Loan receivables		78		18		3		98
Participated receivables from IBM		4		10		4		18
Total	$	120	$	50	$	16	$	185
Write-offs	$	(14)	$	(1)	$	(1)	$	(16)
Recoveries		0		—		0		0
Provision		5		8		1		14
Other*		(12)		(1)		0		(13)
Ending balance at March 31, 2020	$	99	$	56	$	15	$	170
Lease receivables	$	37	$	20	$	7	$	64
Loan receivables	$	57	$	24	$	4	$	85
Participated receivables from IBM	$	4	$	12	$	4	$	21

Collectively Evaluated Receivables

* Primarily represents translation adjustments.

Macroeconomic variables attributed to the expected credit losses for Client Financing receivables may vary by class of financing receivables based on historical experiences, portfolio composition, and current environment. In addition to a qualitative review of credit risk factors across the portfolio, the company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its Client Financing receivables allowance for expected credit losses. The company also considers the impact of current conditions and economic forecasts relating to specific industries, geographical areas, and client-specific exposures on the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. Consistent with the first quarter of 2020, with evolving global impacts from the COVID-19 pandemic, external economic models have been revised with increased frequency and with alternative scenarios. The company’s allowances at June 30, 2020, reflect the qualitative process described above. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

The allowance for Commercial Financing receivables is estimated based on a combination of write-off history and current economic conditions, excluding any individually evaluated accounts. The Commercial Financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)
At December 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,160	$	710	$	404	$	4,274
Loan receivables		6,173		2,415		676		9,264
Participated receivables from IBM		717		1,671		1,922		4,310
Ending balance	$	10,049	$	4,796	$	3,003	$	17,848
Recorded investment collectively evaluated for impairment	$	9,957	$	4,770	$	2,993	$	17,720
Recorded investment individually evaluated for impairment	$	92	$	26	$	10	$	128

Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(14)	$	(10)	$	(4)	$	(29)
Recoveries		0		0		0		1
Provision		7		(6)		(2)		(2)
Foreign currency translation adjustment		(1)		0		0		(1)
Other		0		0		0		0
Ending balance at December 31, 2019	$	98	$	36	$	11	$	146
Lease receivables	$	27	$	21	$	8	$	56
Loan receivables	$	68	$	12	$	2	$	82
Participated receivables from IBM	$	3	$	3	$	1	$	7

Related allowance, collectively evaluated for impairment	$	23	$	11	$	3	$	36
Related allowance, individually evaluated for impairment	$	75	$	26	$	9	$	110

Client Financing Receivables

The following tables present the amortized cost basis or recorded investment for Client Financing receivables at June 30, 2020 and December 31, 2019, respectively, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

Write-offs of lease receivables and loan receivables were $17 million and $11 million, respectively, for the year ended December 31, 2019. Provisions for credit losses recorded for lease receivables and participated receivables from IBM were an addition of $5 million and a release of $6 million, respectively, for the year ended December 31, 2019.


(Dollars in millions)
At June 30, 2020:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	8,948	$	4,759	$	2,863	$	16,570

Allowance for credit losses
Beginning balance at December 31, 2019	$	98	$	36	$	11	$	146
Adjustment for adoption of new standard		21		13		4		39
Beginning balance at January 1, 2020	$	120	$	50	$	16	$	185
Write-offs	$	(15)	$	(1)	$	(1)	$	(17)
Recoveries		0		—		2		2
Additions/(releases)		28		9		(1)		37
Other*		(12)		0		0		(12)
Ending balance at June 30, 2020	$	121	$	58	$	15	$	194

~~Past~~* Primarily ~~Due~~represents ~~Financing~~translation ~~Receivables~~adjustments.

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following tables summarize information about the amortized cost basis or recorded investment in lease and loan financing receivables and participated receivables from IBM, including amortized cost or recorded investment aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost or recorded investment not accruing.


(Dollars in millions)
At December 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,160	$	710	$	404	$	4,274
Loan receivables		6,173		2,415		676		9,264
Participated receivables from IBM		717		1,671		1,922		4,310
Ending balance	$	10,049	$	4,796	$	3,003	$	17,848
Recorded investment collectively evaluated for impairment	$	9,957	$	4,770	$	2,993	$	17,720
Recorded investment individually evaluated for impairment	$	92	$	26	$	10	$	128

Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	38	$	17	$	10	$	65
Loan receivables		66		28		5		98
Participated receivables from IBM		3		8		3		14
Total	$	107	$	53	$	17	$	177
Write-offs	$	(14)	$	(10)	$	(4)	$	(29)
Recoveries		0		0		0		1
Additions/(releases)		7		(6)		(2)		(2)
Foreign currency translation adjustment		(1)		0		0		(1)
Other		0		0		0		0
Ending balance at December 31, 2019	$	98	$	36	$	11	$	146
Lease receivables	$	27	$	21	$	8	$	56
Loan receivables	$	68	$	12	$	2	$	82
Participated receivables from IBM	$	3	$	3	$	1	$	7

Related allowance, collectively evaluated for impairment	$	23	$	11	$	3	$	36
Related allowance, individually evaluated for impairment	$	75	$	26	$	9	$	110

Table of Contents

Notes to Consolidated Financial Statements — (continued)


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,338	$	136	$	106	$	7	$	35
EMEA		601		19		6		0		15
Asia Pacific		376		9		3		0		6
Total lease receivables	$	4,314	$	164	$	115	$	7	$	56

Americas	$	5,657	$	97	$	60	$	10	$	38
EMEA		2,219		55		7		3		50
Asia Pacific		600		7		5		0		1
Total loan receivables	$	8,476	$	158	$	72	$	14	$	90

Americas	$	631	$	7	$	5	$	1	$	3
EMEA		1,715		1		0		0		1
Asia Pacific		1,860		4		4		1		0
Total participated receivables from IBM	$	4,206	$	12	$	9	$	2	$	4

Total	$	16,997	$	333	$	195	$	23	$	149

Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following tables summarize information about the amortized cost basis or recorded investment in Client Financing receivables, including amortized cost or recorded investment aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost or recorded investment not accruing.


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At June 30, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	8,948	$	306	$	230	$	29	$	96
EMEA		4,759		93		30		4		68
Asia Pacific		2,863		19		11		2		8
Total client financing receivables	$	16,570	$	418	$	271	$	35	$	172

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

(2) Of the amortized cost not accruing, there was a related allowance of $95116 million. Financing income recognized on these receivables was immaterial for the three and six months ended ~~March~~June 3130, 2020, respectively.


					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,160	$	179	$	143	$	10	$	37
EMEA		710		24		11		1		16
Asia Pacific		404		9		2		0		7
Total lease receivables	$	4,274	$	213	$	156	$	11	$	59

Americas	$	6,173	$	107	$	66	$	10	$	56
EMEA		2,415		51		3		1		51
Asia Pacific		676		3		1		0		2
Total loan receivables	$	9,264	$	161	$	69	$	11	$	110

Americas	$	717	$	8	$	8	$	1	$	0
EMEA		1,671		7		7		1		1
Asia Pacific		1,922		6		5		1		1
Total participated receivables from IBM	$	4,310	$	21	$	20	$	3	$	2

Total	$	17,848	$	394	$	245	$	25	$	171

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

(2) Of the recorded investment not accruing, $128 million ~~was~~is individually evaluated for impairment with a related allowance of $110 million. Financing income recognized on these receivables was immaterial for the three and six months ended June 30, 2019, respectively.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided ~~annually~~ by Moody’s, where available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based on these indicators and is assigned the same risk rating whether the receivable is a lease, loan or participated from IBM.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following tables present the amortized cost basis or recorded investment for Client Financing receivables by credit ~~ratings~~quality indicator at June 30, 2020 and December 31, 2019, respectively. ~~The~~Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. Effective January 1, 2020, under the new guidance for credit losses, the company discloses its credit quality by year of origination. Additionally, under the ~~customer~~new isguidance, ~~evaluated~~the ~~based~~amortized cost is presented on ~~these~~a ~~indicators~~gross ~~and~~basis, ~~would~~whereas beunder ~~assigned~~the prior guidance, the ~~same~~company ~~risk~~presented ~~rating~~the ~~whether~~recorded investment net of the ~~receivable~~allowance isfor acredit ~~lease~~losses. At June 30, ~~loan~~2020, orthe ~~participated~~credit ~~from~~quality ~~IBM~~indicators reflect mitigating credit enhancement actions taken by the customer which reduces the risk to the company.

The following tables present the amortized cost basis or recorded investment for financing receivables, excluding the Commercial Financing receivables portfolio segment, by credit quality indicator at March 31, 2020 and December 31, 2019, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. Effective January 1, 2020, under the new guidance for credit losses, the company discloses its credit quality by year of origination. Additionally, under the new guidance, the amortized cost is presented on a gross basis, whereas under the prior guidance, the company presented the recorded investment net of allowance for credit losses. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.

(Dollars in millions)

Americas

EMEA

Asia Pacific

At March 31, 2020:

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D

At June 30, 2020

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D

Vintage year:

2020

1,~~406~~539

~~871~~1,173

~~609~~904

~~766~~1,030

~~228~~513

~~134~~206

2019

2,~~182~~054

1,~~587~~175

~~919~~882

~~988~~810

~~1,485~~659

~~585~~235

2018

1,~~136~~161

~~732~~601

~~371~~387

~~342~~319

~~193~~463

50192

2017

~~709~~575

~~382~~254

~~140~~104

~~183~~165

61240

3068

2016

~~289~~142

~~300~~92

8648

34167

1137

2015 and prior

1757

17126

4030

3523

1972

713

Total

5,~~738~~528

3,~~888~~420

2,~~164~~356

2,~~370~~403

2,~~020~~113

~~817~~750


	Lease Receivables						Loan Receivables						Participated Receivables from IBM
(Dollars in millions)					Asia						Asia						Asia
At December 31, 2019	Americas		EMEA		Pacific		Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	305	$	55	$	31	$	732	$	89	$	89	$	440	$	88	$	89
A1 – A3		700		88		124		1,166		178		237		71		271		934
Baa1 – Baa3		949		153		83		1,756		907		107		104		762		500
Ba1 – Ba2		733		206		61		1,461		532		159		49		442		245
Ba3 – B1		196		137		62		444		455		46		43		88		126
B2 – B3		236		45		32		513		228		33		4		18		26
Caa – D		13		5		2		32		15		3		2		0		2
Total	$	3,133	$	689	$	396	$	6,105	$	2,403	$	674	$	714	$	1,668	$	1,921

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the ~~three~~six months ended ~~March 31~~June 30, 2020 or for the year ended December 31, 2019.

7. Leases

Table of Contents

Notes to Consolidated Financial Statements — (continued)

7. Leases:

Accounting for Leases as a Lessor

The following table presents amounts included in the Consolidated Income Statement related to lessor activity:


(Dollars in millions)
For the three months ended March 31:	2020		2019
For the three months ended June 30:	2020		2019
Financing lease revenue	$	5043	$	5551
Operating lease revenue		5854		7870
Variable lease revenue		111		112
Total lease revenue	$	~~119~~98	$	~~144~~124

Table of Contents

Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)
For the six months ended June 30:	2020		2019
Financing lease revenue	$	93	$	107
Operating lease revenue		112		149
Variable lease revenue		12		12
Total lease revenue	$	217	$	268

8. Borrowings:

Short-Term Debt


	Balance		Balance
(Dollars in millions)	36/3130/2020		12/31/2019
Commercial paper	$	—	$	304
Short-term loans		3177		49
Secured borrowings		~~240~~169		280
Debt	$	~~271~~245	$	633
Debt payable to IBM		65,~~210~~938		8,194
Total	$	6,~~480~~184	$	8,827

The weighted-average interest rate for commercial paper was 1.6 percent at December 31, 2019. The weighted-average interest rate for short-term loans was 3.21 percent and 5.2 percent at ~~March 31~~June 30, 2020 and December 31, 2019, respectively. The weighted-average interest rate for secured borrowings was 3.10 percent and 3.6 percent at ~~March 31~~June 30, 2020 and December 31, 2019, respectively. Short-term financing receivables pledged as collateral for short-term secured borrowings were $~~240~~169 million at ~~March 31~~June 30, 2020 and $280 million at December 31, 2019. The weighted-average interest rate for ~~short-term~~ debt payable to IBM was 0.63 percent and 1.6 percent at ~~March 31~~June 30, 2020 and December 31, 2019, respectively.

Long-Term Debt


		Balance		Balance
(Dollars in millions)	Maturities	6/30/2020		12/31/2019
Long-term notes (weighted-average interest rate at June 30, 2020)
2.1%	2020	$	1,500	$	1,500
2.1%	2021		2,850		2,850
2.2%	2022		500		500
3.0%	2023		750		750
		$	5,600	$	5,600

Long-term loans (4.2% weighted-average interest rate at June 30, 2020)	2020-2021		49		113
Secured borrowings (4.1% weighted-average interest rate at June 30, 2020)	2020-2026		590		781
Long-term debt		$	6,239	$	6,495
Less: net unamortized discount			1		1
Less: net unamortized debt issuance costs			3		5
Add: fair value adjustment*			77		28
Debt		$	6,312	$	6,517
Debt payable to IBM (1.4% weighted-average interest rate at June 30, 2020)			8,370		8,751
Total		$	14,682	$	15,268

The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt's carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

The company utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $590 million at June 30, 2020 and $781 million at December 31, 2019.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt


		Balance		Balance
(Dollars in millions)	Maturities	3/31/2020		12/31/2019
Long-term notes (weighted-average interest rate at March 31, 2020)
2.8%	2020	$	1,500	$	1,500
2.4%	2021		2,850		2,850
2.2%	2022		500		500
3.0%	2023		750		750
		$	5,600	$	5,600

Long-term loans (4.3% weighted-average interest rate at March 31, 2020)	2020-2021		93		113
Secured borrowings (4.5% weighted-average interest rate at March 31, 2020)	2020-2025		674		781
Long-term debt		$	6,367	$	6,495
Less: net unamortized discount			1		1
Less: net unamortized debt issuance costs			4		5
Add: fair value adjustment*			76		28
Debt		$	6,438	$	6,517
Debt payable to IBM (1.4% weighted-average interest rate at March 31, 2020)			8,517		8,751
Total		$	14,956	$	15,268

* The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt's carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

The company utilizes certain of its financing receivables as collateral. Long-term financing receivables pledged as collateral for long-term secured borrowings were $674 million at March 31, 2020 and $781 million at December 31, 2019.

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 as such term is defined under the indenture) 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.

Pre-swap annual contractual obligations of long-term debt and long-term debt payable to IBM outstanding at ~~March 31~~June 30, 2020, are as follows:


	2020										2025 and
(Dollars in millions)	(Q2Q3-Q4)		2021		2022		2023		2024		beyond		Total
Long-term debt	$	1,~~839~~702	$	3,~~133~~135	$	~~603~~609	$	786	$	5	$	0	$	6,~~367~~239
Debt payable to IBM		32,~~210~~297		2,~~615~~832		12,~~761~~113		~~675~~786		~~201~~267		5675		8,~~517~~370
Total	$	53,~~049~~999	$	5,~~748~~967	$	2,~~365~~723	$	1,~~461~~572	$	~~205~~272	$	5676	$	14,~~884~~609

Interest on Debt

The company recognized interest expense of $9472 million and $166 million for the three and six months ended ~~March 31~~June 30, 2020, of which $4935 million and $84 million was interest expense on debt payable to IBM, respectively. The company recognized interest expense of $~~150~~135 million and $285 million for the three and six months ended ~~March 31~~June 30, 2019, of which $7458 million and $131 million was interest expense on debt payable to IBM, respectively.

Lines of Credit

On July 2, 2020, IBM and the company ~~have~~entered into a new $2.5 billion, 364-~~Day~~day Credit Agreement to replace the existing $2.5 billion 364-day Credit Agreement, and aalso extended the maturity date of the existing $2.5 billion Three-Year Credit Agreement (together, the Credit Agreements). ~~with~~The new maturity dates offor the 364-day and Three-Year Credit Agreements are July 161, ~~2020~~2021 and July 20, ~~2022~~2023, respectively. As of June 30, 2020, the company had no borrowings outstanding against the 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 is in compliance with its debt covenants, and provides 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 such event of default applied would become immediately due and payable. The Borrowers are also restricted from amending, modifying or terminating the Support Agreement in any manner materially adverse to the lenders. For additional information on the Support Agreement, see note 14, “Relationship with IBM and Related Party Transactions.”

9. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $1.8 billion at both June 30, 2020 and December 31, 2019. A portion of these amounts is available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $5.7 billion and $5.4 billion at June 30, 2020 and December 31, 2019, respectively. Effective January 1, 2020, the company adopted the new standard on credit losses, which resulted in the recognition of a related allowance for non-cancellable off-balance sheet commitments. Refer to

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Asnote of2, ~~March~~“Accounting 31Changes,” ~~2020,~~for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at June 30, 2020. The company ~~had~~collectively noevaluates ~~borrowings~~the ~~outstanding~~allowance ~~against~~for these arrangements using a provision methodology consistent with the ~~Credit~~portfolio ~~Agreements~~of the commitments. Refer to note 6, “Financing Receivables, Receivables Purchased/Participated from IBM,” for additional information.

9. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $1.9 billion and $1.8 billion at March 31, 2020 and December 31, 2019, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $5.9 billion and $5.4 billion at March 31, 2020 and December 31, 2019, respectively. Effective January 1, 2020, the company adopted the new standard on credit losses, which resulted in the recognition of a related allowance for non-cancellable off-balance sheet commitments. Refer to note 2, “Accounting Changes,” for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at March 31, 2020. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note 6, “Financing Receivables, Receivables Purchased/Participated from IBM,” for additional information.

10. Contingencies:

The company is, or may be, involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise in the ordinary course of its business. Certain of these actions and proceedings are similar to suits filed against other financial institutions and captive finance companies. These may include collection and bankruptcy proceedings related to its leases and loans and proceedings concerning client allegations of wrongful repossession or defamation of credit.

The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate). In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, client and employee relations considerations.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended ~~March 31~~June 30, 2020 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. As of ~~March 31~~June 30, 2020, there were no such matters.

11. Equity Activity:

IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended June 30, 2020:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	36	$	14	$	51
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	—	$	—	$	—
Curtailments and settlements		0		0		0
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		1		0		1
Total retirement-related benefit plans	$	1	$	0	$	1
Other comprehensive income/(loss)	$	37	$	14	$	52

(1)	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. (Refer to note 13, "Retirement-Related Benefits," for additional information.)

Table of Contents

Notes to Consolidated Financial Statements — (continued)

11. Equity Activity:

IBM Credit had no unrealized gains or (losses) on cash flow hedges and gains and losses on available-for-sale securities were immaterial during the periods presented in the following tables:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended June 30, 2019:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	16	$	2	$	19
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	—	$	0	$	0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		0		0		0
Total retirement-related benefit plans	$	0	$	0	$	0
Other comprehensive income/(loss)	$	17	$	2	$	19


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2020:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(156)	$	(17)	$	(174)
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	0	$	0	$	0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		1		0		1
Total retirement-related benefit plans	$	1	$	0	$	1
Other comprehensive income/(loss)	$	(155)	$	(17)	$	(173)

(1)	These AOCI components are included in the computation of net periodic pension cost. (Refer to note 13, "Retirement-Related Benefits," for additional information.)

(1) These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. (See note 13, "Retirement-Related Benefits," for additional information.)

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2019:	Amount		Benefit		Amount
For the six months ended June 30, 2020:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	3(120)	$	(3)	$	6(123)
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	0	$	0	$	0
Curtailments and settlements		—0		—0		—0
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		02		0		02
Total retirement-related benefit plans	$	02	$	0	$	02
Other comprehensive income/(loss)	$	3(118)	$	(3)	$	6(121)

(1) These AOCI components are included in the computation of net periodic pension cost. (~~See~~Refer to note 13, "Retirement-Related Benefits," for additional information.)

~~Accumulated~~Reclassifications ~~Other~~and ~~Comprehensive~~Taxes ~~Income/(Loss)~~Related ~~(net~~to Items of ~~tax)~~Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the six months ended June 30, 2019:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	20	$	5	$	25
Retirement-related benefit plans (1):
Net (losses)/gains arising during the period	$	0	$	0	$	0
Curtailments and settlements		—		—		—
Amortization of prior service (credits)/costs		0		0		0
Amortization of net (gains)/losses		1		0		1
Total retirement-related benefit plans	$	0	$	0	$	0
Other comprehensive income/(loss)	$	20	$	5	$	25


			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2020	$	(12)	$	(19)	$	(31)
Other comprehensive income before reclassification		(174)		0		(174)
Amount reclassified from accumulated other comprehensive income		—		1		1
Total change for the period		(174)		1		(173)
March 31, 2020	$	(186)	$	(18)	$	(204)

(1)	These AOCI components are included in the computation of net periodic pension cost. (Refer to note 13, "Retirement-Related Benefits," for additional information.)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2019	$	(23)	$	(10)	$	(33)
Other comprehensive income before reclassification		6		0		6
Amount reclassified from accumulated other comprehensive income		—		0		0
Total change for the period		6		0		6
March 31, 2019	$	(17)	$	(10)	$	(27)

Accumulated Other Comprehensive Income/(Loss) (net of tax)


			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2020	$	(12)	$	(19)	$	(31)
Other comprehensive income before reclassification		(123)		0		(123)
Amount reclassified from accumulated other comprehensive income		—		1		1
Total change for the period		(123)		2		(121)
June 30, 2020	$	(135)	$	(17)	$	(153)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.


			Net Change
	Foreign		Retirement-		Accumulated
	Currency		Related		Other
	Translation		Benefit		Comprehensive
(Dollars in millions)	Adjustments*		Plans		Income/(Loss)
January 1, 2019	$	(23)	$	(10)	$	(33)
Other comprehensive income before reclassification		25		0		24
Amount reclassified from accumulated other comprehensive income		—		1		1
Total change for the period		25		0		25
June 30, 2019	$	1	$	(9)	$	(8)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

12. Derivative Financial Instruments:

The company operates in multiple currencies and is a lender and issuer in the capital markets and a borrower from IBM. In the normal course of business, the company may be exposed to the impact of interest rate changes and foreign currency fluctuations. The company limits its exposure to core market risks by following established risk management policies and procedures, and through the use of match-funding with IBM and third parties. Although the company seeks to substantially match-fund the terms, currency and interest rate variability of its debt against its underlying financial assets, risks may arise between assets and the related liabilities used for funding. The company may also choose to mitigate any remaining exposure relating to interest rate changes and foreign currency fluctuations through the use of interest rate or foreign exchange derivatives.

Derivative assets and liabilities are recorded in other assets and other liabilities in the Consolidated Balance Sheet and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the company with IBM and third parties, and are not necessarily a direct measure of the financial exposure. The company also enters into master netting agreements with certain counterparties that allow for netting of exposures in the event of default or breach. However, in the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements. If derivatives exposures covered by a qualifying master netting agreement with IBM had been netted in the Consolidated Balance Sheet at ~~March 31~~June 30, 2020 and December 31, 2019, the total derivative asset and liability positions would each have been reduced by $1426 million and $18 million, respectively.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the capital markets to fund its operations. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may enter into interest-rate swaps with IBM to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2020 and December 31, 2019, the total notional amount of the company's interest rate swap contracts with IBM was $2,550 million at both periods. The weighted average remaining maturity of these instruments at March 31, 2020 and December 31, 2019, was approximately 1.7 years and 2.0 years, respectively. These interest rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2020 and December 31, 2019.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2020 and December 31, 2019, the total notional amount of derivative contracts with IBM designated as net investment hedges was $1,027 million and

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Notes to Consolidated Financial Statements — (continued)

(i.e., fair value hedges) and to convert variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2020 and December 31, 2019, the total notional amount of the company's interest rate swap contracts with IBM was $12,~~229~~550 million, ~~respectively~~at both periods. The weighted average remaining maturity of these instruments at June 30, 2020 and December 31, 2019, was 0approximately 1.5 years and 2.0 years, atrespectively. ~~both~~These ~~periods~~interest rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at June 30, 2020 and December 31, 2019.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

The company enters into foreign exchange derivatives with IBM as a hedge of net investment of its foreign subsidiaries to reduce the volatility in member's interest caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2020 and December 31, 2019, the total notional amount of derivative contracts with IBM designated as net investment hedges was $948 million and $1,229 million, respectively. The weighted average remaining maturity of these instruments at June 30, 2020 and December 31, 2019, was 0.3 years and 0.2 years, respectively.

Foreign Currency Asset/Liability Management

The company enters into foreign exchange derivative contracts to manage foreign currency exposures associated with the company’s funding from IBM and third parties. These derivatives are not designated as hedges for accounting purposes. However, these derivatives represent economic hedges which provide an economic offset to the underlying foreign currency exposure. The terms of these derivative contracts are generally less than one year. The gains and losses recognized on economic hedges are recorded in other (income) and expense in the Consolidated Income Statement, and the associated cash flows are included in other investing activities - net, in the Consolidated Statement of Cash Flows.

There were no foreign exchange derivative contracts with third parties outstanding at ~~March 31~~June 30, 2020 and December 31, 2019.

The following tables provide a quantitative summary of the derivative instrument-related risk management activity at ~~March 31~~June 30, 2020 and December 31, 2019, as well as for the three and six months ended ~~March 31~~June 30, 2020 and 2019, respectively.

Cumulative Basis Adjustments for Fair Value Hedges

At ~~March 31~~June 30, 2020 and December 31, 2019, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:.


(Dollars in millions)
Line Item in the Consolidated Balance Sheet	At ~~March~~June 3130,		At December 31,
in which the Hedged Item is Included:	2020		2019
Debt:
Carrying amount of the hedged item	$	(2,~~623~~625)	$	(2,574)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		(7677)		(28)

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Notes to Consolidated Financial Statements — (continued)

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items, are as follows:


					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2020		2019		2020		2019
For the three months ended June 30:	2020		2019		2020		2019
Financing cost	$	~~105~~73	$	~~160~~137	$	910	$	42
Other (income) and expense		(21)		(18)		—		—


	Gain/(Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2020		2019		2020		2019
For the three months ended June 30:	Line Item	2020		2019		2020		2019
Derivative instruments in fair value hedges (1):
Interest rate contracts with IBM	Financing cost	$	518	$	2032	$	(481)	$	(2537)

Total		$	518	$	2032	$	(481)	$	(2537)


	Gain/(Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
					Consolidated
					Income	Reclassified				Amounts Excluded from
(Dollars in millions)	Recognized in OCI				Statement	from AOCI				Effectiveness Testing (3)
For the three months ended March 31:	2020		2019		Line Item	2020		2019		2020		2019
For the three months ended June 30:	2020		2019		Line Item	2020		2019		2020		2019
Derivative instruments in net investment hedges:
Foreign exchange contracts with IBM	$	67(56)	$	(108)	Financing cost	$	—	$	—	$	62	$	107

Total	$	67(56)	$	(108)		$	—	$	—	$	62	$	107

(1)	The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)	The amount includes basis adjustments to the carrying value of the hedged item recorded during the period.

(3)	The company's policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

For the three months ending March 31, 2020 and 2019, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.


					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the six months ended June 30:	2020		2019		2020		2019
Financing cost	$	178	$	297	$	19	$	7

13. Retirement-Related Benefits:

IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer, multiple-employer or defined contribution plans, as required by local regulations.

Multiemployer and Defined Contribution Plans:

IBM charges the company for multiemployer and defined contribution costs based on number of employees. The charges are recorded in the company’s operating results in the Consolidated Income Statement. The amounts of (income) or expense attributed to the company by IBM for the three months ended March 31, 2020 and 2019 were not material.

Charges from IBM to the company in relation to these plans (including non-pension, post-retirement benefits) are limited to service costs and defined contribution cost. Contributions to multiemployer and defined contribution plans and any other types of cost are the responsibility of IBM.

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Notes to Consolidated Financial Statements — (continued)


	Gain/(Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized				Attributable to Risk
(Dollars in millions)	Income Statement	on Derivatives				Being Hedged (2)
For the six months ended June 30:	Line Item	2020		2019		2020		2019
Derivative instruments in fair value hedges (1):
Interest rate contracts with IBM	Financing cost	$	60	$	52	$	(49)	$	(62)

Total		$	60	$	52	$	(49)	$	(62)


	Gain/(Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
					Consolidated
					Income					Amounts Excluded from
(Dollars in millions)	Recognized in OCI				Statement	Reclassified from AOCI				Effectiveness Testing (3)
For the six months ended June 30:	2020		2019		Line Item	2020		2019		2020		2019
Derivative instruments in net investment hedges:
Foreign exchange contracts with IBM	$	11	$	(18)	Financing cost	$	—	$	—	$	9	$	17

Total	$	11	$	(18)		$	—	$	—	$	9	$	17

(1)	The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)	The amount includes basis adjustments to the carrying value of the hedged item recorded during the period.

(3)	The company's policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

For the three and six months ended June 30, 2020 and 2019, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges); nor are there any anticipated in the normal course of business.

13. Retirement-Related Benefits:

IBM Credit employees are eligible to participate in IBM’s retirement plans. Retirement-related plans are accounted for as multiemployer, multiple-employer, or defined contribution plans as required by local regulations.

Multiemployer and Defined Contribution Plans:

IBM charges the company for multiemployer and defined contribution costs based on the number of employees. The charges are recorded in the company’s operating results in the Consolidated Income Statement. The amounts of (income) or expense attributed to the company by IBM for the three and six months ended June 30, 2020 and 2019 were not material.

Charges from IBM to the company in relation to these plans (including non pension post retirement benefits) are limited to service costs and defined contribution cost. Contributions to multiemployer and defined contribution plans and any other types of cost are the responsibility of IBM.

Multiple-employer Plans:

For multiple-employer plans (mainly in Germany, Spain and Japan), assets and obligations are based on actuarial valuations or allocations and are recorded in the Consolidated Balance Sheet.

Any gains or losses recorded to AOCI in the three and six months ended ~~March 31~~June 30, 2020 and 2019, were not material.

Costs related to multiple-employer plans are recorded in the company’s operating results in the Consolidated Income Statement. The total costs for multiple-employer plans for the three months ended March 31, 2020 and 2019 were not material. 27

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Notes to Consolidated Financial Statements — (continued)

Costs related to multiple-employer plans are recorded in the company’s Consolidated Income Statement. The total costs for multiple-employer plans for the three and six months ended June 30, 2020 and 2019, were not material.

14. Relationship with IBM and Related Party Transactions:

IBM Credit is a captive finance company and an indirect, wholly owned subsidiary of IBM. IBM Credit generally conducts its financing activities with IBM on an 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 Credit and IBM, regarding support, operating, borrowing, licensing, service and other arrangements.

Support Agreement

Pursuant to a Support Agreement between IBM and IBM Credit, IBM has agreed to retain, directly or indirectly, beneficial ownership of at least 51 percent of the equity voting interests in the company at all times. IBM has also agreed to cause the company to have a minimum consolidated tangible net worth of at least $50 million on the last day of each of the company’s fiscal years (with consolidated tangible net worth for purposes of this discussion of the Support Agreement understood to mean (a) the total assets of IBM Credit and its consolidated subsidiaries less (b) the intangible assets and total liabilities of IBM Credit and its consolidated subsidiaries). IBM has also agreed to cause the company to maintain a leverage ratio not to exceed 11 to 1 for each of the company’s fiscal quarters. Leverage ratio for purposes of this discussion of the Support Agreement is 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 (refer to page 3032 of this Form 10-Q). In the event that the company’s leverage ratio at the end of any fiscal quarter is higher than 11 to 1, then, upon demand by the company, IBM has agreed to make or cause to be made a capital contribution to the company in an amount sufficient to cause the company’s leverage ratio to not exceed 11 to 1. The Support Agreement is not a guarantee by IBM of any indebtedness, other obligation, or liability of any kind of IBM Credit.

Operating Relationship

The company originates financing with end-user clients, which are primarily IBM customers that elect to finance their acquisition of IBM’s hardware, software, and services.

~~The~~Within the Client Financing segment, the company participates in receivables from IBM for certain long-term financing receivables generated from IBM’s Total Solution Offerings in certain countries as well as for certain government and other contracts. The company carries the credit risk of IBM’s clients for all participated receivables from IBM. These receivables earned interest income of $5154 million and $105 million in the three and six months ended ~~March 31~~June 30, 2020, respectively, an increase of $17 million and an increase of $8 million as compared to the same ~~period~~periods in 2019, respectively. The interest income is included in the Consolidated Income Statement as financing revenue. For additional information, see note 6, “Financing Receivables, Receivables Purchased/Participated from IBM.”

~~Within~~In ~~the~~addition, ~~Commercial~~within Client Financing, ~~segment~~in certain countries, the company ~~purchases~~provides ~~interests~~loans to IBM, primarily in ~~certain~~support ~~short-term~~of ~~receivables~~IBM’s atGlobal aTechnology ~~discount~~Services ~~for~~segment’s acquisition of IT assets, which ~~IBM~~it ~~Credit~~uses ~~LLC~~in ~~assumes~~external, revenue-producing services contracts. This financing is included in the ~~associated~~Consolidated ~~credit~~Balance ~~risk~~Sheet ofas ~~IBM’s~~financing ~~clients~~receivables from IBM. InFor the ~~second~~three ~~quarter~~months ofended ~~2019~~June 30, 2020, the ~~company~~interest ~~suspended~~income ~~the~~earned ~~program~~from ~~under~~these ~~which~~receivables itwas ~~purchases~~$26 ~~interests~~million, ina ~~IBM's~~decrease ~~trade~~of ~~accounts~~$19 ~~receivable.~~million Asas acompared ~~result,~~to ~~for~~the same period in 2019. For the ~~three~~six months ended ~~March 31~~June 30, 2020, ~~finance~~interest income earned ~~from these receivables~~ was $460 million, a decrease of $1129 million as compared to the same period in 2019. The declines in both periods were primarily driven by a decline in interest rates. The interest income is included in financing revenue in the Consolidated Income Statement. The amount of such financings outstanding was $3,735 million at June 30, 2020 and $3,870 million at December 31, 2019.

27Within the Commercial Financing segment, the company purchases interests in certain short-term receivables at a discount for which IBM Credit LLC assumes the associated credit risk of IBM’s clients. In the second quarter of 2019, the company suspended the program under which it purchases interests in IBM's trade accounts receivable. As a result,

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Notes to Consolidated Financial Statements — (continued)

Infor ~~certain countries,~~ the ~~company~~three ~~provides~~months ~~loans~~ended toJune 30, ~~IBM~~2020, ~~primarily~~finance inincome ~~support~~earned offrom ~~IBM’s~~these ~~Global~~receivables ~~Technology~~was ~~Services~~$2 ~~segment’s acquisition of IT assets~~million, ~~which~~a itdecrease ~~uses~~of in$6 ~~external,~~million ~~revenue-producing~~as ~~services~~compared ~~contracts.~~to ~~This~~the ~~financing~~same isperiod ~~included~~ in ~~the Consolidated Balance Sheet as financing receivables from IBM~~2019. For the ~~three~~six months ended ~~March 31~~June 30, 2020, ~~the~~finance ~~interest~~ income earned from these receivables was $346 million, a decrease of $1017 million as compared to the same period in 2019. Interest income is included in financing revenue in the Consolidated Income Statement. The amount of such financings outstanding was $3,771 million at March 31, 2020 and $3,870 million at December 31, 2019.

~~The~~In ~~amount~~addition, ofwithin ~~other~~Commercial ~~receivables~~Financing, ~~from~~the ~~IBM~~company ofprovides ~~$742~~financing ~~million~~which ~~and~~includes ~~$513~~an ~~million~~interest atfree ~~March~~period 31to suppliers, ~~2020~~distributors and ~~December~~resellers ~~31, 2019, respectively, primarily relate to the investment~~ of aIBM ~~portion~~products ofand ~~the company's excess cash in short-term interest bearing accounts with IBM~~services, which ~~can~~is befunded ~~withdrawn~~by ~~upon demand~~IBM. ~~The~~Fee ~~company's~~income ~~investment~~earned offrom ~~excess~~these ~~cash~~arrangements ~~with~~for ~~IBM~~the ~~was~~three ~~$736~~months ~~million~~ended ~~at March 31~~June 30, 2020 ~~and~~was $~~509~~24 million ~~at December 31~~, ~~2019.~~a ~~The~~decrease ~~investment~~ of ~~excess~~$9 ~~cash~~million ~~with~~as ~~IBM~~compared isto ~~presented~~the insame ~~other~~period ~~receivables from IBM~~ in ~~the~~2019. ~~Consolidated~~Fee ~~Balance~~income ~~Sheet~~earned ~~and~~for in the ~~investing~~six ~~section~~months ofended ~~the~~June 30, ~~Consolidated~~2020 ~~Statement~~was of$65 ~~Cash~~million, ~~Flows.~~a ~~Interest~~decrease ~~income~~of ~~earned from these investments was~~ $217 million ~~and~~as $8compared ~~million~~to in the ~~three~~same ~~months~~period ~~ended~~in ~~March 31, 2020 and~~ 2019~~, respectively~~. ~~The~~These ~~interest~~fees ~~income~~are is included in financing revenue in the Consolidated Income Statement and are deferred and recognized over the term of the financing arrangement.

InThe ~~addition~~amount of other receivables from IBM of $792 million and $513 million at June 30, ~~within~~2020 ~~Commercial~~and ~~Financing~~December 31, 2019, respectively, primarily relate to the ~~company~~investment ~~provides~~of ~~financing~~a ~~which~~portion ~~includes~~of anthe company's excess cash in short-term interest ~~free~~bearing ~~period~~accounts towith ~~suppliers~~IBM, ~~distributors~~which can be withdrawn upon demand and ~~resellers~~is presented in the investing section of the Consolidated Statement of Cash Flows. The company's investment of excess cash with IBM ~~products~~was ~~and~~$781 ~~services~~million at June 30, ~~which~~2020 isand ~~funded~~$509 bymillion ~~IBM~~at December 31, 2019. ~~Fee~~Interest income earned from these ~~arrangements~~investments ~~for~~was $1 million and $2 million in the three and six months ended ~~March 31~~June 30, 2020, ~~was~~respectively. ~~$41~~Interest ~~million,~~income aearned ~~decrease~~for ofthese investments was $7 million asand ~~compared~~$15 tomillion for the ~~same~~three ~~period~~and insix months ended June 30, 2019, respectively. ~~These~~The ~~fees~~interest ~~are~~income is included in financing revenue in the Consolidated Income Statement ~~and are deferred and recognized over the term of the financing arrangement~~.

Borrowing Relationship

The company has a credit facility with IBM that allows the company to obtain short-~~term~~ and long-term funding. These loans are included in the Consolidated Balance Sheet as debt payable to IBM. Interest expense incurred on loans from IBM was $4935 million and $7484 million for the three and six months ended ~~March~~June 30, 2020, 31respectively, ~~2020~~as compared to $58 million and $131 million for the three and six months ended June 30, 2019, respectively. Interest expense is included in financing cost in the Consolidated Income Statement. For additional information on short-term and long-term funding, see note 8, “Borrowings.”

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. 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 intangible assets in its business. In addition, the company conducts its global operations primarily from IBM leased or IBM owned facilities. For these support services and occupancy expenses, IBM charged the company $3438 million and $4854 million in the three months ended ~~March~~June 30, 312020 and 2019, respectively, and $72 million and $102 million for the six months ended June 30, 2020 and 2019, respectively.

The company participates in the various IBM stock-based compensation plans, including awards of Restricted Stock Units and Performance Share Units. In addition, the company participates in certain multiemployer retirement-related and defined contribution plans that are sponsored by IBM. Amounts charged by IBM to the company related to stock-based compensation, multiemployer retirement-related and defined contribution plans during the periods reported were not material.

Expenses related to the services discussed above are included in selling, general and administrative expense in the Consolidated Income Statement. These expenses may not be indicative of the expenses that IBM Credit will incur in the future, or would have incurred if the company had obtained these services from a third party.

The outstanding amount of accounts payable to IBM of $~~813~~931 million at ~~March 31~~June 30, 2020, and $336 million at December 31, 2019, primarily relate to unsettled purchases of equipment or receivables/loans (for software and services) from IBM. This payable account is non-interest bearing, short term in nature and is expected to be settled in the normal course of business.

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Notes to Consolidated Financial Statements — (continued)

The company sells equipment returned from lease 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 equipment at a pre-negotiated price, which is a function of the discounted value of the scheduled future lease payments and the residual value. The company's net profit from sales of returned equipment to IBM was $319 million and $27 million for the three months ended ~~March 31~~June 30, 2020 and 2019, respectively. The company's net profit from sales of returned equipment to IBM was $21 million and $9 million for the six months ended June 30, 2020 and 2019 respectively. These sales are recorded net in other (income) and expense in the Consolidated Income Statement.

Tax Sharing Agreement

The company’s U.S. federal and certain state and foreign operations are included in various IBM consolidated tax returns; and, in such cases, IBM makes payments to tax authorities on the company’s behalf. IBM and the company maintain a Tax Sharing Agreement for any operations included in an IBM consolidated tax return, pursuant to which IBM charges the company for any taxes owed and reimburses the company for any tax attributes generated. Such charges or reimbursements are based upon a calculation of the company’s relevant pro forma stand-alone tax return.

In the first quarter of 2020, the company reported a benefit from income taxes of $13 million and an effective tax rate of negative 10.1 percent, compared to a provision of $150 million and an effective tax rate of 77.5 percent in the first quarter of 2019. The year-to-year change in the effective tax rate was primarily driven by a $40 million discrete tax benefit in the first quarter of 2020, attributable to a valuation allowance release on deferred tax assets, as compared to an additional tax expense of $116 million in the first quarter of 2019 related to U.S. tax reform.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2020

Financial Results Summary -— Three Months Ended ~~March 31~~June 30:


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2020			2019			Change
For the three months ended June 30:	2020			2019			Change
Revenue	$	~~337~~279		$	~~482~~410		(3032.20)	%
Net margin	$	~~201~~177		$	~~277~~230		(2723.60)	%
Net margin percentage		5963.6	%		5756.42	%	27.24	pts.
Total expense and other (income)	$	7274		$	8394		(1321.79)	%
Income before income taxes	$	~~128~~104		$	~~193~~136		(3323.68)	%
Provision for/(benefit from) income taxes	$	(13)		$	150		NM
Provision for income taxes	$	15		$	23		(36.1)	%
Net income	$	~~141~~89		$	43113		~~225~~(21.72)	%
Net income margin		4231.09	%		927.06	%	334.03	pts.

NM - Not Meaningful


					Yr.-to-Date
	At March 31,		At December 31,		Percent
(Dollars in millions)	2020		2019		Change
Assets	$	25,700	$	28,412	(9.5)	%
Liabilities	$	23,255	$	25,726	(9.6)	%
Member’s interest	$	2,445	$	2,686	(9.0)	%

Financial Performance Summary — Three Months Ended June 30:

In the second quarter of 2020, the company delivered revenue of $279 million and net income of $89 million, compared to revenue of $410 million and net income of $113 million in the same period of 2019.

Total revenue declined $131 million, or 32.0 percent, in the second quarter of 2020 as compared to the same period in 2019, driven by a decrease in financing revenue of $115 million, or 33.8 percent, and by a decline in operating lease revenue of $16 million, or 23.2 percent. The decrease in financing revenue primarily reflects the wind down of OEM IT Commercial Financing operations. The decline in operating lease revenue was due to a lower average asset balance when compared to the prior-year period.

~~Debt-~~In the second quarter of 2020, net margin, which is calculated as revenue minus financing cost and depreciation of equipment under operating lease, was $177 million, a decrease of 23.0 percent when compared to~~-Equity~~ the same period in 2019. The decline in revenue was partially offset by decreases in financing cost and depreciation expense of $64 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 63.6 percent in the second quarter of 2020 increased 7.4 points as compared to the net margin percentage in the same period in 2019.

Total expense and other (income) of $74 million in the second quarter of 2020 decreased $21 million, or 21.9 percent, compared to the same period in 2019.

Pre-tax income of $104 million in the second quarter of 2020 decreased 23.8 percent as compared to the second quarter of 2019. The pre-tax income margin in the second quarter of 2020 of 37.2 percent increased on a year-to-year basis by 4.0 points.

The effective tax rate was 14.2 percent in the second quarter of 2020, a decrease of 2.8 points compared to the second quarter of 2019.

Net income of $89 million decreased $24 million, or 21.2 percent, in the second quarter of 2020 as compared to the same period in 2019. In the second quarter of 2020, net income margin was 31.9 percent, an increase of 4.3 points on a year-to-year basis.

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	At March 31,		At December 31,
	2020		2019
Debt-to-equity ratio*	8.8	x	9.0	x

Management Discussion – (continued)

Net cash provided by operating activities of $31 million in the second quarter of 2020 increased by $93 million when compared to the prior-year period, primarily driven by lower net cash payments to IBM related to accounts payable. Net cash provided by investing activities of $983 million in the second quarter of 2020 decreased by $4,641 million when compared to the prior-year period, primarily driven by a decrease in cash provided by short-term financing receivables which reflects the wind down of OEM IT Commercial financing operations, partially offset by a sale of financing receivables. Net cash used in financing activities of $910 million in the second quarter of 2020 was lower by $4,498 million when compared to the prior-year period, primarily driven by lower net settlements of debt.

Financial Results Summary — Six Months Ended June 30:


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2020			2019			Change
Revenue	$	615		$	892		(31.0)	%
Net margin	$	378		$	507		(25.5)	%
Net margin percentage		61.4	%		56.9	%	4.5	pts.
Total expense and other (income)	$	145		$	178		(18.1)	%
Income before income taxes	$	232		$	330		(29.5)	%
Provision for income taxes	$	2		$	173		(98.9)	%
Net income	$	231		$	156		47.4	%
Net income margin		37.5	%		17.5	%	19.9	pts.


					Yr.-to-Date
	At June 30,		At December 31,		Percent
(Dollars in millions)	2020		2019		Change
Assets	$	25,389	$	28,412	(10.6)	%
Liabilities	$	23,046	$	25,726	(10.4)	%
Member’s interest	$	2,343	$	2,686	(12.8)	%

Debt-to-Equity


	At June 30,		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)
	Three Months Ended						Six Months Ended
For the three months ended March 31:	2020			2019
	June 30,						June 30,
Net income	$	141		$	43
(Dollars in millions)	2020			2019			2020			2019
Annualized net income		566			174
Net income	$	89		$	113		$	231		$	156
Average equity (1)	$	2,565		$	3,292
Annualized net income (1)	$	356		$	452		$	461		$	313
Return on equity (2)		22.1	%		5.3	%
Average equity (2)*	$	2,394		$	2,944		$	2,491		$	3,103
Return on equity (1)/(2)		14.9	%		15.4	%		18.5	%		10.1	%

~~(1)~~* Average of the ending ~~Member’~~member's interest for the last two quarters and three quarters, for the three and six months ended June 30, respectively.

(2) The company’s return on equity is calculated by dividing annualized net income by the average ending balance of member’s interest for the last two quarters, for the reporting periods presented.

Financial Performance Summary — ~~Three~~ Six Months Ended ~~March 31~~June 30:

In the first ~~quarter~~six months of 2020, the company delivered revenue of $~~337~~615 million and net income of $~~141~~231 million. ~~compared~~In tothe ~~revenue~~first six months of ~~$482~~2019, ~~million~~the ~~and~~company ~~net~~had ~~income~~revenue of $43892 million inand ~~the~~net ~~same~~income ~~period~~ of ~~2019~~$156 million.

3032

Table of Contents

Management Discussion – (continued)

Total revenue ~~decreased~~declined $~~146~~277 million, or 3031.2 0 percent, in the first ~~quarter~~six months of 2020 as compared to ~~the same period in~~ 2019, driven by a decrease in financing revenue of $~~126~~240 million, or 3132.1 3 percent, and by a decline in operating lease revenue of $2036 million, or 2524.6 5 percent. The ~~decrease~~decline in financing revenue primarily reflects the wind down of ~~the~~ OEM IT Commercial Financing operations. The decline in operating lease revenue was due to a lower average asset balance ~~when~~ compared to the same period in the prior year.

In the first quarter of 2020, net margin, which is calculated as revenue minus financing costs and depreciation of equipment under operating lease, was $201 million, a decrease of $76 million, or 27.6 percent, when compared to the same period in 2019. The decline in revenue was partially offset by decreases in financing cost and depreciation expense when compared to the same period in the prior year. The decrease in financing cost was due to lower average asset balances and interest rates. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin percentage of 59.6 percent in the first quarter of 2020 increased 2.2 points as compared to the same period in 2019.

~~Total~~Net ~~expense~~margin ~~and~~in ~~other~~the ~~(income)~~first six months of 2020 was $72378 million, ina decrease of 25.5 percent when compared to the ~~first~~same ~~quarter~~period in 2019. The decline in revenue was partially offset by decreases in financing cost and depreciation expense of ~~2020~~$119 ~~decreased~~million and $1129 million, orrespectively, 13when compared to the same period in the prior year.7 The decrease in financing cost was due to a lower average debt balance and lower interest rates. The decline in depreciation expense was driven by lower average operating lease asset balances. Net margin of 61.4 percent, in the first six months of 2020 increased 4.5 points as compared to the same period in 2019.

~~Pre-tax~~Total expense and other (income) of $~~128~~145 million in the first ~~quarter~~six months of 2020 decreased ~~33.6~~$32 ~~percent~~million, asor 18.1 percent, compared to the ~~first~~same ~~quarter~~period ofin 2019. ~~The pre-tax income margin in the first quarter of 2020 of 38.2 percent decreased on a year-to-year basis by 1.9 points.~~

~~The effective~~ Pre-tax ~~rate~~income ~~was~~of ~~negative~~$232 ~~10.1~~million ~~percent~~ in the first ~~quarter~~six months of 2020, ~~compared~~decreased ~~to 77~~29.5 percent inas compared to the first ~~quarter~~six months of 2019. The ~~year~~pre-~~to-year change in the effective~~ tax ~~rate~~income ~~was primarily driven by a $40 million discrete tax benefit~~ margin in the first ~~quarter~~six months of 2020, ~~attributable~~of to37.8 percent aincreased ~~valuation~~year ~~allowance release on deferred tax assets, as compared~~ to anyear ~~additional~~by ~~tax expense of $116 million in the first quarter of 2019 related to U~~0.S.8 ~~tax reform~~points.

~~Net~~The ~~income~~effective oftax ~~$141~~rate ~~million~~was ~~increased~~0.8 ~~$98~~percent ~~million~~ in the first ~~quarter~~six months of 2020, asa decrease of 51.7 points compared to the ~~same~~first ~~period~~six inmonths of 2019. ~~Return~~The onyear-to-year ~~equity~~change in the effective tax rate was ~~22.1~~primarily ~~percent~~driven by a $40 million discrete tax benefit in the first quarter of 2020, anattributable ~~increase~~to ofa ~~16.8~~valuation ~~points~~allowance ~~when~~release on deferred tax assets, as compared to additional tax expense of $116 million in the ~~prior-year~~first ~~period~~quarter of 2019 related to U.S. tax reform.

The company generated $84 million in cash flow from operating activities in the first quarter of 2020, a decrease of $3 million when compared to the first quarter of 2019. Net cash provided by investing activities of $2,356 million in the first quarter of 2020 increased $784 million when compared to the prior-year period. Net cash used for financing activities of $2,505 million in the first quarter of 2020, increased $595 million when compared to the first quarter of 2019.

31Net income of $231 million increased 47.4 percent in the first six months of 2020 as compared to the same period in 2019. In the first six months of 2020, net income margin of 37.5 percent increased 19.9 points on a year-to-year basis.

Net cash provided by operating activities of $115 million in the first six months of 2020 increased by $89 million when compared to the first six months of 2019, primarily driven by lower net cash payments to IBM related to accounts payable and lower net cash income tax payments. Net cash provided by investing activities of $3,339 million in the first six months of 2020 decreased by $3,857 million when compared to the prior-year period, primarily driven by a decrease in cash provided by short term financing receivables which reflects the wind down of OEM IT Commercial financing operations and a reduction to the cash invested with IBM in the prior year, partially offset by a sale of financing receivables. Net cash used in financing activities of $3,415 million in the first six months of 2020 was lower by $3,903 million when compared to the prior-year period, primarily driven by lower net settlements of debt.

Table of Contents

Management Discussion – (continued)

~~First~~Second Quarter and First Six Months in Review

Results of Operations

Segment Details

The following is an analysis of the reportable segment results for the ~~first~~second quarter and first six months of 2020 versus the ~~first~~second quarter and first six months of 2019. The table below presents each reportable segment’s revenue, net margin, and pre-tax income results.


									Yr.-to-Yr.								Yr.-to-Yr.
	Three Months Ended						~~Yr.-to-Yr.~~		Percent/		Six Months Ended						Percent/
	June 30,						~~Percent/~~		Margin		June 30,						Margin
(Dollars in millions)	2020				2019		~~Margin~~		Change		2020			2019			Change
For the three months ended March 31:	2020			2019			Change
Client Financing
Client Financing
Revenue	$	244			$	292			(16.5)	%	$	522		$	614		(14.9)	%
Revenue	$	279		$	322		(13.4)	%
Net margin		151				151			(0.1)	%		306			321		(4.4)	%
Net margin		156			170		(8.3)	%
Net margin percentage		61.9	%			51.7	%		10.2	pts.		58.7	%		52.2	%	6.4	pts.
Net margin percentage		55.8	%		52.7	%	3.1	pts.
Pre-tax income	$	86			$	96			(10.4)	%	$	182		$	213		(14.5)	%
Pre-tax income	$	95		$	117		(18.4)	%
Pre-tax margin		35.3	%			32.9	%		2.4	pts.		34.9	%		34.7	%	0.2	pts.
Pre-tax margin		34.2	%		36.3	%	(2.1)	pts.
Commercial Financing
Commercial Financing
Revenue	$	35			$	118			(70.1)	%	$	93		$	278		(66.6)	%
Revenue	$	58		$	160		(63.9)	%
Net margin		27				79			(66.5)	%		72			187		(61.7)	%
Net margin		45			107		(58.1)	%
Net margin percentage		75.3	%			67.3	%		8.0	pts.		76.9	%		67.1	%	9.8	pts.
Net margin percentage		77.9	%		67.0	%	10.9	pts.
Pre-tax income	$	18			$	40			(55.7)	%	$	50		$	116		(56.9)	%
Pre-tax income	$	33		$	76		(56.8)	%
Pre-tax margin		50.7	%			34.2	%		16.5	pts.		53.8	%		41.8	%	12.0	pts.
Pre-tax margin		57.1	%		47.7	%	9.4	pts.
Total Segments
Total Segments
Revenue	$	279			$	410			(32.0)	%	$	615		$	892		(31.0)	%
Revenue	$	337		$	482		(30.2)	%
Net margin		177				230			(23.0)	%		378			507		(25.5)	%
Net margin		201			277		(27.6)	%
Net margin percentage		63.6	%			56.2	%		7.4	pts.		61.4	%		56.9	%	4.5	pts.
Net margin percentage		59.6	%		57.4	%	2.2	pts.
Pre-tax income	$	104			$	136			(23.8)	%	$	232		$	330		(29.5)	%
Pre-tax income	$	128		$	193		(33.6)	%
Pre-tax margin		37.2	%			33.2	%		4.0	pts.		37.8	%		36.9	%	0.8	pts.
Pre-tax margin		38.2	%		40.1	%	(1.9)	pts.

Client Financing

Client Financing revenue of $~~279~~244 million in the ~~first~~second quarter of 2020 ~~decreased~~declined $4348 million, or 1316.45 percent, as compared to the same period in 2019. The ~~decrease~~decline was driven by ~~declines~~lower inyields ~~financing~~and ~~revenue~~a ~~and~~decline in operating lease revenue of $2316 million ~~and $20 million, respectively~~. ~~The~~Client ~~decrease~~Financing ~~in financing~~ revenue ~~was~~of ~~driven~~$522 bymillion ~~lower~~in ~~yields and average asset balance, and~~ the ~~decrease~~first insix ~~operating~~months ~~lease~~of ~~revenue~~2020 ~~was~~declined ~~driven~~$92 bymillion, aor ~~lower~~14.9 percent, ~~average~~as ~~asset~~compared ~~balance~~to in the ~~current-year~~same period. ~~Yields~~in ~~from~~2019, ~~any~~primarily ~~category~~driven ofby ~~assets~~lower ~~are~~yields ~~the company’s rate of return on these assets~~ and ~~are~~a ~~calculated~~decline byin ~~dividing~~operating ~~income~~lease ~~from~~revenue ~~these~~of ~~assets~~$36 ~~by the average assets during the period~~million.

Net margin was essentially flat in the second quarter as compared to the prior-year period and decreased $14 million, or 84.3 4 percent, for the six months ended June 30, 2020, as compared to the prior-year period. The decrease ~~was~~in ~~primarily~~net margin for the six-month period was driven by the decline in revenue, partially offset by ~~year-to-year~~ decreases in interest expense and depreciation expense of $1548 million and $1429 million, respectively. The decrease in interest expense was mainly due to lower interest rates compared to the prior-year period.

Pre-tax income indecreased ~~the~~$10 ~~first~~million, ~~quarter~~or of10.4 percent, ~~2020~~and decreased $2131 million, or 1814.4 5 percent, as compared to the ~~same~~prior-year period, infor ~~2019~~the three- and six-month periods ended June 30, 2020, respectively. The year-to-year decrease for the three-month period was driven by higher provisions for credit losses of $1932 million and ~~the~~a decline in net margin ~~of $14 million~~, partially offset by ~~lower SG&A expenses of $7 million and~~ an increase in ~~profit~~gains ~~from~~on ~~sales~~sale of equipment ~~upon lease termination~~ of $618 million. ~~when~~The ~~compared~~ year-to ~~the prior~~-year ~~period.~~decrease ~~The increase in provisions~~ for ~~credit~~the ~~losses~~six-month period was driven by ~~higher~~a ~~unallocated~~decline ~~reserves~~ in ~~EMEA~~net inmargin ~~the~~and ~~current-year~~higher ~~period. For additional information on~~ provisions for credit losses, ~~see~~of ~~note~~$51 6million, ~~“Financing~~partially ~~Receivables,~~offset ~~Receivables~~by ~~Purchased/Participated~~an ~~from~~increase ~~IBM,”~~in togains ~~the~~on ~~Consolidated~~sale ~~Financial~~of ~~Statements~~equipment of $24 million.

3234

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Management Discussion – (continued)

Commercial Financing

Commercial Financing revenue of $5835 million in the ~~first~~second quarter of 2020 ~~decreased~~declined $~~102~~83 million, or 6370.91 percent, as compared to the same period in 2019. Commercial Financing revenue of $93 million in the first six months of 2020 declined $185 million, or 66.6 percent, ~~when~~as compared to the same period in 2019. The decline in both periods reflects the wind down of OEM IT Commercial Financing operations.

Net margin indecreased ~~the~~$53 ~~first~~million, ~~quarter~~or of66.5 percent, ~~2020~~and decreased $62115 million, or 5861.17 percent, ~~when~~as compared to the ~~same~~prior-year period, infor ~~2019~~the three- and six-month periods ended June 30, ~~with~~2020, ~~the~~respectively. ~~decline~~The decreases in both periods were driven by declines in revenue, partially offset by ~~lower~~decreases in interest expense ~~of $40 million~~. The ~~decline~~decreases in ~~revenue~~interest ~~and~~expense ~~lower~~were ~~interest~~due ~~expense~~to ~~primarily~~a ~~reflects~~lower ~~the~~average ~~wind~~debt ~~down~~balance ofand ~~the~~lower ~~OEM~~interest ITrates ~~Commercial~~in ~~Financing~~the ~~operations~~current-year periods.

Pre-tax income in the ~~first~~second quarter of 2020 decreased $4322 million, or 5655.8 7 percent, as compared to the same period in 2019,. The year-to-year decrease was driven by a lower net margin, partially offset by lower SG&A expenses of $23 million. For the ~~decrease~~first six months of 2020, pre-tax income decreased $66 million, or 56.9 percent, as compared to the same period in 2019. The year-to-year decrease was driven by a lower net margin and ~~the~~a prior-year divestiture gain of $16 million, partially offset by lower SG&A expenses of $2346 million,. ~~which~~The ~~was~~decline in ~~line~~SG&A ~~with~~expense for the ~~segment’s~~three ~~performance.~~and ~~For~~six ~~additional~~months ~~information~~ended onJune ~~the divestiture~~30, ~~see~~2020 ~~note~~is 4,in ~~“Divestiture,”~~line towith the ~~Consolidated~~wind ~~Financial~~down ~~Statements~~of OEM IT Commercial Financing operations.

Geographic Revenue

The following ~~table~~ provides revenue performance by geography:.


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2020		2019		Change
For the three months ended June 30:	2020		2019		Change
Revenue	$	~~337~~279	$	~~482~~410	(3032.20)	%
Geographies
Americas	$	~~206~~169	$	~~281~~238	(2629.72)	%
Europe/Middle East/Africa (EMEA)		7560		~~127~~100	(40.91)
Asia Pacific		5650		7471	(2530.01)

Americas revenue of $206 million decreased $75 million, or 26.7 percent, in the first quarter of 2020 as compared to the same period in 2019, primarily driven by declines in financing revenue of $71 million.


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2020		2019		Change
Revenue	$	615	$	892	(31.0)	%
Geographies
Americas	$	375	$	519	(27.8)	%
Europe/Middle East/Africa (EMEA)		135		227	(40.5)
Asia Pacific		106		146	(27.5)

EMEA revenue of $75 million decreased $52 million, or 40.9 percent, in the first quarter of 2020 as compared to the same period in 2019, driven by declines in financing revenue of $44 million, as well as declines in operating lease revenue of $8 million.

Americas revenue of $169 million decreased $70 million, or 29.2 percent, in the second quarter of 2020 compared to the same period in 2019, driven by declines in financing revenue of $67 million. EMEA revenue of $60 million declined $40 million, or 40.1 percent, in the second quarter of 2020 compared to the same period in 2019, driven by declines in financing revenue of $33 million. Asia Pacific revenue of $5650 million decreased $1921 million, or 2530.0 1 percent, in the ~~first~~second quarter of 2020 when compared to the same period in 2019, driven by declines in financing revenue of $1114 million, as well as declines in operating lease revenue of $87 million.

~~The~~Americas ~~decline~~revenue of $375 million decreased $145 million, or 27.8 percent, in ~~financing~~the ~~revenue~~first ~~across~~six ~~all~~months ~~geographies~~of ~~primarily~~2020 ~~reflects~~compared to the ~~wind~~first ~~down~~six months of the ~~OEM~~prior year, ITdriven ~~Commercial~~by ~~Financing~~declines ~~operations~~in financing revenue of $138 million. EMEA revenue of $135 million declined $92 million, or 40.5 percent, driven by declines in financing revenue of $77 million. Asia Pacific revenue of $106 million decreased $40 million, or 27.5 percent, driven by declines in financing revenue of $25 million, as well as declines in operating lease revenue of $15 million.

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Management Discussion – (continued)

The declines in financing revenue across all geographies for the three and six months ended June 30, 2020, primarily reflect the wind down of OEM IT Commercial Financing operations.

Expense

Total Expense and Other (Income)


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2020			2019			Change
For the three months ended June 30:	2020			2019			Change
Total expense and other (income)
Selling, general and administrative	$	7477		$	97		(2420.03)	%
Provisions for credit losses		19			4		367.5
Provisions for/(benefit from) credit losses		27			(8)		NM
Other (income) and expense		(2131)			~~(18)~~5		~~15.1~~NM
Total expense and other (income)	$	7274		$	8394		(1321.79)	%
Total expense-to-revenue ratio		2126.4	%		1723.30	%	43.14	pts.

NM - Not Meaningful

Total expense and other (income) of $72 million decreased $11 million, or 13.7 percent, in the first quarter of 2020 as compared to the same period in 2019. For additional information regarding total expense and other (income), see the following analyses by category.


							Yr.-to-Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2020			2019			Change
Total expense and other (income)
Selling, general and administrative	$	151		$	194		(22.1)	%
Provisions for credit losses		45			(4)		NM
Other (income) and expense		(51)			(13)		294.0
Total expense and other (income)	$	145		$	178		(18.1)	%
Total expense-to-revenue ratio		23.6	%		19.9	%	3.7	pts.

NM - Not Meaningful

Total expense and other (income) of $74 million decreased $21 million, or 21.9 percent, in the second quarter of 2020 as compared to the same period in 2019. For the six months ended June 30, 2020, total expense and other (income) of $145 million decreased $32 million, or 18.1 percent, as compared to the prior-year period. For additional information regarding total expense and other (income), see the following analyses by category.

Selling, General and Administrative


					Yr.-to-Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2020		2019		Change
For the three months ended June 30:	2020		2019		Change
Selling, general and administrative expense:
Selling, general and administrative - other	$	36	$	4638	(215.70)	%
Contracted services		4		35	5(27.05)
Functional support services and other related party expenses		3438		4854	(2830.32)
Total selling, general and administrative expense	$	7477	$	97	(2420.03)	%

SG&A expense decreased $23 million, or 24.0 percent, in the first quarter of 2020 as compared to the first quarter of 2019. Functional support services and other SG&A decreased $13 million and $10 million, respectively, when compared to the prior-year period, in line with the wind down of the OEM IT Commercial Financing operations. For additional information on functional support services, see note 14, “Relationship with IBM and Related Party Transactions,” to the Consolidated Financial Statements.36

Provision for Credit Losses

Provisions for credit losses increased $15 million in the first quarter of 2020

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