UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 001-31369
CIT Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1 CIT Drive, Livingston, New Jersey 07039
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (973) 740-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $0.01 per share............. New York Stock Exchange
5 7/8% Notes due October 15, 2008.................... New York Stock Exchange
Securities registered pursuant to Section 12(g) 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 |X| No ____.
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |X| No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
The aggregate market value of voting common stock held by non-affiliates
of the registrant, based on the New York Stock Exchange Composite Transaction
closing price of Common Stock ($24.65 per share, 210,484,519 shares of common
stock outstanding), which occurred on June 30, 2003, was $5,188,443,393. For
purposes of this computation, all officers and directors of the registrant are
deemed to be affiliates. Such determination shall not be deemed an admission
that such officers and directors are, in fact, affiliates of the registrant. At
February 17, 2004, 211,849,987 shares of CIT's common stock, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List here under the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Portions of the registrant's definitive proxy statement relating to the
2004 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof to the extent described herein.
See pages 105 to 109 for the exhibit index.
TABLE OF CONTENTS
Form 10-K
Item No. Name of Item Page
-------- ------------ ----
Part I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 8
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders............. 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 9
Item 6. Selected Financial Data......................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 7A. Quantitative and Qualitative Disclosure about Market Risk....... 11
Item 8. Financial Statements and Supplementary Data..................... 49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 103
Item 9A. Controls and Procedures......................................... 103
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 104
Item 11. Executive Compensation.......................................... 104
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 104
Item 13. Certain Relationships and Related Transactions.................. 104
Item 14. Principal Accountant Fees and Services.......................... 104
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. .................................................... 105
Signatures ................................................................ 110
Where You Can Find More Information........................................ 111
PART I
Item 1. Business
OVERVIEW
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global commercial and consumer finance company. Founded in 1908, we
provide financing and leasing capital for companies in a wide variety of
industries, including many of today's leading industries and emerging
businesses. We offer vendor, equipment, commercial, factoring, consumer and
structured financing products.
We have broad access to customers and markets through our "franchise"
businesses. Each business focuses on specific industries, asset types and
markets, with portfolios diversified by client, industry and geography. Managed
assets were $49.7 billion, owned financing and leasing assets were $40.1 billion
and stockholders' equity was $5.4 billion at December 31, 2003.
We provide a wide range of financing and leasing products to small,
midsize and larger companies across a wide variety of industries, including
manufacturing, retailing, transportation, aerospace, construction, technology,
communication, and various service-related industries. Our secured lending,
leasing and factoring products include direct loans and leases, operating
leases, leveraged and single investor leases, secured revolving lines of credit
and term loans, credit protection, accounts receivable collection, import and
export financing, debtor-in-possession and turnaround financing, and acquisition
and expansion financing. Consumer lending, conducted in our Specialty Finance
segment, consists primarily of home equity lending to consumers originated
largely through a network of brokers and correspondents.
Transactions are generated through direct calling efforts with borrowers,
lessees, equipment end-users, vendors, manufacturers and distributors and
through referral sources and other intermediaries. In addition, our strategic
business units work together in referring transactions to other CIT units to
best meet our customers' overall financing needs. We also buy and sell
participations in and syndications of finance receivables and/or lines of
credit. From time to time, in the normal course of business, we purchase finance
receivables on a wholesale basis to supplement our origination volume and sell
certain finance receivables and equipment under operating leases to reduce
concentrations, for other balance sheet management purposes, or to improve
profitability.
See page 7 for a glossary of key terms used by management in our business.
Business Segments
We conduct our operations through five strategic business units that
market products and services that satisfy the financing needs of specific
customers, industries, vendors/manufacturers, and markets. During 2003, our
segment reporting was modified and prior periods restated to reflect Equipment
Finance and Capital Finance as separate segments. Previously, these two
strategic business units were combined in the Equipment Financing and Leasing
segment. This updated presentation is consistent with the reporting to
management and is intended to facilitate the analysis of our results by our
financial statement users. Our five business segments are as follows:
o Specialty Finance -- vendor programs, small-ticket commercial
lending and leasing, consumer home equity lending and U.S. Small
Business Administration lending;
o Commercial Finance -- mid- to large-ticket asset-based lending,
factoring;
o Equipment Finance -- diversified, middle market equipment lending
and leasing;
o Capital Finance -- commercial aircraft and rail equipment leasing
and lending; and
o Structured Finance -- advisory services, including transaction
structuring, other specialized investment banking services and
project and other large ticket asset-based financing.
1
The following table summarizes the financing and leasing assets and the
managed assets of our business segments at December 31, 2003 ($ in billions):
Financing and
Leasing Assets Managed Assets
------------------- -------------------
Specialty Finance ........ $ 12.3 30.8% $ 18.7 37.8%
Commercial Finance ....... 10.3 25.8% 10.3 20.8%
Equipment Finance ........ 7.0 17.6% 10.2 20.6%
Capital Finance .......... 7.2 18.0% 7.2 14.5%
Structured Finance ....... 3.1 7.8% 3.1 6.3%
------- ------ ------- ------
Total .................... $ 39.9 100.0% $ 49.5 100.0%
======= ====== ======= ======
Note: Amounts exclude Venture Capital/Equity Investments.
Specialty Finance Segment
The Specialty Finance Segment financing and leasing assets include
small-ticket commercial financing and leasing assets, vendor programs, loans
guaranteed by the U.S. Small Business Administration and consumer home equity
loans. Also included in the owned financing and leasing assets are certain
liquidating portfolios, which include manufactured housing, recreational
vehicles, recreational marine and wholesale inventory finance. During 2003,
Equipment Finance transferred to Specialty Finance approximately $1.1 billion of
financing and leasing assets, primarily consisting of small business loans
guaranteed by the U.S. Small Business Administration.
Specialty Finance forms global relationships with industry-leading
equipment vendors, including manufacturers, dealers and distributors, to deliver
customized asset-based sales and financing solutions in a wide array of vendor
programs. These alliances allow our vendor partners to better focus on their
core competencies, reduce capital needs and drive incremental sales volume. As a
part of these programs, we offer (i) credit financing to the manufacturer's
customers for the purchase or lease of the manufacturer's products, and (ii)
enhanced sales tools to manufacturers and vendors, such as asset management
services, efficient loan processing and real-time credit adjudication.
Higher-level partnership programs provide integration with the vendor's business
planning process and product offering systems to improve execution and reduce
cycle times. Specialty Finance has significant vendor programs in information
technology and telecommunications equipment and serves many other industries
through its global network.
These vendor alliances feature traditional vendor finance programs, joint
ventures, profit sharing and other transaction structures with large,
sales-oriented vendor partners. In the case of joint ventures, Specialty Finance
and the vendor combine financing activities through a distinct legal entity that
is jointly owned. Generally, Specialty Finance accounts for these arrangements
on an equity basis, with profits and losses distributed according to the joint
venture agreement, and purchases qualified finance receivables originated by the
joint venture. Specialty Finance also utilizes "virtual joint ventures," whereby
the assets are originated on Specialty Finance's balance sheet, while profits
and losses are shared with the vendor. These strategic alliances are a key
source of business for Specialty Finance and are generated through
intermediaries and other referral sources, as well as through direct end-user
relationships.
The Specialty Finance small-ticket commercial loan business focuses on
leasing office products, computers, point-of-sale equipment and other technology
products in the United States and Canada. Products are originated through direct
calling on customers and through relationships with manufacturers, dealers,
distributors and other intermediaries.
The home equity unit primarily originates, purchases and services loans
secured by first or second liens on detached, single-family, residential
properties. Products are both fixed and variable-rate closed-end loans, and
variable-rate lines of credit. Customers borrow to consolidate debts, refinance
an existing mortgage, fund home improvements, pay education expenses and other
reasons. Loans are originated through brokers and correspondents with a high
proportion of home equity applications processed electronically over the
Internet via BrokerEdge,(SM) a proprietary system. Through experienced lending
professionals and automation, Specialty Finance provides rapid turnaround time
from application to loan funding, which is critical to broker relationships.
2
Specialty Finance occasionally sells individual loans and portfolios of
loans to banks, thrifts and other originators of consumer loans to maximize the
value of its origination network and to improve overall profitability. Contract
servicing for securitization trusts and other third parties is provided through
a centralized consumer Asset Service Center. Commercial assets are serviced via
several centers in the United States, Canada and internationally. Our Asset
Service Center centrally services and collects substantially all of our consumer
receivables, including loans originated or purchased by our Specialty Finance
segment, as well as loans originated or purchased and subsequently securitized
with servicing retained. The servicing portfolio also includes loans owned by
third parties that are serviced by our Specialty Finance segment for a fee on a
"contract" basis. These third-party portfolios totaled $3.2 billion at December
31, 2003.
Commercial Finance Segment
We conduct our Commercial Finance operations through two strategic
business units, both of which focus on accounts receivable and inventories as
the primary source of security for their lending transactions.
o Commercial Services provides factoring and receivable/collection
management products and secured financing to companies in apparel,
textile, furniture, home furnishings and other industries.
o Business Credit provides secured financing, including term and
revolving loans based on asset values, as well as cash flow and
enterprise value structures to a full range of borrowers from small
to larger-sized companies.
Commercial Services
Total financing and leasing assets were $6.3 billion at December 31, 2003,
or 15.8% of our total financing and leasing assets and 12.7% of managed assets.
Commercial Services offers a full range of domestic and international customized
credit protection, lending and outsourcing services that include working capital
and term loans, factoring, receivable management outsourcing, bulk purchases of
accounts receivable, import and export financing and letter of credit programs.
Financing is provided to clients through the purchase of accounts
receivable owed to clients by their customers, as well as by guaranteeing
amounts due under letters of credit issued to the clients' suppliers, which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable is traditionally known as "factoring" and results in the payment by
the client of a factoring fee which is commensurate with the underlying degree
of credit risk and recourse, and which is generally a percentage of the factored
receivables or sales volume. When Commercial Services "factors" (i.e.,
purchases) a customer invoice from a client, it records the customer receivable
as an asset and also establishes a liability for the funds due to the client
("credit balances of factoring clients"). Commercial Services also may advance
funds to its clients prior to collection of receivables, typically in an amount
up to 80% of eligible accounts receivable (as defined for that transaction),
charging interest on such advances (in addition to any factoring fees) and
satisfying such advances by the collection of receivables. The operating systems
of the clients and Commercial Services are integrated to facilitate the
factoring relationship.
Clients use Commercial Services' products and services for various
purposes, including improving cash flow, mitigating or reducing the risk of
charge-offs, increasing sales and improving management information. Further,
with the TotalSource(SM) product, clients can outsource bookkeeping, collection
and other receivable processing activities. These services are attractive to
industries outside the typical factoring markets. Commercial Services generates
business regionally from a variety of sources, including direct calling efforts
and referrals from existing clients and other referral sources. Accounts
receivable, operations and other administrative functions are centralized.
Business Credit
Financing and leasing assets totaled $4.0 billion at December 31, 2003, or
9.8% of our total financing and leasing assets and 7.9% of managed assets.
Business Credit offers loan structures ranging from asset-based revolving and
term loans secured by accounts receivable, inventories and fixed assets to loans
based on earnings performance and enterprise valuations to mid through
larger-sized companies. Clients use such loans primarily for working capital,
growth, acquisitions, debtor-in-possession financing and debt restructurings.
Business Credit sells and purchases participation interests in such loans to and
from other lenders.
3
Through its variable rate, senior revolving and term products, Business
Credit meets its customer financing needs that are unfulfilled by other sources
of senior debt. Business Credit primarily structures financings on a secured
basis, although its Corporate Finance unit extends loans based upon the
sustainability of a customer's operating cash flow and ongoing enterprise
valuations. Revolving and term loans are made on a variable interest-rate basis
based upon published indices such as LIBOR or the prime rate of interest.
Business is originated regionally via solicitation activities focused upon
various types of intermediaries and referral sources. As a result of the current
economic environment, business volume has returned to more traditional working
capital asset-based lending and acquisition financings and away from debt
restructuring activities. Business Credit maintains long-term relationships with
selected banks, finance companies, and other lenders to both source and
diversify senior debt exposures.
Equipment Finance Segment
The Equipment Finance Segment is a diversified, middle-market secured
equipment lender with a strong market presence throughout North America.
Equipment Finance provides customized financial solutions for its customers,
which include manufacturers, dealers, distributors, intermediaries, and
end-users of equipment. Equipment Finance's financing and leasing assets include
a diverse mix of customers, industries, equipment types and geographic areas. In
2003, Equipment Finance transferred approximately $1.1 billion in financing and
leasing assets to the Specialty Finance segment, primarily consisting of small
business loans guaranteed by the U.S. Small Business Administration.
Primary products in Equipment Finance include loans, leases, wholesale and
retail financing packages, operating leases, sale-leaseback arrangements,
portfolio acquisitions, revolving lines of credit and in-house syndication
capabilities. A core competency for Equipment Finance is assisting customers
with the total life-cycle management of their capital assets including
acquisition, maintenance, refinancing and the eventual liquidation of their
equipment. Equipment Finance originates its products through direct
relationships with manufacturers, dealers, distributors and intermediaries and
through an extensive network of direct sales representatives and business
partners located throughout the United States and Canada. Competitive advantage
is built through an experienced staff that is both familiar with local market
factors and knowledgeable about the industries they serve. Operating
efficiencies are realized through Equipment Finance's two servicing centers
located in Tempe, Arizona, and Burlington, Ontario. These offices centrally
service and collect all loans and leases originated throughout the United States
and Canada.
Equipment Finance is organized into three primary operating units:
Construction and Industrial, Specialized Industries and Canadian Operations. The
Construction and Industrial unit has provided financing to the construction and
industrial industries in the United States for over fifty years. Products
include equipment loans and leases, collateral and cash flow loans, revolving
lines of credit and other products that are designed to meet the special
requirements of contractors, distributors and dealers. The Specialized Industry
unit offers a wide range of financial products and services to customers in
specialized industries such as corporate aircraft, healthcare, food and
beverage, gaming, sports, defense and security, mining and energy, and regulated
industries. Equipment Finance's Canadian unit has leadership positions in the
construction, healthcare, printing, plastics and machine tool industries.
Capital Finance Segment
Capital Finance specializes in providing customized leasing and secured
financing primarily to end-users of commercial aircraft and railcars, including
operating leases, single investor leases, equity portions of leveraged leases,
and sale and leaseback arrangements, as well as loans secured by equipment.
Typical customers are major domestic and international airlines, North American
railroad companies and middle-market to larger-sized companies. New business is
generated through direct calling efforts, supplemented with transactions
introduced by intermediaries and other referral sources. Capital Finance
utilizes special purpose entities ("SPEs") to record certain structured leasing
transactions, primarily aerospace leveraged leases. These SPEs are consolidated
in CIT's financial statements.
Capital Finance has provided financing to commercial airlines for over 30
years, and the commercial aerospace portfolio includes most of the leading U.S.
and foreign commercial airlines. As of December 31, 2003, the commercial
aerospace financing and leasing portfolio was $4.7 billion, consisting of 84
accounts and 209 aircraft with an average age of approximately 6 years.
4
Capital Finance has developed strong direct relationships with most major
airlines and major aircraft and aircraft engine manufacturers. This provides
Capital Finance with access to technical information, which enhances customer
service, and provides opportunities to finance new business. See
"Concentrations" section of "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion of our
aerospace portfolio.
Capital Finance has been financing the rail industry for over 25 years.
Its dedicated rail equipment group maintains relationships with several leading
railcar manufacturers and calls directly on railroads and rail shippers in North
America. The rail portfolio, which totaled $2.4 billion at December 31, 2003,
includes leases to all of the U.S. and Canadian Class I railroads (which are
railroads with annual revenues of at least $250 million) and numerous shippers.
The operating lease fleet includes primarily: covered hopper cars used to ship
grain and agricultural products, plastic pellets and cement; gondola cars for
coal, steel coil and mill service; open hopper cars for coal and aggregates;
center beam flat cars for lumber; and boxcars for paper and auto parts. The
railcar operating lease fleet is relatively young, with an average age of
approximately seven years and approximately 85% (based on net investment) built
in 1994 or later. The rail owned and serviced fleet totals in excess of 55,000
railcars and approximately 500 locomotives.
Capital Finance personnel have extensive experience in managing equipment
over its full life cycle, including purchasing new equipment, maintaining
equipment, estimating residual values and re-marketing via re-leasing or selling
equipment. The unit's equipment and industry expertise enables it to effectively
manage equipment risk. For example, Capital Finance can reacquire commercial
aircraft, if necessary, obtain any required maintenance and repairs for such
aircraft, and re-certify such aircraft with the appropriate authorities. We
manage the equipment, the residual value and the risk of equipment remaining
idle for extended periods of time and, where appropriate, locate alternative
equipment users or purchasers.
Structured Finance Segment
Structured Finance provides specialized investment banking services to the
international corporate finance and institutional finance markets by providing
asset-based financing for large-ticket asset acquisitions, project financing and
related advisory services to equipment manufacturers, corporate clients,
regional airlines, governments and public sector agencies. Communications
(including telecommunication and media), transportation, and the power and
utilities sectors are among the industries that Structured Finance serves.
Structured Finance has a global presence with operations in the United States,
Canada and Europe.
Structured Finance also serves as an origination conduit to its lending
partners by seeking out and creating investment opportunities. Structured
Finance has established relationships with insurance companies and institutional
investors and can arrange financing opportunities that meet asset class, yield,
duration and credit quality requirements. Accordingly, syndication capability
and fee generation are key characteristics of Structured Finance's business.
Structured Finance utilizes SPEs to record certain structured leasing
transactions, including leveraged leases. These SPEs are generally consolidated
in CIT's financial statements.
Structured Finance manages the direct private equity ($101.1 million) and
private fund venture capital ($148.8 million) investment portfolios, which
totaled $249.9 million at December 31, 2003. In our segment reporting, these
results are reflected in Corporate. In 2001, we ceased making new venture
capital investments beyond existing commitments. During the fourth quarter of
2003, we decided to accelerate the liquidation of the direct investment
portfolio via sale. Accordingly, in January 2004, we signed a purchase and sale
agreement to sell the direct private equity portfolio.
Other Segment and Concentration Data
The percentage of total segment operating margin for the year ended
December 31, 2003 by segment is as follows: Specialty Finance -- 48%, Commercial
Finance -- 30%, Equipment Finance -- 8%, Capital Finance -- 7%, and Structured
Finance -- 7%. For the year ended December 31, 2003, approximately 80% of our
revenues were derived from U.S. financing and leasing activities and
approximately 20% were derived from international financing and leasing
activities. Further segment data, including certain income related balances, is
disclosed in "Item 8. Financial Statements and Supplementary Data," Note 21.
5
See "Item 8. Financial Statements and Supplementary Data," Note 5 and the
"Concentrations" section of "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 7A. Quantitative and
Qualitative Disclosures about Market Risk," for a discussion on industry
concentration.
Competition
Our markets are highly competitive with factors that vary based upon
product and geographic region. Competitors include captive and independent
finance companies, commercial banks and thrift institutions, industrial banks,
leasing companies, manufacturers and vendors. Substantial financial services
operations with global reach have been formed by bank holding, leasing, finance
and insurance companies that compete with us. On a local level, community banks
and smaller independent finance and mortgage companies are a competitive force.
Some competitors have substantial local market positions. Many of our
competitors are large companies that have substantial capital, technological and
marketing resources. Some of these competitors are larger than we are and may
have access to capital at a lower cost than we do. Competition was enhanced by a
strong economy and growing marketplace liquidity prior to 2001. During 2002 and
2001, the economy slowed and marketplace liquidity tightened. However, that
trend shifted as the economy showed signs of recovery during 2003. The markets
for most of our products are characterized by a large number of competitors,
although the number of competitors has fallen in recent years as a consequence
of continued consolidation in the industry.
We compete primarily on the basis of pricing, terms and structure. From
time to time, our competitors seek to compete aggressively on the basis of these
factors and we may lose market share to the extent we are unwilling to match
competitor pricing and terms in order to maintain interest margins and/or credit
standards.
Other primary competitive factors include industry experience, client
service and relationships. In addition, demand for our products with respect to
certain industries will be affected by demand for such industry's services and
products and by industry regulations.
Regulation
Our operations are subject, in certain instances, to supervision and
regulation by state, federal and various foreign governmental authorities and
may be subject to various laws and judicial and administrative decisions
imposing various requirements and restrictions, which, among other things, (i)
regulate credit granting activities, including establishing licensing
requirements, if any, in various jurisdictions, (ii) establish maximum interest
rates, finance charges and other charges, (iii) regulate customers' insurance
coverages, (iv) require disclosures to customers, (v) govern secured
transactions, (vi) set collection, foreclosure, repossession and claims handling
procedures and other trade practices, (vii) prohibit discrimination in the
extension of credit and administration of loans and (viii) regulate the use and
reporting of information related to a borrower's credit experience and other
data collection. In addition, (i) CIT Bank, a Utah industrial loan corporation
wholly owned by CIT, is subject to regulation and examination by the Federal
Deposit Insurance Corporation and the Utah Department of Financial Institutions,
(ii) CIT Small Business Lending Corporation, a Delaware corporation, is licensed
by and subject to regulation and examination by the U.S. Small Business
Administration, (iii) The Equipment Insurance Company, a Vermont corporation,
and Highlands Insurance Company Limited, a Barbados company, are each licensed
to enter into insurance contracts and are regulated by the Department of
Insurance in Vermont and Barbados, respectively, (iv) various banking
corporations in France, Italy, Belgium and Sweden, are each subject to
regulation and examination by banking regulators in its home country, and (v)
various broker-dealer entities in Canada, the United Kingdom, and the United
States are each subject to regulation and examination by securities regulators
in its home country.
Employees
CIT employed approximately 5,800 people at December 31, 2003, of which
approximately 4,480 were employed in the United States and approximately 1,320
were outside the United States.
6
Glossary of Key Terms
Term Description
- --------------------------------------------------------------------------------
Average Earning Assets (AEA)........ "AEA" is the average during the reporting
period of finance receivables, operating
lease equipment, finance receivables held
for sale and certain investments, less
credit balances of factoring clients.
Earning assets are those that generate
income, either interest or other revenue.
The average is used for certain key
profitability ratios including return on
AEA and margins as a percentage of AEA.
Average Finance Receivables (AFR)... "AFR" is the average during the reporting
period of finance receivables and
includes loans and finance leases. It
excludes operating lease equipment. The
average is used to measure the rate of
charge-offs for the period.
Average Managed Assets (AMA)........ "AMA" is the average earning assets plus
the average of finance receivables
previously securitized and still managed
by us. The average is used to measure the
rate of charge-offs on a managed basis
for the period to monitor overall credit
performance, and to monitor expense
control.
Derivative Contracts................ Derivatives are entered into to reduce
interest rate or foreign currency risks.
Derivative contracts used by CIT include
interest rate swaps, cross currency swaps
and foreign exchange forward contracts.
Efficiency Ratio.................... The efficiency ratio measures the level
of expenses in relation to revenue
earned, and is calculated as the
percentage of salaries and general
operating expenses to operating margin,
excluding the provision for credit
losses.
Financing and Leasing Assets........ Financing and leasing assets include
loans, capital and finance leases,
leveraged leases, operating leases,
assets held for sale and certain
investments.
Leases -- capital and finance....... Lease designation describing financing
structures whereby substantially all of
the economic benefits and risks of
ownership are passed to the lessee.
Leases -- leveraged................. Similar to capital leases except a third
party, long-term creditor is involved and
provides debt financing. CIT is party to
these lease types as creditor and lessor.
Leases -- tax-optimized leverage.... Tax-optimized leveraged leases, where we
are the lessor, have increased risk in
comparison to other leveraged lease
structures as the creditor in these
structures has a priority recourse to the
leased equipment.
Leases -- operating................. Lease designation where CIT maintains
ownership of the asset, collects rent
payments and recognizes depreciation on
the asset.
Non-GAAP Financial Measures......... Non-GAAP financial measures are balances
that do not readily agree to balances
disclosed in financial statements
presented in accordance with accounting
principles generally accepted in the U.S.
These measures are disclosed to provide
additional information and insight
relative to historical operating results
and financial position of the business.
Non-performing Assets............... Non-performing assets include loans
placed on non-accrual status, due to
doubt of collectibility of principal and
interest, and repossessed assets.
Quality Spreads..................... Interest costs we incur on borrowings in
excess of comparable term U.S. Treasury
rates measured in percentage terms. These
incremental costs typically reflect our
debt credit ratings.
Retained Interest................... The portion of the interest in assets
sold in a securitization transaction that
is retained by CIT.
7
Term Description
- --------------------------------------------------------------------------------
Residual Values..................... Residual values represent the estimated
value of equipment at the end of the
lease term. For operating leases, it is
the value to which the asset is
depreciated at the end of its useful
economic life (i.e. "salvage" or "scrap
value").
Risk Adjusted Margin................ Net finance margin after provision for
credit losses.
Special Purpose Entity (SPE)........ Distinct legal entities created for a
specific purpose. SPEs are typically used
in securitization transactions, joint
venture relationships and certain
structured leasing transactions.
Tangible Equity..................... Tangible stockholders' equity excludes
goodwill and other intangible assets, and
certain other comprehensive income items
and includes preferred capital
securities. Tangible equity is utilized
in leverage ratios and return ratios.
Item 2. Properties
CIT operates in the United States, Canada, Europe, Latin America,
Australia and the Asia-Pacific region. CIT occupies approximately 2.4 million
square feet of office space, substantially all of which is leased. Such office
space is suitable and adequate for our needs and we utilize, or plan to utilize,
substantially all of our leased office space. During 2003, we purchased our
Livingston facility.
Item 3. Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contained allegations that the
registration statement and prospectus prepared and filed in connection with
CIT's 2002 Initial Public Offering ("IPO") were materially false and misleading,
principally with respect to the adequacy of CIT's telecommunications-related
loan loss reserves at the time. The lawsuit purported to have been brought on
behalf of all those who purchased CIT common stock in or traceable to the IPO,
and sought, among other relief, unspecified damages or rescission for those
alleged class members who still hold CIT stock and unspecified damages for other
alleged class members. On June 25, 2003, by order of the United States District
Court, the lawsuit was consolidated with five other substantially similar suits,
all of which had been filed after April 10, 2003 and one of which named as
defendants some of the underwriters in the IPO and certain former directors of
CIT. Glickenhaus & Co., a privately held investment firm, was named lead
plaintiff in the consolidated action.
On September 16, 2003, an amended and consolidated complaint was filed.
That complaint contains substantially the same allegations as the original
complaints. In addition to the foregoing, two similar suits were brought by
certain shareholders on behalf of CIT against CIT and some of its present and
former directors under Delaware corporate law.
CIT believes that the allegations in each of these actions are without
merit and that its disclosures were proper, complete and accurate. CIT intends
to vigorously defend itself in these actions.
In addition, there are various legal proceedings pending against CIT,
which have arisen in the ordinary course of business. Management believes that
the aggregate liabilities, if any, arising from such actions, including the
class action suit above, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of security holders during the
three months ended December 31, 2003.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York Stock Exchange. The following
table sets forth the high and low reported sale prices for CIT's common stock
for each of the quarterly periods in the two years ended December 31, 2003.
2003 2002
-------------------- -------------------
Common Stock Prices High Low High Low
- ------------------- ------- ------- ------- -------
First Quarter .............. $21.90 $16.61 N/A N/A
Second Quarter ............. $24.65 $17.22 N/A N/A
Third Quarter .............. $30.10 $23.97 $23.80(1) $17.98(1)
Fourth Quarter ............. $35.95 $29.50 $22.49 $13.95
- --------------------------------------------------------------------------------
(1) Prices for the period from July 2, 2002 (the first day of trading
subsequent to our IPO) through September 30, 2002.
During the year ended December 31, 2003, for each of the four quarters, we
paid a dividend of $0.12 per share for a total of $0.48 per share. This $0.12
per share quarterly dividend rate was approved by our Board of Directors
following our July 2002 IPO and was paid initially on November 27, 2002 to
shareholders of record on November 15, 2002. From June 2001 until the IPO
(during Tyco's ownership), there were no cash dividends on our common stock.
During January 2004, our Board of Directors increased the quarterly
dividend to $0.13 per share. Our dividend practice is to pay a dividend while
retaining a strong capital base. The declaration and payment of future dividends
are subject to the discretion of our Board of Directors. Any determination as to
the payment of dividends, including the level of dividends, will depend on,
among other things, general economic and business conditions, our strategic and
operational plans, our financial results and condition, contractual, legal and
regulatory restrictions on the payment of dividends by us, and such other
factors as the Board of Directors may consider to be relevant.
As of February 17, 2004, there were 86,541 beneficial owners of CIT common
stock.
All equity compensation plans were approved by our shareholders during
2003, and are summarized in the following table.
Number of securities
remaining available for
Number of securities future issuance under
to be issued Weighted-average equity compensation plans
upon exercise of exercise price of (excluding securities
outstanding options outstanding options reflected in column (a))
-------------------- ------------------- -------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders ...................... 18,766,824 $30.48 14,620,566
We had no equity compensation plans that were not approved by
shareholders. For further information on such plans, including the weighted
average exercise price, see Item 8. Financial Statements and Supplementary Data,
Note 16.
9
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial information
regarding our results of operations and balance sheets. The data presented below
should be read in conjunction with Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures about Market Risk and Item 8. Financial Statements and
Supplementary Data.
At or for At or for At or for
the Year the Three At or for the the Nine At or for the Years Ended
Ended Months Ended Year Ended Months Ended December 31,
December 31, December 31, September 30, September 30, --------------------------
2003 2002 2002 2001 2000 1999
($ in millions, ------------ ------------ ------------ ------------ ------------ -----------
except per share data) (successor) (successor) (successor) (combined) (predecessor) (predecessor)
- ----------------------
Results of Operations
Net finance margin ............. $ 1,357.2 $ 354.4 $ 1,662.5 $ 1,318.8 $ 1,469.4 $ 917.4
Provision for credit losses .... 387.3 133.4 788.3 332.5 255.2 110.3
Operating margin ............... 1,829.2 478.1 1,806.5 1,558.9 2,126.2 1,157.9
Salaries and general operating
expenses ....................... 942.3 242.1 946.4 794.5 1,035.2 516.0
Net income (loss) .............. 566.9 141.3 (6,698.7)(2) 263.3 611.6 389.4
Net income (loss) per
share(1) -- diluted ........ 2.66 0.67 (31.66) 1.24 2.89 1.84
Dividends per share(1) ......... 0.48 0.12 -- 0.25 0.50 0.31
Balance Sheet Data
Total finance receivables ...... $31,300.2 $27,621.3 $28,459.0 $31,879.4 $33,497.5 $31,007.1
Reserve for credit losses ...... 643.7 760.8 777.8 492.9 468.5 446.9
Operating lease equipment, net.. 7,615.5 6,704.6 6,567.4 6,402.8 7,190.6 6,125.9
Total assets ................... 46,342.8 41,932.4 42,710.5 51,349.3 48,689.8 45,081.1
Commercial paper ............... 4,173.9 4,974.6 4,654.2 8,869.2 9,063.5 8,974.0
Variable-rate bank credit
facilities .................. -- 2,118.0 4,037.4 -- -- --
Variable-rate senior notes ..... 9,408.4 4,906.9 5,379.0 9,614.6 11,130.5 7,147.2
Fixed-rate senior notes ........ 19,830.8 19,681.8 18,385.4 17,113.9 17,571.1 19,052.3
Stockholders' equity ........... 5,394.2 4,870.7 4,757.8 5,947.6 6,007.2 5,554.4
Selected Data and Ratios
Profitability
Net income (loss) as a
percentage of AEA ........... 1.58% 1.73% (18.71)% 0.87% 1.50% 1.52%
Net income (loss) as a
percentage of average tangible
stockholders' equity ........ 11.8% 12.5% (160.0)% 8.5% 16.0% 14.2%
Net finance margin as a
percentage of AEA ........... 3.79% 4.34% 4.64% 4.34% 3.61% 3.59%
Efficiency ratio ............... 42.5% 39.6% 36.5% 42.0% 43.8% 41.3%
Salaries and general operating
expenses (excluding
goodwill amortization) as
a percentage of AMA ......... 2.06% 2.18% 2.01% 2.09% 2.01% 1.75%
10
At or for At or for At or for
the Year the Three At or for the the Nine At or for the Years Ended
Ended Months Ended Year Ended Months Ended December 31,
December 31, December 31, September 30, September 30, --------------------------
2003 2002 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------ -----------
($ in millions) (successor) (successor) (successor) (combined) (predecessor) (predecessor)
- ---------------
Credit Quality
60+ days contractual
delinquency as a percentage
of finance receivables ....... 2.16% 3.63% 3.76% 3.46% 2.98% 2.71%
Non-accrual loans as a
percentage of finance
receivables .................. 1.81% 3.43% 3.43% 2.67% 2.10% 1.65%
Net credit losses as a
percentage of AFR ............ 1.77% 2.32% 1.67% 1.20% 0.71% 0.42%
Reserve for credit losses as a
percentage of finance
receivables .................. 2.06% 2.75% 2.73% 1.55% 1.40% 1.44%
Other
Total managed assets ............ $49,735.6 $46,357.1 $47,622.3 $50,877.1 $54,900.9 $51,433.3
Tangible stockholders' equity
to managed assets ............ 10.4% 10.4% 9.9% 8.6% 7.8% 7.7%
Employees ....................... 5,800 5,835 5,850 6,785 7,355 8,255
- --------------------------------------------------------------------------------
(1) Net income (loss) and dividend per share calculations for the periods
preceding September 30, 2002 assume that common shares outstanding as a
result of the July 2002 IPO (basic and diluted of 211.6 million and 211.7
million) were outstanding during such historical periods.
(2) Includes goodwill impairment charge of $6,511.7 million. See "Goodwill and
Other Intangible Assets Impairment and Amortization" in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further information.
Note: See "Background -- 2002 IPO and Ownership Change" in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
information regarding the presentation of selected financial data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
and
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Introduction
CIT is a global commercial and consumer finance company that was founded
in 1908. We provide financing and leasing capital for companies in a wide
variety of industries, offering vendor, equipment, commercial, factoring,
consumer, and structured financing products.
Our primary sources of revenue are interest and rental income related to
collateralized lending and equipment leasing. Finance receivables (loans and
capital leases) and operating lease equipment (operating leases) are the two
major asset types that generate this revenue. In the case of finance receivables
(which are financial assets), the substantive risks and rewards of equipment
ownership have been transferred to the customer and we retain predominantly the
borrower credit risk. With operating lease equipment, we retain the substantive
risks and rewards of equipment ownership. We fund our leasing and lending
activity via the global capital markets, using commercial paper, unsecured term
debt, and securitizations. We refer to the excess of our interest and rental
income over our interest expense as "net finance margin." This revenue is
supplemented by other "non-spread" sources of revenue such as syndication fees,
gains from dispositions of equipment, factoring commissions, servicing of loans
and other fees.
We measure our overall level of profitability with the following metrics:
o Net income as a percentage of average earning assets (AEA);
o Net income per common share (EPS); and
o Net income as a percentage of average tangible equity (ROTE).
11
The keys to enhancing profitability in our business are as follows:
Net Interest Margin -- Our ability to lend money at rates in excess of our
cost of borrowing. We measure this with the following ratios:
o Finance income as a percentage of average earning assets
(AEA); and
o Net finance income as a percentage of AEA.
Funding and Market Rate Risk Management -- Our ability to access funding
sources at competitive rates, which is dependent on the maintenance of
high quality assets, strong capital ratios and high credit ratings. This
profitability key is also a function of interest rate risk management,
where the goal is to substantially insulate our interest margins and
profits from movements in market interest rates and foreign currency
rates. We gauge our funding and interest rate risk management activities
with various measurements, including the following:
o Interest expense as a percentage of AEA;
o Quality spread trends (our interest rate costs over comparable
term U.S. Treasury rates);
o Net finance margin as a percentage of AEA; and
o Various liquidity measurements that are discussed in Liquidity
Risk Management.
Credit Risk Management -- Our ability to evaluate the creditworthiness of
our customers, both during the credit granting process and periodically
after the advancement of funds, and to maintain high quality assets. We
assess our credit risk management activities with the following
measurements:
o Delinquent assets as a percentage of finance receivables;
o Non-performing assets as a percentage of finance receivables;
and
o Net charge-offs as a percentage of average finance
receivables.
Expense Management -- Our ability to maintain efficient operating
platforms and infrastructure in order to run our business at competitive
cost levels. We track our efficiency with the following measurements:
o Efficiency ratio, which is the ratio of salaries and general
operating expenses to operating margin excluding the provision
for credit losses; and
o Operating expenses as a percentage of average managed assets
(AMA).
Equipment and Residual Risk Management -- Our ability to evaluate
collateral risk in leasing and lending transactions and to remarket
equipment at lease termination. We measure these activities with the
following:
o Operating lease margin as a percentage of average leased
equipment;
o Gains and losses on equipment sales; and
o Equipment utilization/value of equipment off lease.
Asset Generation and Growth -- Our ability to originate new business and
build our earning assets in a focused and prudent manner. We measure our
performance in these areas with the following:
o Origination volumes;
o Levels of financing and leasing assets and managed assets
(including finance receivables securitized that we continue to
manage); and
o Levels of non-spread and other revenue.
Capital Management -- Our ability to maintain a strong capital base and
adequate credit loss reserve levels. We measure our performance in these
areas with the following:
o Debt to tangible equity ratio;
o Tangible equity to managed assets ratio; and
o Reserve for credit losses as a percentage of finance
receivables, of delinquent assets, and of non-performing
assets.
12
Profitability and Key Business Trends
In 2003, we improved profitability with each successive quarter. Improved
asset quality, lower funding costs and higher asset levels led to this
improvement.
The weak economy increased defaults and put downward pressure on
collateral values in 2002, particularly in our Equipment Finance segment. In
response, we intensified our credit and collection efforts, selectively
tightened credit underwriting standards and strengthened credit loss reserves.
The combination of these actions, and some economic improvement in the latter
part of 2003, resulted in significant improvement in our credit metrics over
recent quarters.
We restored our funding base and fully repaid our bank lines in 2003. We
achieved consistent access to both the commercial paper and term debt markets
and we benefited from the significant reduction of our term debt quality spreads
(interest rate cost over U.S. treasury rates) to pre-2002 levels. Our funding
base was disrupted in 2002 following our former parent's announcement of its
break-up plan and intent to sell CIT.
During 2003, we focused on core markets served through our strategic
businesses. Organic growth has been modest, consistent with the economic
environment. As a result, we have supplemented growth with strategic portfolio
purchases that integrate well with our existing business platforms and meet our
financial return requirements. During the year ended December 31, 2003, we
completed the acquisition of a railcar leasing portfolio, and the purchase of
two significant factoring portfolios. Focused, prudent growth continues to be a
primary goal for 2004.
We have been liquidating several non-strategic product lines. These
include owner-operator trucking, franchise, manufactured housing, recreational
vehicle and inventory finance loans, which totaled $1,173 million at December
31, 2003, compared to $1,674 million at December 31, 2002 and $1,802 million at
September 30, 2002. Included in these balances are venture capital investments.
During the fourth quarter of 2003, we decided to accelerate the liquidation of
the direct investment venture capital portfolio via sale, which resulted in a
pre-tax fair value write-down of $63.0 million. We announced on January 15, 2004
that we signed a purchase and sale agreement for the disposition of the direct
investment portfolio at a price that approximates the December 31, 2003 book
value.
Our profitability measurements for the respective periods are presented in
the table below:
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Net income per diluted share(1) ......... $2.66 $0.67 $(31.66) $1.24
Net income as a percentage of AEA ....... 1.58% 1.73% (18.71%) 0.87%
Return on average tangible equity ....... 11.8% 12.5% (160.0%) 8.5%
- --------------------------------------------------------------------------------
(1) Earnings per diluted share calculations for the periods preceding
September 30, 2002 assume that diluted common shares outstanding as a
result of the July 2002 IPO ($211.7 million) were outstanding during such
historical periods.
The following table summarizes the impact of various items for the
respective reporting periods that affect the comparability of our financial
results under GAAP. We are presenting these items as a supplement to the GAAP
results to facilitate the comparability of results between periods. During 2003,
we recognized a gain on the redemption of certain debt instruments and took a
charge to write-down certain direct private equity investments to estimated fair
value following our decision to accelerate the liquidation of this portfolio via
a sale. In 2002 and 2001, we took specific reserving actions and recorded other
charges. These transactions are significant, and the exclusion thereof aids in
the analysis of results over the periods presented. The adoption of SFAS No.
142, "Goodwill and Other Intangible Assets" in October 2001 eliminated goodwill
amortization and introduced goodwill impairment charges. The impairment charge
in the period ended September 30, 2002 was a non-cash
13
charge and did not impact our tangible capital. The TCH results relate to a Tyco
acquisition company that had temporary status with respect to Tyco's acquisition
of CIT. For these reasons, we believe that this table, in addition to the GAAP
results, aids in the analysis of the significant trends in our business over the
periods presented ($ in millions):
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Net income/(loss) GAAP basis ...................... $566.9 $141.3 $(6,698.7) $263.3
Charges/(gains) included in net income/loss
Venture capital losses/(gains) .................. 53.9 3.9 25.0 (3.7)
Gain on debt redemption ......................... (30.8) -- -- --
Goodwill impairment ............................. -- -- 6,511.7 --
Goodwill amortization ........................... -- -- -- 92.5
Specific reserving actions and other charges .... -- -- 220.1 158.0
TCH losses ...................................... -- -- 723.5 70.5
------ ------ --------- ------
Net Income -- before charges/gains ................ $590.0 $145.2 $ 781.6 $580.6
====== ====== ========= ======
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosure about Market
Risk" contain certain non-GAAP financial measures. See "Non-GAAP Financial
Measurements" for additional information. The sections that follow analyze our
results by financial statement caption and are referenced back to the
profitability keys that are discussed in "Introduction."
Net Finance Margin
An analysis of net finance margin is set forth below ($ in millions):
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Finance income .................................. $ 3,729.5 $ 971.7 $ 4,342.8 $ 3,975.3
Interest expense ................................ 1,319.3 340.0 1,439.3 1,619.8
--------- --------- --------- ---------
Net finance income ............................ 2,410.2 631.7 2,903.5 2,355.5
Depreciation on operating lease equipment ....... 1,053.0 277.3 1,241.0 1,036.7
--------- --------- --------- ---------
Net finance margin ............................ $ 1,357.2 $ 354.4 $ 1,662.5 $ 1,318.8
========= ========= ========= =========
Average Earnings Asset ("AEA") .................. $35,813.4 $32,693.2 $35,796.4 $40,442.0
========= ========= ========= =========
As a % of AEA:
Finance income .................................. 10.41% 11.89% 12.13% 13.10%
Interest expense ................................ 3.68% 4.16% 4.02% 5.34%
--------- --------- --------- ---------
Net finance income ............................ 6.73% 7.73% 8.11% 7.76%
Depreciation on operating lease equipment ....... 2.94% 3.39% 3.47% 3.42%
--------- --------- --------- ---------
Net finance margin ............................ 3.79% 4.34% 4.64% 4.34%
========= ========= ========= =========
We utilize these ratios and trends to assess our funding and market risk
management activities. Finance income for 2003 reflected the continued decline
in market interest rates. However, interest expense did not decline directly
with the corresponding drop in market interest rates due to the use of bank
lines (drawn in 2002) for part of 2003, term debt issued in 2002 at wider credit
spreads and excess cash maintained for liquidity purposes. Therefore, net
finance margin as percentage of AEA decreased in 2003 from the prior periods.
Finance income (interest on loans and lease rentals) as a percentage of
AEA declined in each period since 2001. This primarily reflected the drop in
U.S. treasury rates of approximately 275 basis points from the first quarter of
2002 through the second quarter of 2003. Reduced operating lease rentals, as
discussed further below, also contributed to the decline.
Interest expense as a percentage of AEA also declined since 2001, as the
favorable impact of lower market interest rates was partially offset by wider
borrowing spreads and the resultant higher cost of funding done
14
following the funding base disruption. At December 31, 2003, $4.2 billion in
outstanding commercial paper was fully supported by undrawn bank facilities. At
December 31, 2002, September 30, 2002 and September 30, 2001, commercial paper
outstanding was $5.0 billion, $4.7 billion and $8.9 billion, respectively, while
drawn commercial bank lines were $2.1 billion, $4.0 billion and $0,
respectively.
Net finance margin as a percentage of AEA improved modestly in 2002 over
2001, as the benefit of a number of positive factors were mitigated by the
impact of wider credit spreads and the other factors mentioned above that
followed the 2002 funding base disruption and continued into 2003. The
liquidation or disposal of non-strategic and under-performing businesses, lower
leverage and the effect of fair value adjustments in the new basis of accounting
(recorded as adjustments to goodwill) to reflect market interest rates on debt
and assets were among the positive factors. AEA declined during 2002 due to
increased securitization activity, the runoff of non-strategic, liquidating
portfolios and the slower economy, while the renewed focus on asset growth
during the current year led to the increase in AEA led to the 2003 increase.
The following table summarizes the trend in our quality spreads in
relation to 5-year U.S. treasuries. Amounts are in basis points and represent
the average spread or cost of funds over comparable term U.S. Treasury
securities:
Year Three Months Year Nine Months Year
Ended Ended Ended Ended Ended
December 31, December 31, September 30, September 30, December 31,
2003 2002 2002 2001 2000
------------ ------------ ------------- ------------- ------------
Average spread over
U.S. Treasuries ................. 138 302 313 147 154
Since our 2002 IPO, we have readily accessed the term markets, issuing
$17.0 billion in term debt, comprised of $9.5 billion in floating-rate debt and
$7.5 billion in fixed-rate debt. As the table shows, our borrowing spreads have
recently returned to near historical levels. The funding base disruption in the
first half of 2002 resulted in a period of increased funding cost with our
borrowing spreads being higher than traditionally experienced.
On February 13, 2004, we issued $750 million of 10-year senior fixed-rate
notes at 103 basis points over U.S. Treasuries.
Operating Leases
The table below summarizes operating lease margin, both in amount and as a
percentage of average operating lease equipment ($ in millions):
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Rental income ................................... $1,480.3 $ 389.7 $1,733.4 $1,473.1
Depreciation expense ............................ 1,053.0 277.3 1,241.0 1,036.7
-------- -------- -------- --------
Operating lease margin ........................ $ 427.3 $ 112.4 $ 492.4 $ 436.4
======== ======== ======== ========
Average operating lease equipment ............... $7,241.1 $6,605.0 $6,554.8 $7,114.6
======== ======== ======== ========
As a % of Average Operating
Lease Equipment:
Rental income ................................... 20.4% 23.6% 26.4% 27.6%
Depreciation expense ............................ 14.5% 16.8% 18.9% 19.4%
-------- -------- -------- --------
Operating lease margin .......................... 5.9% 6.8% 7.5% 8.2%
======== ======== ======== ========
These trends and ratios are measurements of our equipment risk management
activities. The decline in operating lease margin and its components for the
above periods reflects lower rentals on the aerospace portfolio due to the
commercial airline industry downturn and the simultaneous change in equipment
mix to a greater proportion of aircraft and rail assets with an average
depreciable life of 25 and 40 years, respectively, from smaller-ticket assets
with lives generally of 3 years in the Specialty Finance and Equipment Finance
portfolios.
15
The following table summarizes the total operating lease portfolio by
segment ($ in millions).
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------ ------------
Capital Finance -- Aerospace ........... $4,011.7 $3,129.8 $2,949.6 $1,968.6
Capital Finance -- Rail and Other ...... 2,092.1 1,590.1 1,439.3 1,303.8
Specialty Finance ...................... 959.5 1,257.3 1,353.2 1,796.1
Equipment Finance ...................... 419.6 668.3 765.8 1,281.7
Structured Finance ..................... 132.6 59.1 59.5 52.6
-------- -------- -------- --------
Total .................................. $7,615.5 $6,704.6 $6,567.4 $6,402.8
======== ======== ======== ========
o The increases in the Capital Finance aerospace portfolio reflects
deliveries of new commercial aircraft.
o The increase in Capital Finance rail assets in 2003 was due to an
acquisition.
o The declines in the Specialty Finance and Equipment Finance
operating lease portfolios are a result of the continued trend
toward financing equipment through finance leases and loans in these
segments.
o The 2003 Structured Finance increase was primarily in the regional
aerospace portfolio.
Management strives to maximize the profitability of the lease equipment
portfolio by balancing equipment utilization levels with market rental rates and
lease terms. Equipment not subject to lease agreements totaled $265.9 million,
$385.9 million, and $267.3 million at December 31, 2003 and 2002, and September
30, 2002, respectively. The higher December 31, 2002 off lease equipment balance
primarily reflects the higher level of commercial aircraft and rail assets off
lease in Capital Finance at that time. The current weakness in the commercial
airline industry and the slower economy could adversely impact prospective
rental and utilization rates.
Net Finance Margin after Provision for Credit Losses (Risk Adjusted Margin)
The following table summarizes risk adjusted margin, both in amount and as
a percentage of AEA ($ in millions):
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Net Finance Margin .................... $ 1,357.2 $ 354.4 $ 1,662.5 $ 1,318.8
Provision for credit losses ........... 387.3 133.4 788.3 332.5
--------- ------- --------- ---------
Risk adjusted margin ................ $ 969.9 $ 221.0 $ 874.2 $ 986.3
========= ======= ========= =========
As a percentage of AEA:
Net Finance Margin .................... 3.79% 4.34% 4.64% 4.34%
Provision for credit losses ........... 1.08% 1.64% 2.20% 1.09%
--------- ------- --------- ---------
Risk Adjusted Margin .................. 2.71% 2.70% 2.44% 3.25%
========= ======= ========= =========
Excluding the additional credit provisions in 2002 to establish reserves
for the telecommunications and Argentine exposures, and certain 2001 specific
telecommunication provisions, risk adjusted margin as a percentage of AEA was
3.38% for the twelve months ended September 30, 2002, and 3.54% for the combined
nine months ended September 30, 2001. On this basis, the trend down to 2.71% for
the full year 2003 primarily reflects the previously discussed net finance
margin trends.
In conjunction with the June 2001 acquisition-related fresh start
accounting, we used discounted cash flow projection analysis to estimate the
fair value of our various liquidating portfolios by modeling the portfolio
revenues, credit costs, servicing costs and other related expenses over the
remaining lives of the portfolios. These discounts are being accreted into
income as the portfolios liquidate. The positive impact on risk-adjusted margin
due to purchase accounting fair value adjustments related to the liquidating
portfolios were 2 basis points for the year ended December 31, 2003, 13 basis
points for the three months ended December 31, 2002, 13 basis points for the
year ended September 30, 2002, and 5 basis points for the combined nine months
ended September 30, 2001. In addition, risk-adjusted interest margin was
impacted positively due to fair value adjustments to mark receivables
16
and debt to market in conjunction with the Tyco acquisition by approximately 14
basis points for the year ended December 31, 2003, 38 basis points for the three
months ended December 31, 2002, 45 basis points for the twelve months ended
September 30, 2002 and 16 basis points for the combined nine months ended
September 30, 2001.
Other Revenue
The components of other revenue are set forth in the following table ($ in
millions).
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Fees and other income .......................... $586.2 $169.2 $644.5 $387.2
Factoring commissions .......................... 189.8 55.1 165.5 111.9
Gains on securitizations ....................... 100.9 30.5 149.0 97.7
Gains on sales of leasing equipment ............ 70.7 8.7 13.6 47.9
Other charges .................................. -- -- -- (78.1)(1)
------ ------ ------ ------
Total ........................................ $947.6 $263.5 $972.6 $566.6
====== ====== ====== ======
Total Other Revenue as % of AEA ................ 2.65% 3.22% 2.72% 1.87%
====== ====== ====== ======
(1) Includes $19.6 million of write-downs relating to venture capital
investments.
The following table presents information regarding gains on
securitizations ($ in millions):
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Total volume securitized(1) ...................... $5,320.2 $1,189.3 $7,668.5 $3,293.3
Gains ............................................ $ 100.9 $ 30.5 $ 149.0 $ 97.7
Gains as a percentage of volume securitized ...... 1.90% 2.57% 1.94% 2.97%
Gains as a percentage of pre-tax income .......... 10.8% 12.9% 16.9% 15.7%
- --------------------------------------------------------------------------------
(1) Excludes short-term trade receivables securitized for liquidity purposes.
We continue to emphasize growth and diversification of other revenues to
improve our overall profitability.
o Fees and other income include servicing fees, miscellaneous fees,
syndication fees and gains from asset sales. For the year ended
December 31, 2003, fees and other income, while still strong in our
Commercial Finance segment, were derived from more traditional,
smaller working capital asset-based lending facilities and less from
the larger-ticket debtor in possession lending that drove the 2002
activity.
o Higher factoring commissions than in the prior periods reflect both
higher volume and higher commission rates, as well as some impact
from one of the two large acquisitions completed during the second
half of the year.
o Securitization volume, including consumer home equity loans,
increased in 2002 to meet funding and liquidity needs. We have since
returned to more normal securitization levels and have de-emphasized
securitizing home equity loans in light of lower cost,
on-balance-sheet funding. We continue to target maximum
securitization gains at 15% of pretax income.
o Gains on sales of equipment improved sharply from prior periods as
we saw firming of prices during the year, particularly in the
mid-ticket equipment and rail portfolios.
o Other charges in 2001, consisting of write-downs for other than
temporary impairment of certain equity investments in the
telecommunications industry and e-commerce markets, were recorded as
reductions to other revenue.
Losses on Venture Capital Investments
During the fourth quarter of 2003, we decided to accelerate the
liquidation of the venture capital direct investment portfolio and marketed the
portfolio to prospective buyers. The resulting indications of value contributed
to a pre-tax fair value write-down of $63.0 million. We announced on January 15,
2004, that we signed
17
a purchase and sales agreement for the disposition of the direct investment
portfolio at an amount approximating the carrying value at December 31, 2003.
Losses on venture capital investments also include realized losses on both
direct investments and venture capital fund investments for all periods
presented.
Gain on Redemption of Debt
We had $1.25 billion of term debt securities outstanding that were
callable at par in December 2003 and January 2004. These notes were listed on
the New York Stock Exchange under the ticker symbols CIC and CIP and are
commonly known as PINEs ("Public Income Notes"). The securities carried coupon
rates of 8.125% and 8.25%, but were marked down to a yield of approximately 7.5%
in CIT's financial statements through purchase accounting adjustments. In light
of the high coupon rates, we called the securities for redemption pursuant to
the terms outlined in the prospectuses. The December call of $735 million
resulted in a pretax gain of $50.4 million ($30.8 million after tax), as these
securities had been adjusted to reflect market interest rates in conjunction
with the June 2001 new basis of accounting. The call of the remaining $512
million on January 15, 2004 resulted in an additional pretax gain of $41.8
million ($25.5 million after tax), which will be reflected in the first quarter
2004 results.
Provision for Credit Losses
Our provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions).
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Balance beginning of period ....................... $760.8 $777.8 $492.9 $468.5
------ ------ ------ ------
Provision for credit losses ....................... 408.8 133.4 453.3 243.0
Provision for credit losses -- specific
reserving actions(1) ........................... (21.5) -- 335.0 89.5
Reserves relating to dispositions,
acquisitions, other ............................ 17.5 4.1 (11.1) (16.3)
------ ------ ------ ------
Additions to reserve for credit losses, net .... 404.8 137.5 777.2 316.2
------ ------ ------ ------
Net credit losses:
Specialty Finance -- commercial ................... 110.5 23.2 80.3 57.0
Specialty Finance -- Argentina .................... 101.0 -- -- --
Commercial Finance ................................ 74.1 33.5 88.2 38.9
Equipment Finance ................................. 125.7 69.8 258.8 82.6
Capital Finance ................................... 13.1 1.3 0.1 0.2
Structured Finance ................................ 42.0 15.5 18.5 64.8
Specialty Finance -- consumer ..................... 55.5 11.2 46.4 48.3
------ ------ ------ ------
Total net credit losses ........................ 521.9 154.5 492.3 291.8
------ ------ ------ ------
Balance end of period ............................. $643.7 $760.8 $777.8 $492.9
====== ====== ====== ======
Reserve for credit losses as a percentage
of finance receivables ......................... 2.06% 2.75% 2.73% 1.55%
====== ====== ====== ======
Reserve for credit losses as a percentage
of past due receivables (60 days or more)(2) ...... 95.2% 76.0% 72.7% 44.7%
====== ====== ====== ======
Reserve for credit losses as a percentage
of non-performing assets(3) .................... 95.2% 70.1% 68.2% 50.8%
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) The specific reserving actions for the twelve months ended September 30,
2002 consist of provisions relating to telecommunications ($200.0 million)
and Argentine exposures ($135.0 million), while the action for the nine
months ended September 30, 2001 consists of a provision for
under-performing loans and leases, primarily in the telecommunications
portfolio. The ($21.5) provision in 2003 reflects the transfer of specific
Argentine reserves to other portfolio reserves.
(2) The reserve for credit losses as a percentage of past due receivables (60
days or more), excluding telecommunication and Argentine reserves and
corresponding delinquencies, was 80.6% at December 31, 2003, 49.0% at
December 31, 2002 and 45.3% at September 30, 2002.
(3) The reserve for credit losses as a percentage of non-performing assets,
excluding telecommunication and Argentine reserves and corresponding
non-performing assets, was 84.7% at December 31, 2003, 48.9% at December
31, 2002 and 47.2% at September 30, 2002.
18
The decreased provision for the year ended December 31, 2003 in relation
to 2002 reflects lower charge-offs (excluding Argentina) and improving credit
metrics. The increased provision for the year ended September 30, 2002 reflects
higher charge-off levels and reserving actions relating to exposures in the
telecommunications portfolio ($200 million primarily to Competitive Local
Exchange Carriers ("CLECs"), and our Argentine exposure ($135 million, detailed
further below). The 2001 provision includes a provision for credit losses of
$89.5 million relating to the impairment of certain under-performing equipment
leasing and loan portfolios, primarily in the Structured Finance
telecommunications portfolio.
Net Charge-offs
The following table sets forth our net charge-off experience in amount and
as a percentage of average finance receivables by business segment ($ in
millions):
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Specialty Finance-commercial .... $110.5 1.59% $ 23.2 1.55% $ 80.3 1.26% $ 57.0 1.11%
Specialty Finance-Argentina ..... 101.0 75.07% -- -- -- -- -- --
------ ------ ------ ------
Total Specialty Finance-
commercial ................. 211.5 2.98% 23.2 1.55% 80.3 1.26% 57.0 1.11%
Commercial Finance .............. 74.1 0.80% 33.5 1.92% 88.2 1.13% 38.9 0.66%
Equipment Finance ............... 125.7 2.03% 69.8 3.78% 258.8 2.97% 82.6 1.07%
Capital Finance ................. 13.1 1.06% 1.3 0.37% 0.1 0.01% 0.2 0.02%
Structured Finance .............. 42.0 1.44% 15.5 2.24% 18.5 0.75% 64.8 4.40%
------ ------ ------ ------
Total Commercial Segments ..... 466.4 1.75% 143.3 2.33% 445.9 1.65% 243.5 1.13%
Specialty Finance-consumer ...... 55.5 2.01% 11.2 2.24% 46.4 1.78% 48.3 1.72%
------ ------ ------ ------
Total ........................... $521.9 1.77% $154.5 2.32% $492.3 1.67% $291.8 1.20%
====== ====== ====== ======
The 2003 charge-offs include a $101.0 million Argentine write-off,
reflecting the substantial progress of collection and work out efforts in the
Argentine portfolio. Excluding Argentina, charge-offs were 1.44% for 2003,
reflecting improvements in Equipment Finance and Commercial Finance.
o The increased Capital Finance charge-offs were primarily the result
of an $11.3 million charge-off recorded to write down the value of a
waste-to-energy project following bankruptcy proceedings and the
renegotiation of the related contracts.
o The Structured Finance charge-offs continue to be driven by
telecommunication charge-offs.
The higher loss rates in the Commercial Finance segment in 2002 reflect
charge-offs associated with several loan work-outs due to the weaker economic
trends. The higher net charge-off percentages for the year ended September 30,
2002 in relation to 2001 also reflect higher charge-off rates associated with
receivables in liquidation status, which included owner-operator trucking,
franchise, inventory finance, manufactured housing and recreational vehicle
receivables, as well as charge-offs in the telecommunications portfolio.
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown in total and for the Argentine, liquidating and
telecommunication portfolios in the following tables ($ in millions):
Year Ended December 31, 2003
--------------------------------------------------------
Before Argentina, Argentina,
Liquidating and Liquidating and
Total Telecommunications Telecommunications
------------- ------------------ ------------------
Specialty Finance-commercial ........ $211.5 2.98% $108.8 1.56% $102.7 73.33%
Commercial Finance .................. 74.1 0.80% 69.4 0.75% 4.7 36.43%
Equipment Finance ................... 125.7 2.03% 94.8 1.62% 30.9 8.34%
Capital Finance ..................... 13.1 1.06% 13.1 1.06% -- --
Structured Finance .................. 42.0 1.44% 2.9 0.14% 39.1 5.01%
------ ------ ------
Total Commercial Segments ........ 466.4 1.75% 289.0 1.14% 177.4 13.60%
Specialty Finance-consumer .......... 55.5 2.01% 30.2 1.54% 25.3 3.15%
------ ------ ------
Total ............................... $521.9 1.77% $319.2 1.17% $202.7 9.62%
====== ====== ======
19
Three Months Ended December 31, 2002
--------------------------------------------------------
Before Argentina, Argentina,
Liquidating and Liquidating and
Total Telecommunications Telecommunications
------------- ------------------ ------------------
Specialty Finance-commercial ........ $ 23.2 1.55% $ 21.2 1.42% $ 2.0 36.36%
Commercial Finance .................. 33.5 1.92% 33.5 1.92% -- --
Equipment Finance ................... 69.8 3.78% 56.5 3.32% 13.3 9.25%
Capital Finance ..................... 1.3 0.37% 1.3 0.37% -- --
Structured Finance .................. 15.5 2.24% -- -- 15.5 8.75%
------ ------ ------
Total Commercial Segments ........ 143.3 2.33% 112.5 1.93% 30.8 9.44%
Specialty Finance-consumer .......... 11.2 2.24% 6.1 2.11% 5.1 2.42%
------ ------ ------
Total ............................ $154.5 2.32% $118.6 1.94% $ 35.9 6.68%
====== ====== ======
Year Ended September 30, 2002
--------------------------------------------------------
Before Argentina, Argentina,
Liquidating and Liquidating and
Total Telecommunications Telecommunications
------------- ------------------ ------------------
Specialty Finance-commercial ........ $ 80.3 1.26% $ 70.7 1.14% $ 9.6 5.62%
Commercial Finance .................. 88.2 1.13% 88.2 1.13% -- --
Equipment Finance ................... 258.8 2.97% 168.5 2.22% 90.3 8.02%
Capital Finance ..................... 0.1 0.01% 0.1 0.01% -- --
Structured Finance .................. 18.5 0.75% 0.1 0.01% 18.4 2.78%
------ ------ ------
Total Commercial Segments ........ 445.9 1.65% 327.6 1.31% 118.3 6.04%
Specialty Finance-consumer .......... 46.4 1.78% 24.4 1.33% 22.0 2.86%
------ ------ ------
Total ............................ $492.3 1.67% $352.0 1.32% $140.3 5.15%
====== ====== ======
Reserve for Credit Losses
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of corresponding finance receivables
($ in millions):
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
------------------- ------------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
--------- --------- --------- --------- --------- --------- --------- ---------
Finance receivables ...... $524.6 1.71% $472.2 1.77% $473.7 1.72% $492.9 1.55%
Telecommunications ....... 106.6 19.16%(1) 153.6 22.40%(1) 169.1 24.77%(1) -- --%
Argentina ................ 12.5 55.07%(2) 135.0 73.11%(2) 135.0 71.85%(2) -- --%
------ ------ ------ ------
Total .................... $643.7 2.06% $760.8 2.75% $777.8 2.73% $492.9 1.55%
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
The decline in the reserve for credit losses at December 31, 2003, in both
amount and percentage, from the 2002 periods was due to Argentine and
telecommunication portfolio charge-offs.
The changes in percentages of reserves to finance receivables during the
periods shown in the above table reflects the weakening economic conditions and
deteriorating internal credit metrics in 2002 followed by improvements in 2003.
The increase to $524.6 million in the finance receivables reserve in total
dollars during 2003 reflects portfolio growth during the current year.
Reserve for Credit Losses -- Finance Receivables
The reserve for credit losses is determined based on three key components
(1) specific reserves for collateral dependent loans which are impaired under
SFAS 114, (2) reserves for estimated losses inherent in the portfolio based upon
historical and projected credit trends and (3) reserves for general economic
environment and other factors.
20
The reserve includes specific reserves relating to impaired loans of $66.4
million at December 31, 2003, $52.9 million at December 31, 2002, $109.0 million
at September 30, 2002 and $122.3 million at September 30, 2001. The changes in
the inherent estimated loss and estimation risk components of the reserve
reflect trends in our key credit metrics as mentioned above.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral, among other things. Therefore, changes in economic
conditions or credit metrics, including past due and non-performing accounts, or
other events affecting specific obligors or industries may necessitate additions
or reductions to the consolidated reserve for credit losses. Management
continues to believe that the credit risk characteristics of the portfolio are
well diversified by geography, industry, borrower and equipment type. Refer to
"Concentrations" for more information. Based on currently available information,
management believes that our total reserve for credit losses is adequate.
Reserve for Credit Losses -- Telecommunications
In light of the continued deterioration in the telecommunications sector,
particularly with respect to our CLEC portfolio, we added $200.0 million to the
reserve for credit losses during the quarter ended June 30, 2002. In the
subsequent quarters through December 31, 2003, we have recorded net write offs
of $93.4 million against this specific reserve.
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in Note 5 to the Consolidated Financial
Statements. This portfolio includes lending and leasing transactions to the
telecommunications sector. Lending and leasing telecommunication equipment to
non-telecom companies is conducted in our Specialty Finance business and is
included in the lessee's industry in the industry composition table. Certain
statistical data is presented in the following table ($ in millions).
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
CLEC accounts ................................................. $197.8 $262.3 $275.2
Other telecommunication accounts .............................. 381.2 447.8 432.0
------ ------ ------
Total telecommunications portfolio ............................ $579.0 $710.1 $707.2
====== ====== ======
Portfolio as a % of total financing and leasing assets ........ 1.8% 2.0% 1.9%
Number of accounts ............................................ 44 52 52
Average account balance ....................................... $ 13.2 $ 13.7 $ 13.6
Top 10 accounts ............................................... $253.4 $264.5 $265.3
Largest account exposure ...................................... $ 31.0 $ 32.9 $ 34.1
Non-performing accounts ....................................... $ 57.2 $120.2 $137.0
Number of non-performing accounts ............................. 6 10 11
Non-performing accounts as a percentage of portfolio .......... 9.9% 16.9% 19.4%
Reserve for Credit Losses -- Argentina
We established a $135.0 million specific reserve for Argentine exposure in
the first half of 2002 to reflect the geopolitical risks associated with
collecting our peso-based assets and repatriating them into U.S. dollars that
resulted from the Argentine government instituting certain economic reforms.
When established, the reserve was about two-thirds of our combined currency and
credit exposure. During the fourth quarter of 2003, based on the substantial
progress with collection and work out efforts, we recorded a $101.0 million
charge-off against this specific reserve and transferred $21.5 million to the
Reserve for Credit Losses -- Finance Receivables. At December 31, 2003, we have
$22.7 million in Argentina loans that remains to be collected and repatriated.
The remaining reserve ($12.5 million) reflects our estimate of future loss
related to these balances.
21
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are summarized in the following table
($ in millions).
Year Three Months Year Nine Months
Ended Ended Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Efficiency ratio ................................ 42.5% 39.6% 35.6% 40.2%
Salaries and general operating expenses
as a percentage of AMA ....................... 2.06% 2.18% 1.96% 2.07%
Salaries and general operating expenses ......... $ 942.3 $ 242.1 $ 923.4 $ 784.8
Average Managed Assets .......................... $45,809.3 $44,361.8 $47,126.9 $50,600.3
Note: Ratios exclude expenses relating to TCH, a Tyco acquisition company that
had temporary status with respect to Tyco's acquisition of CIT.
Salaries and general operating expenses for the year ended December 31,
2003 increased from the prior periods primarily due to incentive-based
compensation and other employee benefit expenses, as well as from expenses
associated with our return to public ownership, which include investor
relations, advertising, corporate governance, increased insurance premiums, and
costs associated with rebuilding our income tax function. These increased
expenses were mitigated by lower collection and repossession expenses.
The decreased expenses for the year ended September 30, 2002 compared to
the annualized run rate for the combined nine months ended September 30, 2001
were due to corporate staff reductions and business restructurings effected in
2001, which were partially offset by higher collection, repossession and loan
workout expenses in the latter part of 2001 through 2002. Personnel decreased to
approximately 5,800 at December 31, 2003, from 5,835 at December 31, 2002, 5,850
at September 30, 2002, and 6,785 at September 30, 2001.
The deterioration in the efficiency ratio for the year ended December 31,
2003 and three months ended December 31, 2002 is principally the result of lower
revenues in the respective periods as well as somewhat higher expenses.
Similarly, the deterioration in the ratio of salaries and general operating
expenses to AMA from the September 30, 2002 fiscal year reflects reduced levels
of average managed assets.
Expenses are monitored closely by business unit and corporate management
and are reviewed monthly. An approval and review procedure is in place for major
capital expenditures, such as computer equipment and software, including
post-implementation evaluations. We continue to target an improved efficiency
ratio in the mid 30% area and an AMA ratio of under 2.00%, as we have existing
capacity to grow assets without commensurate expense increases. This efficiency
improvement will be partially offset by higher expenditures related to corporate
governance and compliance.
22
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets and the related percentages of
finance receivables ($ in millions):
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Past Dues:
Specialty Finance-
commercial ............ $226.4 3.17% $ 182.9 3.07% $ 215.4 3.54% $ 259.5 3.97%
Commercial Finance ...... 105.9 1.03% 172.3 2.14% 209.4 2.35% 151.4 1.75%
Equipment Finance ....... 137.9 2.18% 359.3 4.88% 350.7 4.66% 416.2 4.30%
Capital Finance ......... 9.5 0.87% 85.5 6.40% 101.5 6.86% 50.3 2.85%
Structured Finance ...... 47.0 1.59% 67.6 2.31% 65.8 2.45% 38.3 1.75%
------ -------- -------- --------
Total Commercial
Segments ................ 526.7 1.90% 867.6 3.39% 942.8 3.53% 915.7 3.18%
Specialty Finance-
consumer .............. 149.6 4.26% 133.7 6.66% 127.2 7.20% 188.2 6.12%
------ -------- -------- --------
Total ..................... $676.3 2.16% $1,001.3 3.63% $1,070.0 3.76% $1,103.9 3.46%
====== ======== ======== ========
Non-performing assets:
Specialty Finance-
commercial ............ $119.8 1.68% $ 98.2 1.65% $ 103.1 1.69% $ 124.2 1.90%
Commercial Finance ...... 75.6 0.74% 136.2 1.69% 176.1 1.98% 106.0 1.22%
Equipment Finance ....... 218.3 3.46% 403.5 5.48% 470.0 6.25% 362.2 3.75%
Capital Finance ......... 3.6 0.33% 154.9 11.60% 78.5 5.31% 96.9 5.50%
Structured Finance ...... 103.0 3.48% 151.6 5.19% 172.2 6.40% 110.4 5.05%
------ -------- -------- --------
Total Commercial
Segments .............. 520.3 1.87% 944.4 3.69% 999.9 3.75% 799.7 2.78%
Specialty Finance-
consumer .............. 156.2 4.45% 141.4 7.04% 139.9 7.92% 170.0 5.53%
------ -------- -------- --------
Total ..................... $676.5 2.16% $1,085.8 3.93% $1,139.8 4.01% $ 969.7 3.04%
====== ======== ======== ========
Non accrual loans ......... $566.5 $ 946.4 $ 976.6 $ 851.6
Repossessed assets ........ 110.0 139.4 163.2 118.1
------ -------- -------- --------
Total non-performing
assets ................ $676.5 $1,085.8 $1,139.8 $ 969.7
====== ======== ======== ========
2003 Trends
The December 31, 2003 delinquency rate of 2.16% marked the fifth
consecutive quarter of improvement and constitutes the lowest level since
December 1999. Past due loans were down across virtually all segments with the
greatest improvement in Equipment Finance. The fluctuations in the Equipment
Finance and Specialty Finance -- commercial also reflects the transfer in March
2003 of small business loans and leases from Equipment Finance to Specialty
Finance -- commercial. Past due accounts related to these transferred portfolios
approximated $66 million, $79 million and $65 million at December 31, 2003,
December 31, 2002 and September 30, 2002, respectively. Prior periods have not
been restated to reflect this transfer.
o Absent the transfer, Specialty Finance -- commercial delinquency
improved, reflecting the continued decline in past dues in
International portfolios, including European operations where
servicing was centralized during 2003.
o The Commercial Finance decline from both 2002 periods was due to
improvements in both the Commercial Services (factoring) and
Business Credit (asset-based lending) units.
o Capital Finance delinquency improved $76.0 million during 2003, due
to the return to earning status of a waste-to-energy project and
lower delinquency in the aerospace portfolio. See "Provision for
Credit Losses" for additional discussion of the waste-to-energy
charge.
23
o Though up in amount from 2002, Specialty Finance -- consumer
delinquency as a percentage of finance receivables improved,
reflecting a return to on-balance growth in this portfolio during
2003. This is in contrast to 2002 when higher quality consumer
assets were securitized to meet funding requirements. As shown in
the table below, consumer delinquency on a managed basis has been
relatively stable in percentage over the periods presented.
Non-performing assets also declined for the fifth consecutive quarter, and
constitute the lowest levels since 1999, reflecting the same trends discussed
above, namely considerable improvement in the Equipment Finance and Capital
Finance segments. In addition to the above mentioned waste-to-energy project,
the Capital Finance reduction from December 31, 2002 also reflects the
conversion of United Airlines receivables ($95.7 million) to short-term
operating leases following the carrier's December 2002 Chapter 11 bankruptcy
filing. Non-performing telecommunications accounts (in Structured Finance)
totaled $57.2 million, $120.2 million and $137.0 million at December 31, 2003,
December 31, 2002 and September 30, 2002, respectively.
2002 Trends
Past due loans at December 31, 2002 declined $68.7 million from September
30, 2002, to 3.63% of finance receivables versus 3.76%. This reflected
improvements in most businesses, particularly Commercial Finance and Specialty
Finance -- commercial. The decline in Commercial Finance reflected the
conclusion of several large loan work outs, while the Specialty Finance --
commercial improvement included lower delinquency in the European operations and
vendor programs. Non-performing assets decreased $54.0 million from September
30, 2002 due to reductions in Commercial Finance and Structured Finance. The
Equipment Finance non-performing assets declined sharply during the quarter, but
were more than offset by additional aerospace assets placed on non-accrual in
Capital Finance relating to the bankruptcy filing of UAL Corp., the parent
company of United Airlines.
Past due loans decreased $33.9 million from September 30, 2001 to
September 30, 2002. However, due to increased securitization activity and
declining asset levels, the percentage of past due receivables increased over
the same time period. After peaking in March 31, 2002, there was steady
improvement in Specialty Finance -- commercial past dues. Specialty
Finance-consumer past due portfolio metrics were down in dollar terms, but up in
percentage of finance receivables, due to the continued runoff of liquidating
portfolios and the home equity securitization activity, which lowered owned
asset levels during the year. Non-performing assets also trended downwards from
December 2002, reflecting improvement across the majority of our small-ticket
businesses and runoff of our liquidating portfolio assets. However,
non-performing assets increased from September 30, 2001 to September 30, 2002,
both in dollars and as a percentage of finance receivables, due to: (1)
increased telecommunications (CLEC exposure) non-accrual accounts in Structured
Finance, (2) the previously discussed municipal waste-to-energy project in
Capital Finance, (3) increased non-accrual accounts in the Small Business
Administration lending unit of Equipment Finance (transferred to Specialty
Finance in 2003) and (4) increased repossessed assets in Equipment Finance. Past
due and non-performing assets of Commercial Finance were up from September 2001
to September 2002, mainly due to two large customer balances.
Managed past due loans in dollar amount and as a percentage managed
financial assets are shown in the table below ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Past Dues:
Specialty Finance-
commercial .......... $ 321.2 2.77% $ 265.1 2.62% $ 303.3 2.94% $ 386.4 3.57%
Commercial Finance .... 105.9 1.03% 172.3 2.14% 209.4 2.35% 151.4 1.75%
Equipment Finance ..... 243.6 2.49% 545.7 4.78% 609.1 5.07% 760.2 5.34%
Capital Finance ....... 9.5 0.87% 85.5 6.40% 101.5 6.86% 50.3 2.84%
Structured Finance .... 47.0 1.59% 67.6 2.31% 65.8 2.45% 38.3 1.75%
-------- -------- -------- --------
Total Commercial ...... 727.2 2.04% 1,136.2 3.36% 1,289.1 3.64% 1,386.6 3.63%
Specialty Finance-
consumer ............ 294.8 4.78% 259.4 4.71% 249.5 4.71% 253.2 4.32%
-------- -------- -------- --------
Total ................... $1,022.0 2.44% $1,395.6 3.55% $1,538.6 3.78% $1,639.8 3.72%
======== ======== ======== ========
24
Managed past due loans decreased both in dollar amount and as a percentage
of managed financial assets, reflecting the same factors that are discussed in
the owned delinquency analysis.
Income Taxes
The following table sets for the certain information concerning our income
taxes ($ in millions):
Year Three Months Year Combined Nine
Ended Ended Ended Months Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Provision for income taxes ...................... $365.0 $92.0 $374.0 $242.2
Effective tax rates ............................. 39.0% 39.0% (5.9%) 47.1%
Effective tax rates excluding goodwill
impairment, goodwill amortization
and TCH results ............................... 39.0% 39.0% 38.1% 39.6%
At December 31, 2003, CIT had U.S. federal net operating losses of
approximately $1,973.7 million, which expire in various years beginning in 2011.
In addition, CIT has various state net operating losses that will expire in
various years beginning in 2004. Federal and state net operating losses may be
subject to annual use limitations under section 382 of the Internal Revenue Code
of 1986, as amended, and other limitations under certain state laws. Management
believes that CIT will have sufficient taxable income in future years and can
avail itself of tax planning strategies in order to fully utilize these losses.
Accordingly, CIT does not believe a valuation allowance is required with respect
to these net operating losses.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO, we classified our tax reporting as a "reportable condition", as
defined by standards established by the American Institute of Certified Public
Accountants. We have made substantial progress in rebuilding our tax reporting
and compliance functions, including hiring and training personnel, rebuilding
tax reporting systems, preparing amendments to prior period U.S. Federal income
tax returns, and implementing processes and controls with respect to income tax
reporting and compliance. We have built processes to prepare a tax basis balance
sheet to complete the analysis of deferred tax assets and liabilities as of
December 31, 2003. Further work continues in the areas of quality control, proof
and reconciliation and we anticipate completing this initiative during the
second or third quarter of 2004. Future income tax return filings and the
completion of the aforementioned analysis of deferred tax assets and liabilities
could result in reclassifications to deferred tax assets and liabilities. See
Note 15 -- Income Taxes for further information.
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, the
allocation of most corporate expenses and exclude TCH results of operations ($
in millions).
Nine
Year Ended Three Months Year Ended Months Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Net Income
Specialty Finance ............................... $260.9 $ 73.7 $ 349.8 $ 196.7
Commercial Finance .............................. 221.3 63.4 198.9 134.8
Equipment Finance ............................... 38.5 13.5 121.1 130.6
Capital Finance ................................. 36.0 22.7 80.9 84.5
Structured Finance .............................. 60.3 13.9 65.2 45.8
------ ------ --------- -------
Total Segments ................................ 617.0 187.2 815.9 592.4
Corporate, including certain charges ............ (50.1) (45.9) (6,791.1) (258.6)
------ ------ --------- -------
Total ......................................... $566.9 $141.3 $(5,975.2) $ 333.8
====== ====== ========= =======
Return on AEA
Specialty Finance ............................... 2.13% 2.86% 2.98% 1.83%
Commercial Finance .............................. 3.42% 5.18% 3.41% 3.14%
Equipment Finance ............................... 0.56% 0.65% 1.24% 1.46%
Capital Finance ................................. 0.53% 1.50% 1.45% 2.02%
Structured Finance .............................. 2.00% 1.96% 2.47% 2.37%
Total Segments ................................ 1.74% 2.32% 2.29% 1.97%
Corporate ....................................... (0.16)% (0.59)% (18.98)% (0.87)%
Total ......................................... 1.58% 1.73% (16.69)% 1.10%
25
The improvement in the bottom-line return on AEA over 2002 was due to the
goodwill impairment charge in 2002 and reduced corporate charges in the current
period. Corporate for the year ended December 31, 2003 includes the results of
the venture capital business ($77.6 million loss after tax), as well as
unallocated funding and other costs ($3.3 million after tax), which were offset
in part by the gain on the early redemption of debt ($30.8 million after tax).
Segment returns for 2003 versus the 2002 periods were reduced by the
allocation of all borrowing costs in the current year. Noteworthy 2003 trends by
segment are as follows:
o Return on AEA for Specialty Finance, while below 2002, was in line
with Corporate return on equity hurdles. The Specialty Finance
performance for 2003 included improved earnings in International
operations and strong earnings from vendor programs, offset by
slightly higher charge-offs and reduced securitization gains from
2002.
o Commercial Finance earnings remained very strong, benefiting from
continued high returns in both the factoring and asset-based lending
businesses.
o Equipment Finance returns reflected soft margins, offset in part by
reduced charge-offs in relation to 2002.
o Capital Finance earnings were dampened by the lower aerospace rental
rates and the waste-to-energy project charge-off described
previously in "Provision for Credit Losses."
o Structured Finance returns for 2003 remained in line with Corporate
return on equity hurdles and reflected strong advisory and
syndication fees, offset by higher charge-offs.
With respect to 2002 trends:
o Net income improved sharply in Specialty Finance over 2001 based on
stronger margins and higher securitization gains.
o Commercial Finance also showed improvement from 2001 due to stronger
factoring revenues on increased business volume.
o Equipment Finance reported reduced net income and return on assets
due to lower portfolio assets and higher charge-offs.
o Capital Finance experienced a decline in net income and return on
assets due to lower aerospace rental income.
Corporate funding costs increased significantly in 2002 from 2001,
reflecting management's decision to not allocate to the business units the
incremental costs of borrowing and liquidity relating to the disruption to our
funding base and credit downgrades. Such 2002 additional costs included higher
debt quality spreads, use of bank line versus commercial paper borrowings,
incremental cost of liquidity facilities, and excess cash held to enhance
liquidity. Although management chose to not allocate these incremental costs
because they were viewed as relating to temporary conditions, costs were
allocated beginning January 1, 2003. For all periods shown, Corporate includes
the results of the venture capital business.
Corporate included the following items in the year ended September 30,
2002: (1) goodwill impairment of $6,511.7 million, (2) provision for
telecommunications of $200.0 million ($124.0 million after tax), (3) Argentine
provision of $135.0 million ($83.7 million after tax), (4) funding costs of
$85.9 million ($53.2 million after tax), and (5) venture capital operating
losses of $72.8 million ($44.4 million after tax). Excluding these items,
unallocated corporate operating items totaled $7.2 million pre-tax (income) or
$3.9 million after tax. For the other periods shown in the table above, the
corporate segment included funding costs and unallocated corporate operating
expenses.
26
Financing and Leasing Assets
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions).
% Change
-------------------------
December 31, December 31, September 30, Dec. `03 vs. Dec. `02 vs.
2003 2002 2002 Dec `02 Sep. `02
------------ ------------ ------------- ----------- --------
Specialty Finance:
Commercial:
Finance receivables ................... $ 7,698.1 $ 6,722.4 $ 6,620.2 14.5% 1.5%
Operating lease equipment, net ........ 959.5 1,257.3 1,353.2 (23.7) (7.1)
--------- --------- ---------
Total commercial .................... 8,657.6 7,979.7 7,973.4 8.5 0.1
--------- --------- ---------
Consumer:
Home equity ........................... 2,814.3 962.7 1,314.2 192.3 (26.7)
Other ................................. 846.5 1,374.4 831.8 (38.4) 65.2
--------- --------- ---------
Total consumer ...................... 3,660.8 2,337.1 2,146.0 56.6 8.9
--------- --------- ---------
Total Specialty Finance Segment ..... 12,318.4 10,316.8 10,119.4 19.4 2.0
--------- --------- ---------
Commercial Finance:
Commercial Services ...................... 6,325.8 4,392.5 5,040.4 44.0 (12.9)
Business Credit .......................... 3,936.1 3,649.1 3,869.8 7.9 (5.7)
--------- --------- ---------
Total Commercial Finance
Segment ........................... 10,261.9 8,041.6 8,910.2 27.6 (9.7)
--------- --------- ---------
Equipment Finance:
Finance receivables ................... 6,538.1 7,476.9 7,633.0 (12.6) (2.0)
Operating lease equipment, net ........ 419.6 668.3 765.8 (37.2) (12.7)
--------- --------- ---------
Total ............................... 6,957.7 8,145.2 8,398.8 (14.6) (3.0)
--------- --------- ---------
Capital Finance:
Finance receivables ................... 1,097.4 1,335.8 1,479.5 (17.8) (9.7)
Operating lease equipment, net ........ 6,103.8 4,719.9 4,388.9 29.3 7.5
--------- --------- ---------
Total ............................... 7,201.2 6,055.7 5,868.4 18.9 3.2
--------- --------- ---------
Structured Finance:
Finance receivables ................... 2,962.2 2,920.9 2,689.6 1.4 8.6
Operating lease equipment, net ........ 132.6 59.1 59.5 124.4 (0.7)
--------- --------- ---------
Total Structured Finance Segment .... 3,094.8 2,980.0 2,749.1 3.9 8.4
Equity investments .................. 249.9 335.4 341.7 (25.5) (1.8)
--------- --------- ---------
TOTAL FINANCING AND
LEASING PORTFOLIO
ASSETS ............................ 40,083.9 35,874.7 36,387.6 11.7 (1.4)
--------- --------- ---------
Finance receivables securitized:
Specialty Finance-commercial .......... 3,915.4 3,377.4 3,703.1 15.9 (8.8)
Specialty Finance-consumer ............ 2,510.1 3,168.8 3,147.5 (20.8) 0.7
Equipment Finance ..................... 3,226.2 3,936.2 4,384.1 (18.0) (10.2)
--------- --------- ---------
Total ............................. 9,651.7 10,482.4 11,234.7 (7.9) (6.7)
--------- --------- ---------
TOTAL MANAGED ASSETS .............. $49,735.6 $46,357.1 $47,622.3 7.3% (2.7)%
========= ========= =========
During the quarter ended March 31, 2003, to better align competencies, we
transferred $1,078.6 million of certain small business loans and leases
including the small business lending unit, from Equipment Finance to Specialty
Finance -- commercial. Prior periods have not been restated to conform to this
current presentation.
27
The primary factors that fueled the increase in financing and leasing
portfolio assets during 2003 include: two factoring acquisitions in Commercial
Services, growth in Business Credit, the combination of a strong refinancing
market and our decision to limit securitization activity in the Specialty
Finance home equity portfolio, a rail acquisition and deliveries of aerospace
assets in Capital Finance.
The 2002 trend of declining asset levels reflects the increased use of
securitization as a funding tool in 2002 and the liquidation of non-strategic
assets. The targeted non-strategic business lines and products were sold or
placed in liquidation status, and we ceased originating new business in these
areas. In addition, during 2001 we ceased making new venture capital investments
beyond existing commitments. During the fourth quarter of 2003, we decided to
accelerate the liquidation of the venture capital direct investment portfolio.
See "Losses on Venture Capital Investments" for more information. The balance of
each of these non-strategic/liquidating portfolios are presented in the
following table ($ in millions):
December 31, December 31, September 30,
Portfolio 2003(1) 2002(1) 2002(1)
- --------- ------------ ------------ -------------
Manufactured housing ............... $ 584 $ 624 $ 628
Recreational vehicle ............... 58 34 38
Recreational marine ................ 86 123 133
Wholesale inventory finance ........ 2 18 22
Franchise finance .................. 102 322 390
Owner-operator trucking ............ 91 218 249
------ ------ ------
Total ........................... $ 923 $1,339 $1,460
====== ====== ======
- --------------------------------------------------------------------------------
(1) On-balance sheet financing and leasing assets.
The following table presents new business volume (excluding factoring) by
segment ($ in millions).
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Specialty Finance(1) ............ $12,429.6 $2,698.2 $10,106.2
Commercial Finance .............. 1,931.7 501.4 1,583.1
Equipment Finance(1) ............ 3,824.1 1,184.4 4,480.7
Capital Finance ................. 1,242.7 356.2 1,476.2
Structured Finance .............. 804.0 371.9 1,418.9
--------- -------- ---------
Total new business volume ..... $20,232.1 $5,112.1 $19,065.1
========= ======== =========
- --------------------------------------------------------------------------------
(1) During the March 2003 quarter, certain portfolios were transferred from
Equipment Finance to Specialty Finance. New business volumes associated
with the transferred portfolios were $208.6 million for the three months
ended December 31, 2002 and $1,743.0 million for the year ended September
30, 2002. Prior period data has not been restated to conform to present
period presentation.
New origination volume for the year ended December 31, 2003 (excluding
factoring volume) included stronger volume from our Specialty Finance vendor
relationships and home equity units, the more traditional financing transactions
in Equipment Finance and working capital financings in Business Credit.
Concentrations
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.2% of our total financing and leasing assets at December 31, 2003
(the largest account being less than 1.0%), 5.0% at December 31, 2002, 4.8% at
September 30, 2002 and 3.7% at September 30, 2001.
Leveraged Leases
As of December 31, 2003, net investments in leveraged leases totaled $1.1
billion, or 3.6% of finance receivables, with the major components being (i)
$450.4 million in commercial aerospace transactions, including $217.9 million of
tax-optimization leveraged leases, which generally have increased risk for
lessors in relation to conventional lease structures due to additional leverage
in the transactions; (ii) $325.0 million of project finance transactions,
primarily in the power and utility sector; and (iii) $225.4 million in rail
transactions.
28
Joint Venture Relationships
Our strategic relationships with industry-leading equipment vendors are a
significant origination channel for our financing and leasing activities. These
vendor alliances include traditional vendor finance programs, joint ventures and
profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya Inc.
are among our largest alliances. The joint venture agreements with Dell and
Snap-on run until October 2005 and January 2007, respectively. The Avaya
agreement, which relates to profit sharing on a CIT direct origination program,
extends through September 2006.
At December 31, 2003, our financing and leasing assets included $1,425.1
million, $1,093.4 million and $828.6 million related to the Dell, Snap-on and
Avaya programs, respectively. These amounts include receivables originated
directly by CIT as well as receivables purchased from joint venture entities.
Securitized assets included $2,471.6 million, $68.2 million and $781.0 million
from the Dell, Snap-on and Avaya origination sources, respectively. Any
significant reduction in origination volumes from any of these alliances could
have a material impact on our asset levels. For additional information regarding
certain of our joint venture activities, see Note 20 -- Certain Relationships
and Related Transactions.
Geographic Composition
The following table summarizes significant state concentrations greater
than 5.0% and foreign concentrations in excess of 1.0% of our owned financing
and leasing portfolio assets at December 31, 2003 and 2002, and September 30,
2002 and 2001. For each period presented, our managed asset geographic
composition did not differ significantly from our owned asset geographic
composition.
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
State
California ............ 10.2% 9.8% 10.0% 10.4%
Texas ................. 7.7% 7.0% 7.1% 7.7%
New York .............. 7.4% 7.9% 7.8% 8.8%
Total United States 79.3% 79.3% 79.9% 83.1%
Country
Canada ................ 5.1% 5.0% 4.7% 4.8%
England ............... 2.8% 3.2% 3.1% 2.1%
Australia ............. 1.3% 1.3% 1.3% (1)
France ................ 1.1% 1.0% (1) (1)
Germany ............... 1.0% 1.1% 1.2% (1)
Mexico ................ 1.0% (1) (1) (1)
China ................. (1) 1.2% 1.1% (1)
Brazil ................ (1) 1.1% (1) (1)
Total Outside U.S. . 20.7% 20.7% 20.1% 16.9%
- --------------------------------------------------------------------------------
(1) The applicable balances are less than 1.0%.
Industry Composition
The following discussions provide information with respect to selected
industry compositions.
Aerospace
At December 31, 2003, our commercial aerospace portfolio in Capital
Finance consists of financing and leasing assets of $4,716.1 million covering
209 aircraft, with an average age of approximately 6 years (based on a dollar
value weighted average). The portfolio was comprised of 84 accounts, with the
majority placed with major airlines around the world. The commercial aerospace
portfolio at December 31, 2002 was $4,072.8 million of financing and leasing
assets, which covered 194 aircraft and 78 accounts, with a weighted average age
of approximately 7 years. The commercial aircraft all comply with stage III
noise regulations. The increase during 2003 was due to new aircraft deliveries
from both Airbus and Boeing.
29
The following table summarizes the composition of the commercial aerospace
portfolio ($ in millions):
December 31, 2003 December 31, 2002 September 30, 2002
------------------------- ---------------------- ----------------------
Net Number of Net Number of Net Number of
Investment Planes Investment Planes Investment Planes
---------- ------ ---------- ------ ---------- ------
By Region:
Europe .......................... $1,991.0 65 $1,506.5 51 $1,586.9 55
North America(1) ................ 1,029.7 72 1,042.2 75 1,025.9 76
Asia Pacific .................... 1,013.6 40 853.6 35 813.4 31
Latin America ................... 612.7 28 595.9 29 483.3 27
Africa/Middle East .............. 69.1 4 74.6 4 77.2 4
-------- --- -------- --- -------- ---
Total .............................. $4,716.1 209 $4,072.8 194 $3,986.7 193
======== === ======== === ======== ===
By Manufacturer:
Boeing .......................... $2,581.7 140 $2,388.1 135 $2,439.6 137
Airbus .......................... 2,114.6 57 1,647.9 42 1,507.7 38
Other ........................... 19.8 12 36.8 17 39.4 18
-------- --- -------- --- -------- ---
Total .............................. $4,716.1 209 $4,072.8 194 $3,986.7 193
======== === ======== === ======== ===
By Body Type(2):
Narrow .......................... $3,415.7 159 $2,799.4 142 $2,723.3 141
Intermediate .................... 877.0 18 859.2 17 849.0 16
Wide ............................ 403.6 20 377.4 18 375.0 18
Other ........................... 19.8 12 36.8 17 39.4 18
-------- --- -------- --- -------- ---
Total .............................. $4,716.1 209 $4,072.8 194 $3,986.7 193
======== === ======== === ======== ===
- --------------------------------------------------------------------------------
(1) Comprised of net investments in the U.S. and Canada of $822.7 million (66
aircraft) and $207.0 million (6 aircraft) at December 31, 2003,
respectively, and $832.7 million (69 aircraft) and $209.5 million (6
aircraft) at December 31, 2002, respectively and $847.5 million (70
aircraft) and $178.4 million (6 aircraft) at September 30, 2002,
respectively.
(2) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglass DC10
series aircraft.
As of December 31, 2003, operating leases represented approximately 85% of
the portfolio, with the remainder consisting of capital leases (including
leveraged leases) and loans. Tax-optimization leveraged leases were
approximately $217.9 million while total leveraged leases, including the tax
optimization structures, were $450.4 million or 9.6% of the aerospace portfolio
at December 31, 2003. Of the 209 aircraft, 5 are off-lease, 3 of which have been
remarketed with leases pending as of December 31, 2003. In general, the use of
leverage increases the risk of a loss in the event of a default, with the
greatest risk incurred in tax-optimization leveraged leases.
The top five commercial aerospace exposures totaled $1,020.1 million at
December 31, 2003, the largest of which was $268.6 million. All top five are to
carriers outside of the U.S. and the top three are to European carriers. The
largest exposure to a U.S. carrier at December 31, 2003 was $138.5 million.
Future revenues and aircraft values could be impacted by the actions of the
carriers, management's actions with respect to re-marketing the aircraft,
airline industry performance and aircraft utilization.
The regional aircraft portfolio at December 31, 2003 consists of 119
planes and a net investment of $291.6 million, and is concentrated primarily in
Structured Finance. The carriers are primarily located in North America and
Europe. Operating leases account for about 44% of the portfolio, with the rest
capital leases or loans. There are 12 aircraft that are off-lease at December
31, 2003 with a total book value of approximately $46.5 million. At December 31,
2002, the portfolio consisted of 117 planes and a net investment of $344.0
million.
The following is a list of our exposure to bankrupt aerospace carriers and
the current status of the related aircraft at December 31, 2003.
o UAL Corp. -- Under existing operating lease agreements, United
Airlines leases 4 CIT-owned narrow body aircraft (2 Boeing 757
aircraft and 2 Boeing 737 aircraft) with a net investment of $87.0
million.
o Avianca Airlines -- Lessee of one MD 80 aircraft and one Boeing 757,
with a combined net investment of $31.7 million at December 31,
2003.
o Air Canada -- Our net investment in aircraft is approximately $50
million, relating to one Boeing 767 aircraft which was converted
from an investment in a non-accrual leveraged lease (not a
tax-optimized
30
structure) to a performing operating lease during 2003, and a $25.6
million loan collateralized by 12 Bombardier Dash 8 aircraft. The
loan is collateralized by the Bombardier aircraft and fully
guaranteed by the Canadian government.
o Sobelair -- Filed a bankruptcy proceeding in Belgium, in January
2004, which resulted in a liquidation of the airline. At that time,
we had two Boeing 737 aircraft on operating lease to Sobelair, one
of which was scheduled for return in March 2004. By agreement with
Sobelair's trustee, we took possession of both of these aircraft in
January 2004. We have leased one aircraft and have agreed to lease
terms for the other aircraft. Our net investment in these aircraft
at December 31, 2003 was approximately $60 million.
Additionally, we hold Senior A tranche Enhanced Equipment Trust
Certificates ("EETCs") with a fair value of $43.0 million issued by United
Airlines, which are debt instruments collateralized by aircraft operated by the
airline. In connection with United Airlines' filing under Chapter 11, we are a
co-arranger in a $1.2 billion secured revolving and term loan facility with a
commitment of $102.0 million. This debtor-in-possession facility, with an
outstanding balance of $28.0 million at December 31, 2003, is secured by, among
other collateral, previously unencumbered aircraft.
Our aerospace assets include both operating leases and capital leases.
Management monitors economic conditions affecting equipment values, trends in
equipment values, and periodically obtains third party appraisals of commercial
aerospace equipment, which include projected rental rates. We adjust the
depreciation schedules of commercial aerospace equipment on operating leases or
residual values underlying capital leases, when required. Aerospace assets are
reviewed for impairment annually, or more often when events or circumstances
warrant. An aerospace asset is defined as impaired when the expected
undiscounted cash flow over its expected remaining life is less than its book
value. Both historical information and current economic trends are factored into
the assumptions and analyses used when determining the expected undiscounted
cash flow. Included among these assumptions are the following:
o Lease terms
o Remaining life of the asset
o Lease rates supplied by independent appraisers
o Remarketing prospects
o Maintenance costs
An impairment loss is recognized if circumstances indicate that the
carrying amount of the asset may not be recoverable. For the year ended December
31, 2003, a $1.8 million commercial aerospace impairment loss was recorded, as
indicated by the excess of asset book value over corresponding fair value for
those aircraft determined to be impaired. Utilization is high, with only five
aircraft off-lease at December 31, 2003 (three of which have letters of intent
signed), which demonstrates our ability to place aircraft. However, these
current placements are at compressed rental rates, which reflect current market
conditions. Generally, leases are being written for terms between three and five
years. See Note 17 -- Commitments and Contingencies for additional information
regarding commitments to purchase additional aircraft.
Equity and Venture Capital Investments
Our portfolio of direct and private fund venture capital equity
investments is summarized in the following table ($ in millions).
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Total equity and venture capital investments ................... $249.9 $335.4 $341.7
Direct equity investments ...................................... $101.1 $188.8 $196.6
Number of direct equity investments ............................ 47 57 60
Private fund venture capital equity investments ................ $148.8 $146.6 $145.1
Number of private fund investments ............................. 52 52 52
Remaining capital commitments -- private fund investments ...... $124.2 $164.9 $176.6
Remaining capital commitments -- direct investments ............ $ -- $ 4.4 $ 4.4
See Note 5 -- Concentrations for further discussion on concentrations.
31
Other Assets
Other assets totaled $3.3 billion at both December 31, 2003 and December
31, 2002, and $3.4 billion at September 30, 2002.
Other assets primarily consisted of the following at December 31, 2003:
accrued interest and receivables from derivative counterparties of $0.9 billion,
investments in and receivables from non-consolidated subsidiaries of $0.6
billion, deposits on commercial aerospace flight equipment of $0.3 billion,
direct and private fund equity investments of $0.2 billion, prepaid expenses of
$0.2 billion and repossessed assets and off-lease equipment of $0.1 billion. The
remaining balance includes furniture and fixtures, miscellaneous receivables and
other assets.
Goodwill and Other Intangible Assets Impairment and Amortization
We periodically review and evaluate goodwill and other intangible assets
for potential impairment. Effective October 1, 2001 we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill is no
longer amortized but instead is assessed for impairment at least annually. As
part of the adoption, we allocated goodwill to each of our reporting units.
Under the transition provisions of SFAS 142, there was no goodwill impairment as
of October 1, 2001.
During the quarter ended March 31, 2002, in connection with its announced
break-up plan, our former parent, Tyco, experienced disruptions to its business,
downgrades in its credit ratings, and a significant decline in its market
capitalization, which also disrupted our access to capital markets. As a result,
management performed impairment analyses during the quarters ended March 31,
2002 and June 30, 2002. These analyses resulted in goodwill impairment charges
of $4.513 billion and $1.999 billion for the quarters ended March 31, 2002 and
June 30, 2002, respectively. We performed a goodwill impairment analysis as of
October 1, 2003, which indicated that the fair value of goodwill was in excess
of carrying value. Therefore, additional impairment charges were not required.
The changes in the carrying amount of goodwill were as follows ($ in
millions):
Specialty Commercial
Finance Finance Total
------- ------- -----
Balance as of December 31, 2002 ......... $14.0 $370.4 $384.4
Severance reserve reduction ............. (1.3) -- (1.3)
----- ------ ------
Balance as of December 31, 2003 ......... $12.7 $370.4 $383.1
===== ====== ======
The downward revision to severance liabilities during the year ended
December 31, 2003 represents previously established reserves that were no longer
required. The revision was related to Specialty Finance restructuring activities
and was recorded as a reduction to goodwill, because the severance liability was
established in conjunction with Tyco acquisition purchase accounting
adjustments.
Other intangible assets, net, comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
totaled $104.6 million, at December 31, 2003, $16.5 million at December 31,
2002, $17.6 million at September 30, 2002 and $22.0 million at September 30,
2001, and are included in Goodwill and Intangible Assets in the Consolidated
Balance Sheets. The increase in other intangible assets during the year ended
December 31, 2003 relates to customer relationships acquired in the purchase of
two factoring businesses. Other intangible assets are being amortized on a
straight-line basis over their respective lives that range from five to twenty
years. Amortization expense totaled $4.9 million for the year ended December 31,
2003, $1.1 million for the three months ended December 31, 2002, $4.4 million
for the year ended September 30, 2002, and there was no amortization expense for
the combined nine month period ended September 30, 2001.
Results and Trends in Relation to the Prior Year Twelve Months
The following analysis is provided in addition to the required analysis of
GAAP periods to discuss year-over-prior year trends in our business on a
calendar basis. We believe this analysis provides additional meaningful
information on a comparative basis. The balances provided for the 2002
twelve-month period are non-GAAP and are derived by the combination of results
for the three month transition period ended December 31, 2002 and the nine
months ended September 30, 2002.
32
Net income for 2003 totaled $566.9 million, or $2.66 per diluted share,
compared to the 2002 net loss of $(6,741.5) million or $(31.70) proforma diluted
loss per share. The results for 2003 included two significant transactions.
First, we recognized a pre-tax gain of $50.4 million, related to the early
redemption of $735 million in term debt. Second, a determination to accelerate
the liquidation of our direct investment venture capital portfolio and the
related marketing efforts to prospective buyers resulted in a pre-tax fair value
write-down of $63.0 million. Net income for 2003, excluding the gain on the debt
call and venture capital losses, was $590.0 million.
Net income for 2002 includes: goodwill impairment charge of $6,511.7
million, $206.4 million of telecommunication and Argentine reserving actions,
charges of $668.6 million for TCH related expenses and losses on our venture
capital portfolio of $30.3 million. Excluding these 2002 items, net income was
$675.5 million. The reduction in 2003 net income reflects primarily lower net
finance margin due to higher funding costs.
The table that follows presents results for the year ended December 31,
2003 and the twelve months ended December 31, 2002, both in amount and as a
percentage of AEA ($ in millions).
Year Ended Twelve Months Ended
December 31, 2003 December 31, 2002
------------------------ ------------------------
Amount % AEA Amount % AEA
--------- ------- --------- --------
Finance income .................................... $ 3,729.5 10.41% $ 4,115.5 12.13%
Interest expense .................................. 1,319.3 3.68% 1,406.3 4.14%
--------- ---- --------- ------
Net finance income ................................ 2,410.2 6.73% 2,709.2 7.99%
Depreciation on operating lease equipment ......... 1,053.0 2.94% 1,179.8 3.48%
--------- ---- --------- ------
Net finance margin ................................ 1,357.2 3.79% 1,529.4 4.51%
Provision for credit losses ....................... 387.3 1.08% 808.8 2.38%
--------- ---- --------- ------
Net finance margin after provision for
credit losses ..................................... 969.9 2.71% 720.6 2.13%
Other revenue ..................................... 947.6 2.65% 993.6 2.93%
Loss on venture capital investments ............... (88.3) (0.25)% (49.3) (0.15)%
--------- ---- --------- ------
Operating margin .................................. 1,829.2 5.11% 1,664.9 4.91%
Salaries and general operating expenses ........... 942.3 2.63% 949.8 2.80%
Goodwill impairment ............................... -- -- 6,511.7 19.19%
Interest expense -- TCH ........................... -- -- 586.3 1.73%
--------- ---- --------- ------
Operating expenses ................................ 942.3 2.63% 8,047.8 23.72%
Gain on call of debt .............................. 50.4 0.14% -- --
--------- ---- --------- ------
Income before provision for income taxes .......... 937.3 2.62% (6,382.9) (18.81%)
Provision for income taxes ........................ ( 365.0) (1.02)% (347.8) (1.03%)
Dividends on preferred capital securities,
after tax ...................................... ( 5.4) (0.02)% (10.8) (0.03%)
--------- ---- --------- ------
Net income ........................................ $ 566.9 1.58% $(6,741.5) (19.87%)
========= ==== ========= ======
AEA ............................................... $35,813.4 $33,928.8
========= =========
Although net finance margin was down from the prior year, we demonstrated
steady improvement in profitability throughout 2003 as we benefited from a
return to historical debt spread levels (in relation to U.S. Treasuries). The
compression in rental rates, particularly in aerospace assets, also contributed
to the margin compression. Interest expense decreased due to the low interest
rate environment, but was tempered by debt issued last year and through a
portion of this year at higher spread levels. We also maintained excess
liquidity throughout the year.
The drop in depreciation expense from the prior year reflects the growth
of the longer-lived aerospace and rail equipment portfolios, coupled with lower
operating lease equipment levels with shorter lives in both Specialty Finance
and Equipment Finance. Our depreciable assets range from smaller-ticket,
shorter-term leases (e.g. computers) to larger-ticket, longer-term leases (e.g.
commercial aircraft and rail assets).
The provision for credit losses decreased $421.5 million from last year
due to the prior year reserving actions of $335.0 million relating to the
telecommunications and Argentine portfolios, and improved credit quality, most
notably in Equipment Finance.
33
For 2003, other revenue totaled $947.6 million, down from $993.6 million
in 2002. Fees and other income, which includes servicing fees, miscellaneous
fees, syndication fees and gains from asset sales, were down, primarily in
Equipment Finance. Factoring commissions were up slightly in 2003. Although we
acquired two factoring portfolios, these transactions were completed later in
the year and had a modest impact on the improvement. We witnessed a
strengthening in equipment sales values, both on large and smaller ticket
assets, as noted by the increase on gains from these sales, primarily in
Specialty Finance. Securitization gains during 2003 totaled $100.9 million,
10.8% of pretax income, on volume of $5,320 million, down from $151.5 million,
14.2% of pretax income (excluding goodwill impairment, TCH charges and reserving
action charges) on volume of $7,634 million for 2002. In 2002 we securitized
home equity loans for liquidity purposes, whereas in 2003 we de-emphasized
securitizing home equity loans because on-balance sheet funding costs were
lower.
Salaries and general operating expenses were $942.3 million 2003, compared
to $935.0 million (excluding TCH expenses) for 2002. The increase from last year
included higher incentive-based compensation, and incremental expenses
associated with our return to public ownership, which were in part offset by
lower legal and collection expenses. Salaries and general operating expenses
were 2.06% of average managed assets for 2003, essentially unchanged from 2.05%
in 2002. The efficiency ratio for 2003 (salaries and general operating expenses
divided by operating margin, excluding provision for credit losses) was 42.5%,
compared to 37.8% in 2002. Headcount was 5,800 at December 31, 2003, compared to
5,835 in 2002.
Risk Management
Our business activities involve various elements of risk. We consider the
principal types of risk to be credit risk (including credit, collateral and
equipment risk) and market risk (including interest rate, foreign currency and
liquidity risk). Managing risks is essential to conducting our commercial and
consumer businesses and to our profitability. Accordingly, our risk management
systems and procedures are designed to identify and analyze key business risks,
to set appropriate policies and limits, and to continually monitor these risks
and limits by means of reliable administrative and information systems, along
with other policies and programs. We performed additional risk management
procedures in 2002 and into 2003 in light of the factors discussed previously in
the "Profitability and Key Business Trends" section. During the third quarter of
2003, we further elevated the prominence of risk management throughout the
organization with the establishment of the newly-created position of Vice
Chairman & Chief Credit Officer within the Office of the Chairman.
We review and monitor credit exposures, both owned and managed, on an
ongoing basis to identify, as early as possible, customers that may be
experiencing declining creditworthiness or financial difficulty, and
periodically evaluate the performance of our finance receivables across the
entire organization. We monitor concentrations by borrower, industry, geographic
region and equipment type, and we set or modify exposure limits as conditions
warrant to minimize credit concentrations and the risk of substantial credit
loss. We have maintained a standard practice of reviewing our aerospace
portfolio regularly and, in accordance with SFAS No. 13 and SFAS No. 144, we
test for asset impairment based upon projected cash flows and relevant market
data, with any impairment in value charged to earnings. Given the developments
in the aerospace sector during 2002 and 2003, performance, profitability and
residual values relating to aerospace assets have been reviewed more frequently
with the Executive Credit Committee.
Our Asset Quality Review Committee is comprised of members of senior
management, including the Vice Chairman & Chief Credit Officer, the Vice
Chairman & Chief Financial Officer, the Chief Risk Officer, the Controller and
the Director of Credit Audit. Periodically, the Committee meets with senior
executives of our business units and corporate credit risk management group to
review portfolio performance, including the status of individual financing and
leasing assets, owned and managed, to obligors with higher risk profiles. In
addition, this committee periodically meets with the Chief Executive Officer of
CIT to review overall credit risk, including geographic, industry and customer
concentrations, and the reserve for credit losses.
34
Credit Risk Management
We have developed systems specifically designed to manage credit risk in
each of our business segments. We evaluate financing and leasing assets for
credit and collateral risk during the credit granting process and periodically
after the advancement of funds. The Corporate Credit Risk Management group,
which reports to the Vice Chairman and Chief Credit Officer, oversees and
manages credit risk throughout CIT. This group includes senior credit executives
in each of the business units, as well as a senior executive with corporate-wide
asset recovery and workout responsibilities. Our Executive Credit Committee
includes the Chief Executive Officer, the Chief Operating Officer, the Chief
Credit Officer and members of the Corporate Credit Risk Management group. The
committee approves transactions which are outside of established target market
definitions and risk acceptance criteria, corporate exceptions as delineated
within the individual business unit credit authority and transactions that
exceed the strategic business units' credit authority. The Corporate Credit Risk
Management group also includes an independent credit audit function.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These guidelines set forth risk
acceptance criteria for:
o acceptable maximum credit lines;
o selected target markets and products;
o creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow, financial performance and quality
of management; and
o the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
Compliance with established corporate policies and procedures and the
credit management processes at each strategic business unit are reviewed by the
credit audit group. The credit audit group examines adherence with established
credit policies and procedures and tests for inappropriate credit practices,
including whether potential problem accounts are being detected and reported on
a timely basis.
Commercial Credit Risk Management
The commercial credit management process (other than small ticket leasing
transactions) begins with the initial evaluation of credit risk and underlying
collateral at the time of origination and continues over the life of the finance
receivable or operating lease, including collecting past due balances and
liquidating underlying collateral.
Credit personnel review a potential borrower's financial condition,
results of operations, management, industry, customer base, operations,
collateral and other data, such as third party credit reports, to thoroughly
evaluate the customer's borrowing and repayment ability. Borrowers are graded
according to credit quality based upon our uniform credit grading system, which
considers both the borrower's financial condition and the underlying collateral.
Credit facilities are subject to approval within our overall credit approval and
underwriting guidelines and are issued commensurate with the credit evaluation
performed on each borrower.
Consumer and Small Ticket Leasing/Lending
For consumer transactions and small-ticket leasing/lending transactions,
we employ proprietary automated credit scoring models by loan type that include
customer demographics and credit bureau characteristics. The profiles emphasize,
among other things, occupancy status, length of residence, employment, debt to
income ratio (ratio of total installment debt and housing expenses to gross
monthly income), bank account references, credit bureau information, combined
loan to value ratio, length of time in business, industry category and
geographic location. The models are used to assess a potential borrower's credit
standing and repayment ability considering the value or adequacy of property
offered as collateral. Our credit criteria include reliance on credit scores,
including those based upon both our proprietary internal credit scoring model
and external credit bureau scoring, combined with judgment. The credit scoring
models are regularly reviewed for effectiveness utilizing statistical tools.
We regularly evaluate the consumer loan portfolio and the small ticket
leasing portfolio using past due, vintage curve and other statistical tools to
analyze trends and credit performance by loan type, including analysis
35
of specific credit characteristics and other selected subsets of the portfolios.
Adjustments to credit scorecards and lending programs are made when deemed
appropriate. Individual underwriters are assigned credit authority based upon
their experience, performance and understanding of the underwriting policies and
procedures of our consumer and small-ticket leasing operations. A credit
approval hierarchy also exists to ensure that an underwriter with the
appropriate level of authority reviews all applications.
Equipment/Residual Risk Management
We have developed systems, processes and expertise to manage the equipment
and residual risk in our commercial segments. Our process consists of the
following: 1) setting residual value at deal inception; 2) systematic residual
reviews; and 3) monitoring of residual realizations. Reviews for impairment are
performed at least annually. Residual realizations, by business unit and
product, are reviewed as part of our ongoing financial and asset quality review,
both within the business units and by senior management.
Market Risk Management
Market risk is the risk of loss arising from changes in values of
financial instruments, and includes interest rate risk, foreign exchange risk,
derivative credit risk and liquidity risk. We engage in transactions in the
normal course of business that expose us to market risks. We conduct what we
believe are appropriate management practices and maintain policies designed to
effectively mitigate such risks. The objectives of our market risk management
efforts are to preserve the economic and accounting returns of our assets by
matching the repricing and maturity characteristics of our assets with that of
our liabilities. Strategies for managing market risks associated with changes in
interest rates and foreign exchange rates are an integral part of the process,
because those strategies affect our future expected cash flows as well as our
cost of capital.
Our Capital Committee sets policies, oversees and guides the interest rate
and currency risk management process, including the establishment and monitoring
of risk metrics, and ensures the implementation of those policies. Other risks
monitored by the Capital Committee include derivative credit risk and liquidity
risk. The Capital Committee meets periodically and includes the Chief Executive
Officer, Chief Operating Officer, Vice Chairman and Chief Financial Officer,
Vice Chairman and Chief Credit Officer, Vice Chairman -- Specialty Finance,
Treasurer, and Controller, with business unit executives serving on a rotating
basis.
Interest Rate and Foreign Exchange Risk Management
We offer a variety of financing products to our customers, including fixed
and floating-rate loans of various maturities and currency denominations, and a
variety of leases, including operating leases. Changes in market interest rates,
relationships between short-term and long-term market interest rates, or
relationships between different interest rate indices (i.e., basis risk) can
affect the interest rates charged on interest-earning assets differently than
the interest rates paid on interest-bearing liabilities, and can result in an
increase in interest expense relative to finance income. We measure our
asset/liability position in economic terms through duration measures and
sensitivity analysis, and we measure the effect on earnings using maturity gap
analysis.
A matched asset/liability position is generally achieved through a
combination of financial instruments, including commercial paper, medium-term
notes, long-term debt, interest rate and currency swaps, foreign exchange
contracts, and through securitization. We do not speculate on interest rates or
foreign exchange rates, but rather seek to mitigate the possible impact of such
rate fluctuations encountered in the normal course of business. This process is
ongoing due to prepayments, refinancings and actual payments varying from
contractual terms, as well as other portfolio dynamics.
We periodically enter into structured financings (involving the issuance
of both debt and an interest rate swap with corresponding notional principal
amount and maturity) to manage liquidity and reduce interest rate risk at a
lower overall funding cost than could be achieved by solely issuing debt.
We use derivatives for hedging purposes only, and do not enter into
derivative financial instruments for trading or speculative purposes. Interest
rate swaps are an effective means of achieving our target matched funding
objectives by converting debt to the desired basis and duration. As part of
managing the exposure to changes in market interest rates, CIT, as an end-user,
enters into various interest rate swap transactions in the over-the-counter
markets, with other financial institutions acting as principal counterparties.
To ensure both appropriate use as a
36
hedge and hedge accounting treatment under SFAS 133, all derivatives entered
into are designated according to a hedge objective against a specified
liability, including long-term debt and commercial paper or in limited instances
against specific assets. Our primary hedge objectives include the conversion of
variable-rate liabilities to fixed rates, and the conversion of fixed-rate
liabilities to variable rates. The notional amounts, rates, indices and
maturities of derivatives are required to closely match the related terms of
hedged items.
Interest rate swaps with notional principal amounts of $9.4 billion at
December 31, 2003, $7.8 billion at December 31, 2002, $7.1 billion at September
30, 2002 and $6.9 billion at September 30, 2001 were designated as hedges
against outstanding debt. The net increase in notional principal amounts of
interest rate swaps at December 31, 2003 compared to the prior year consisted of
a $2,268.4 million increase in fixed to floating-rate swaps (fair value hedges)
and a $665.5 million decrease in floating to fixed-rate swaps (cash flow
hedges). The increase in fixed to float swaps was primarily due to the fact that
we elevated our fixed-rate debt issuance during 2003, as we extended our
maturity profile in conjunction with spreads declining. In addition, we enter
into hedge transactions in conjunction with our securitization programs. See
Note 9 -- Derivative Financial Instruments for further details.
The following table summarizes the composition of our assets and
liabilities before and after swaps:
Before Swaps After Swaps
---------------------------- --------------------------
Fixed Rate Floating Rate Fixed Rate Floating Rate
---------- ------------- ---------- -------------
December 31, 2003
Assets ............................. 52% 48% 52% 48%
Liabilities ........................ 59% 41% 46% 54%
December 31, 2002
Assets ............................. 53% 47% 53% 47%
Liabilities ........................ 62% 38% 55% 45%
A comparative analysis of the weighted average principal outstanding and
interest rates on our debt before and after the effect of interest rate swaps is
shown in the following table ($ in millions).
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Before Swaps
Commercial paper,
variable-rate senior
notes and bank credit
facilities ............... $12,352.1 1.83% $12,344.2 2.09% $17,087.2 2.34% $20,373.6 4.91%
Fixed-rate senior and
subordinated notes ........ 20,002.0 6.06% 18,055.3 6.20% 16,764.8 6.11% 17,078.6 4.63%
--------- --------- --------- ---------
Composite ................... $32,354.1 4.45% $30,399.5 4.54% $33,852.0 4.21% $37,452.2 4.14%
========= ========= ========= =========
After Swaps
Commercial paper,
variable-rate notes and
bank credit facilities .... $15,942.0 2.63% $13,103.1 2.82% $14,813.2 2.55% $14,209.8 4.97%
Fixed-rate senior and
subordinated note ......... 16,412.1 5.82% 17,296.4 5.87% 19,038.8 5.90% 23,242.4 4.71%
--------- --------- --------- ---------
Composite ................... $32,354.1 4.25% $30,399.5 4.56% $33,852.0 4.43% $37,452.2 4.34%
========= ========= ========= =========
The weighted average interest rates before swaps do not necessarily
reflect the interest expense that would have been incurred over the life of the
borrowings had we chosen to manage interest rate risk without the use of such
swaps.
We regularly monitor and simulate our degree of interest rate sensitivity
by measuring the repricing characteristics of interest-sensitive assets,
liabilities, and derivatives. The Capital Committee reviews the results of this
modeling periodically. The interest rate sensitivity modeling techniques we
employ include the creation of prospective twelve month "baseline" and "rate
shocked" net interest income simulations.
37
At the date that interest rate sensitivity is modeled, "baseline" net
interest income is derived considering the current level of interest-sensitive
assets and related run-off (including both contractual repayment and historical
prepayment experience), the current level of interest-sensitive liabilities and
related maturities, and the current level of derivatives. The "baseline"
simulation assumes that, over the next successive twelve months, market interest
rates (as of the date of simulation) are held constant and that no new loans or
leases are extended. Once the "baseline" net interest income is calculated,
market interest rates, which were previously held constant, are raised 100 basis
points instantaneously and parallel across the entire yield curve, and a "rate
shocked" simulation is run. Interest rate sensitivity is then measured as the
difference between calculated "baseline" and "rate shocked" net interest income.
An immediate hypothetical 100 basis point parallel increase in the yield
curve on January 1, 2004 would reduce net income by an estimated $24 million
after-tax over the next twelve months. A corresponding decrease in the yield
curve would cause an increase in net income of a like amount. A 100 basis point
increase in the yield curve on January 1, 2003 would have reduced net income by
an estimated $16 million after tax, while a corresponding decrease in the yield
curve would have increased net income by a like amount. Although management
believes that this measure provides a meaningful estimate of our interest rate
sensitivity, it does not account for potential changes in the credit quality,
size, composition and prepayment characteristics of the balance sheet and other
business developments that could affect net income. Accordingly, no assurance
can be given that actual results would not differ materially from the estimated
outcomes of our simulations. Further, such simulations do not represent
management's current view of future market interest rate movements.
We also utilize foreign currency exchange forward contracts to hedge
currency risk underlying our net investments in foreign operations and cross
currency interest rate swaps to hedge both foreign currency and interest rate
risk underlying foreign debt. At December 31, 2003, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $2.6 billion
and maturities ranging from 2004 to 2007 and party to cross currency interest
rate swaps with notional amounts totaling $1.8 billion and maturities ranging
from 2004 to 2024. At December 31, 2002, CIT was party to foreign currency
exchange forward contracts with notional amounts totaling $3.0 billion and party
to cross currency interest rate swaps with notional amounts totaling $1.5
billion. At September 30, 2002, CIT was party to $3.1 billion in notional
principal amount of foreign currency exchange forward contracts and $1.7 billion
in notional principal amount of cross-currency swaps. Translation gains and
losses of the underlying foreign net investment, as well as offsetting
derivative gains and losses on designated hedges, are reflected in other
comprehensive income in the Consolidated Balance Sheet.
Derivative Risk Management We enter into interest rate and currency swaps
and foreign exchange forward contracts as part of our overall market risk
management practices. We assess and manage the external and internal risks
associated with these derivative instruments in accordance with the overall
operating goals established by our Capital Committee. External risk is defined
as those risks outside of our direct control, including counterparty credit
risk, liquidity risk, systemic risk, legal risk and market risk. Internal risk
relates to those operational risks within the management oversight structure and
includes actions taken in contravention of CIT policy.
The primary external risk of derivative instruments is counterparty credit
exposure, which is defined as the ability of a counterparty to perform its
financial obligations under a derivative contract. We control the credit risk of
our derivative agreements through counterparty credit approvals, pre-established
exposure limits and monitoring procedures.
The Capital Committee, in conjunction with Corporate Risk Management,
approves each counterparty and establishes exposure limits based on credit
analysis and market value. All derivative agreements are entered into with major
money center financial institutions rated investment grade by nationally
recognized rating agencies, with the majority of our counterparties rated "AA"
or better. Credit exposures are measured based on the market value of
outstanding derivative instruments. Exposures are calculated for each derivative
contract and are aggregated by counterparty to monitor credit exposure.
Liquidity Risk Management -- Liquidity risk refers to the risk of being
unable to meet potential cash outflows promptly and cost effectively. Factors
that could cause such a risk to arise might be a disruption of a securities
market or other source of funds. We actively manage and mitigate liquidity risk
by maintaining diversified sources of funding and committed alternate sources of
funding, and we maintain and periodically review a contingency funding plan to
be implemented in the event of any form of market disruption. The primary
funding sources are commercial paper (U.S.), long-term debt (U.S. and
International) and asset-backed securities (U.S. and Canada).
38
The commercial paper program closed the 2003 year at $4.2 billion, versus
$5.0 billion at December 31, 2002 and $4.7 billion at September 30, 2002. Our
targeted U.S. program size remains at $5.0 billion with modest programs
aggregating $500 million to be maintained in Canada and Australia. Our goal is
to maintain committed bank lines in excess of aggregate outstanding commercial
paper.
CIT maintains registration statements with the Securities and Exchange
Commission ("SEC") covering debt securities that we may sell in the future. At
December 31, 2003, we had $10.1 billion of registered, but unissued, debt
securities available under a shelf registration statement. Term-debt issued
during the year ended December 31, 2003 consisted of $4.7 billion in fixed-rate
notes and $8.3 billion in variable-rate notes. In November 2002, we introduced a
retail note program in which we offer fixed-rate senior, unsecured notes
utilizing numerous broker-dealers for placement to retail accounts. During the
year, we issued $1.3 billion under this program having maturities of between 2
and 10 years. As part of our strategy to further diversify our funding sources,
$0.3 billion of fixed-rate foreign currency denominated debt was issued during
the last quarter of 2003. We plan on utilizing these alternate sources of debt
funding to meet our strategic growth initiatives.
To further strengthen our funding capabilities, we maintain committed
asset backed facilities and shelf registration statements, which cover a range
of assets from equipment to consumer home equity receivables and trade accounts
receivable. While these are predominately in the U.S., we also maintain
facilities for Canadian domiciled assets. As of December 31, 2003, we had
approximately $3.0 billion of availability in our committed asset-backed
facilities, including $1.0 billion relating to our trade receivable facility,
and $3.8 billion of registered, but unissued, securities available under public
shelf registration statements relating to our asset-backed securitization
program.
Our committed asset-backed commercial paper programs in the U.S. and
Canada provide a substantial source of alternate liquidity. We also maintain
committed bank lines of credit to provide backstop support of commercial paper
borrowings and local bank lines to support our international operations.
Additional sources of liquidity are loan and lease payments from customers,
whole-loan asset sales and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability as
outlined in the following table.
Current December 31, December 31,
Liquidity Measurement Target 2003 2002
- --------------------- ------- ------------ ------------
Commercial paper to total debt ........................ Maximum of 15% 13% 16%
Short-term debt to total debt ......................... Maximum of 45% 36% 47%
Bank lines to short-term debt ......................... Minimum of 45% 76% 54%
Aggregate alternate liquidity* to short-term debt ..... Minimum of 75% 93% 75%
- --------------------------------------------------------------------------------
* Aggregate alternative liquidity includes available bank facilities,
asset-backed conduit facilities and cash.
Our credit ratings are an important factor in meeting our margin targets
as better ratings generally correlate to lower cost of funds (see Net Finance
Margin, interest expense discussion). The following credit ratings have been in
place since September 30, 2002.
Short-Term Long-Term Outlook
---------- --------- -------
Moody's ............................. P-1 A2 Stable
Standard & Poor's ................... A-1 A Stable
Fitch ............................... F1 A Stable
The credit ratings stated above are not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal by the assigning
rating organization. Each rating should be evaluated independently of any other
rating.
We have certain covenants contained in our legal documents that govern our
funding sources. The most significant covenant in CIT's indentures and credit
agreements is a negative pledge provision, which limits granting or permitting
liens on our assets, but provides for exceptions for certain ordinary course
liens needed to operate our business. In addition, our credit agreements also
contain a minimum net worth test ranging from $3.75 billion to $4.0 billion.
39
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of December 31, 2003 ($
in millions):
Payments and Collections by Period
--------------------------------------------------------
After
Contractual Obligations Total(3) 2004 2005 2006 2007 2007
- ----------------------- --------- --------- --------- --------- --------- --------
Commercial paper ....................... $ 4,173.9 $ 4,173.9 $ -- $ -- $ -- $ --
Variable-rate term debt ................ 9,408.4 4,806.4 3,333.3 985.3 37.5 245.9
Fixed-rate term debt ................... 19,830.8 3,930.2 4,328.6 2,639.4 3,498.9 5,433.7
Preferred securities ................... 255.5 -- -- -- -- 255.5
Lease rental expense ................... 164.7 53.2 38.3 28.6 20.7 23.9
--------- --------- --------- --------- --------- --------
Total contractual obligations ....... 33,833.3 12,963.7 7,700.2 3,653.3 3,557.1 5,959.0
--------- --------- --------- --------- --------- --------
Finance receivables(1) ................. 31,300.2 11,698.9 4,503.7 3,441.2 2,197.8 9,458.6
Operating lease rental income .......... 2,871.8 997.1 666.5 411.0 269.9 527.3
Finance receivables held for sale(2) ... 918.3 918.3 -- -- -- --
Cash -- current balance ................ 1,973.7 1,973.7 -- -- -- --
Retained interests in
securitizations ..................... 1,380.8 626.2 318.1 165.4 95.8 175.3
--------- --------- --------- --------- --------- --------
Total projected cash availability ... 38,444.8 16,214.2 5,488.3 4,017.6 2,563.5 10,161.2
--------- --------- --------- --------- --------- --------
Net projected cash inflow (outflow) .... $ 4,611.5 $ 3,250.5 $(2,211.9) $ 364.3 $ (993.6) $4,202.2
========= ========= ========= ========= ========= ========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amounts could differ due to
prepayments, extensions of credit, charge-offs and other factors.
(2) Based upon management's intent to sell rather than contractual maturities
of underlying assets.
(3) Projected proceeds from the sale of operating lease equipment, interest
revenue from finance receivables, debt interest expense and other items
are excluded. Obligations relating to postretirement programs are also
excluded. See Note 16--Post Retirement and Other Benefit Plans for more
information.
Commitment Expiration by Period
-----------------------------------------------------
After
Contractual Commitments Total 2004 2005 2006 2007 2007
- ----------------------- ----- ---- ---- ---- ---- ----
Aircraft purchases ..................... $ 2,934.0 $ 634.0 $ 952.0 $1,088.0 $ 260.0 $ --
Credit extensions ...................... 5,934.3 1,611.5 872.1 977.2 715.6 1,757.9
Letters of credit ...................... 1,202.7 1,127.3 1.8 73.2 -- 0.4
Sale-leaseback payments ................ 486.4 28.5 28.5 28.5 28.5 372.4
Manufacturer purchase commitments ...... 197.2 197.2 -- -- -- --
Venture capital commitments ............ 124.2 -- -- -- -- 124.2
Guarantees ............................. 133.2 120.7 -- -- 10.5 2.0
Acceptances ............................ 9.3 9.3 -- -- -- --
--------- -------- -------- -------- -------- --------
Total commitments .................... $11,021.3 $3,728.5 $1,854.4 $2,166.9 $1,014.6 $2,256.9
========= ======== ======== ======== ======== ========
Internal Controls
In 2003, we formed an Internal Controls Committee that is responsible for
monitoring and improving internal controls and overseeing the internal controls
attestation mandated by Section 404 of the Sarbanes-Oxley Act of 2002
("SARBOX"), for which the implementation year is 2004. The committee, which is
chaired by the Controller, includes the CFO, the Director of Internal Audit and
other senior executives in finance, legal, risk management and information
technology. We are currently finalizing the documentation phase of the SARBOX
project and will begin the testing, assessment and remediation of internal
controls in early 2004, with documentation and management testing of internal
controls expected to be completed during the first three quarters of 2004. Our
management self-assessment is planned for the second half of 2004. At this time,
the standards for independent assessment by independent auditors have not been
finalized.
40
Off-balance Sheet Arrangements
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and provide an additional
source of liquidity, we use an array of securitization programs, including both
asset-backed commercial paper and term structures, to access both the public and
private asset-backed securitization markets. Current products in these programs
include receivables and leases secured by equipment as well as consumer loans
secured by residential real estate. The following table summarizes data relating
to our securitization balance and activity ($ in millions).
Three Months Nine Months
Year Ended Ended Year Ended Ended
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Securitized assets:
Specialty Finance -- commercial ................. $3,915.4 $ 3,377.4 $ 3,703.1 $ 4,023.2
Specialty Finance -- consumer ................... 2,510.1 3,168.8 3,147.5 1,659.9
Equipment Finance ............................... 3,226.2 3,936.2 4,384.1 4,464.8
-------- --------- --------- ----------
Total securitized assets ...................... $9,651.7 $10,482.4 $11,234.7 $10,147.9
======== ========= ========= ==========
Securitized assets as a % of managed assets ........ 19.4% 22.6% 23.6% 19.9%
Volume securitized:
Specialty Finance -- commercial ................. $3,416.2 $ 590.6 $ 2,602.0 $ 1,988.3
Specialty Finance -- consumer ................... 489.2 288.1 2,738.6 --
Equipment Finance ............................... 1,414.8 310.6 2,327.9 1,305.0
-------- --------- --------- ----------
Total volume securitized ...................... $5,320.2 $ 1,189.3 $ 7,668.5 $ 3,293.3
======== ========= ========= ==========
With the restoration of our funding base and the strengthening of our
credit spreads, securitization volume normalized during 2003. Our securitization
activity relating to commercial finance receivables was $4.8 billion, as the
economics remained favorable to complete these sales. Also, we decided to grow
the consumer home equity portfolio on-balance sheet during the second half of
2003. Management targets a maximum of 15% of pre-tax income from securitization
gains.
Under our typical asset-backed securitization, we sell a "pool" of secured
loans or leases to a special-purpose entity, typically a trust. The
special-purpose entity, in turn, issues certificates and/or notes that are
collateralized by the pool and entitle the holders thereof to participate in
certain pool cash flows. We retain the servicing of the securitized contracts,
for which we earn a servicing fee. We also participate in certain "residual"
cash flows (cash flows after payment of principal and interest to certificate
and/or note holders, servicing fees and other credit-related disbursements). At
the date of securitization, we estimate the "residual" cash flows to be received
over the life of the securitization, record the present value of these cash
flows as a retained interest in the securitization (retained interests can
include bonds issued by the special-purpose entity, cash reserve accounts on
deposit in the special-purpose entity or interest only receivables) and
typically recognize a gain.
In estimating residual cash flows and the value of the retained interests,
we make a variety of financial assumptions, including pool credit losses,
prepayment speeds and discount rates. These assumptions are supported by both
our historical experience and anticipated trends relative to the particular
products securitized. Subsequent to recording the retained interests, we review
them quarterly for impairment based on estimated fair value. These reviews are
performed on a disaggregated basis. Fair values of retained interests are
estimated utilizing current pool demographics, actual note/certificate
outstandings, current and anticipated credit losses, prepayment speeds and
discount rates.
Our retained interests had a carrying value at December 31, 2003 of
$1,309.3 million, including interests in commercial securitized assets of
$1,129.7 million and consumer securitized assets of $179.6 million. The total
retained interest as of December 31, 2003 is comprised of $623.3 million in
over-collateralization, $425.7 million of interest only strips, and $260.3
million of cash reserve accounts. Retained interests are subject to credit and
prepayment risk. As of December 31, 2003, approximately 50% of our outstanding
securitization pool balances are
41
in conduit structures. Our interests relating to commercial securitized assets
are generally subject to lower prepayment risk because of the contractual terms
of the underlying receivables. These assets are subject to the same credit
granting and monitoring processes which are described in the "Credit Risk
Management" section.
Securitization and Joint Venture Activities
We utilize special purpose entities ("SPEs") and joint ventures in the
normal course of business to execute securitization transactions and conduct
business in key vendor relationships.
Securitization Transactions -- SPEs are used to achieve "true sale"
requirements for these transactions in accordance with SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." Pools of assets are originated or acquired and sold to SPEs, which
in turn issue debt securities to investors solely backed by asset pools.
Accordingly, CIT has no legal obligations to repay the securities in the event
of a default by the SPE. CIT retains the servicing rights and participates in
certain cash flows of the pools. The present value of expected net cash flows
that exceeds the estimated cost of servicing is recorded in other assets as a
"retained interest." Assets securitized are shown in our managed assets and our
capitalization ratios on a managed basis. Under the recently issued rules
relating to consolidation and SPEs, non-qualifying securitization entities have
to be consolidated. We believe that all of our existing asset-backed SPE
structures meet the definition of a qualifying special purpose entity ("QSPE")
as defined by SFAS No. 140 and therefore will continue to qualify as off-balance
sheet transactions. As part of these related activities, CIT entered into $2.7
billion in notional amount of hedge transactions to protect the related trusts
against interest rate risk. CIT is insulated from this risk by entering into
offsetting swap transactions with third parties totalling $2.7 billion in
notional amount at December 31, 2003.
During 2003, we successfully completed a consent solicitation to amend the
negative pledge provision in our 1994 debt indenture. This action conforms the
1994 debt indenture to our other agreements and provides flexibility in
structuring our securitizations as accounting sales or secured financings.
Joint Ventures -- We utilize joint ventures organized through distinct
legal entities to conduct financing activities with certain strategic vendor
partners. Receivables are originated by the joint venture and purchased by CIT.
The vendor partner and CIT jointly own these distinct legal entities, and there
is no third-party debt involved. These arrangements are accounted for using the
equity method, with profits and losses distributed according to the joint
venture agreement. See related FASB Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities" discussion in "Accounting and
Technical Pronouncements" and disclosure in Item 8. Financial Statements and
Supplementary Data, Note 20 -- Certain Relationships and Related Transactions.
Capitalization
The following table presents information regarding our capital structure
($ in millions).
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Commercial paper .................................. $ 4,173.9 $ 4,974.6 $ 4,654.2 $ 8,869.2
Bank credit facilities ............................ -- 2,118.0 4,037.4 --
Term debt ......................................... 29,239.2 24,588.7 23,764.4 26,828.5
Preferred Capital Securities ...................... 255.5 257.2 257.7 260.0
Stockholders' equity(1) ........................... 5,427.8 4,968.5 4,857.3 10,661.4(2)
--------- --------- --------- ---------
Total capitalization .............................. 39,096.4 36,907.0 37,571.0 46,619.1
Goodwill and other intangible assets .............. (487.7) (400.9) (402.0) (6,569.5)
--------- --------- --------- ---------
Total tangible capitalization ..................... $38,608.7 $36,506.1 $37,169.0 $40,049.6
========= ========= ========= =========
Tangible stockholders' equity(1) and Preferred
Capital Securities to managed assets ............ 10.45% 10.41% 9.89% 8.55%(2)
Total debt (excluding overnight deposits)
to tangible stockholders' equity(1) and
Preferred Capital Securities .................... 6.14x 6.24x 6.56x 8.13x(2)
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 9 to the Consolidated
Financial Statements and certain unrealized gains or losses on retained
interests and investments, as these amounts are not necessarily indicative
of amounts that will be realized. See "Non-GAAP Financial Measurements."
(2) Excludes equity deficit relating to TCH that was relieved via capital
contributions from Tyco through June 30, 2002.
42
The preferred capital securities are 7.70% Preferred Capital Securities
issued in 1997 by CIT Capital Trust I, a wholly-owned subsidiary. CIT Capital
Trust I invested the proceeds of that issue in Junior Subordinated Debentures of
CIT having identical rates and payment dates. Consistent with rating agency
measurements, preferred capital securities are included in tangible equity in
our leverage ratios. See "Non-GAAP Financial Measurements" for additional
information. Also see Note 1 Summary of Significant Accounting Policies for
information regarding the accounting and reporting for these securities.
See "Liquidity Risk Management" for discussion of risks impacting our
liquidity and capitalization.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to use judgment in making estimates and assumptions that affect
reported amounts of assets and liabilities, the reported amounts of income and
expense during the reporting period and the disclosure of contingent assets and
liabilities at the date of the financial statements. The following accounting
estimates, which are based on relevant information available at the end of each
period, include inherent risks and uncertainties related to judgments and
assumptions made by management. We consider the following accounting estimates
to be critical in applying our accounting policies due to the existence of
uncertainty at the time the estimate is made, the likelihood of changes in
estimates from period to period and the potential impact that these estimates
can have on the financial statements.
Investments -- Investments for which CIT does not have the ability to
exercise significant influence and for which there is not a readily determinable
market value, are accounted for at fair value. The majority of these investments
are in our venture capital portfolio. Accordingly, management uses judgment in
determining fair value. As discussed previously, a significant write-down was
taken in 2003 on our direct private equity investment portfolio based on
management's estimates of fair value, reflecting our decision to accelerate the
liquidation of these assets and additional fair value data obtained in the
marketing of the portfolio to prospective buyers. As of December 31, 2003,
venture capital and private equity investments totaled $249.9 million. A 10%
fluctuation in value of venture capital and private equity investments equates
to $0.07 in earnings per share.
Charge-off of Finance Receivables -- Finance receivables are reviewed
periodically to determine the probability of loss. Charge-offs are taken after
substantial collection efforts are conducted, considering such factors as the
borrower's financial condition and the value of underlying collateral and
guarantees (including recourse to dealers and manufacturers).
Impaired Loans -- Loan impairment is defined as any shortfall between the
estimated value and the recorded investment for those loans defined as impaired
loans in the Company's application of SFAS 114, with the estimated value
determined using the fair value of the collateral and other cash flows, if the
loan is collateral dependent, or the present value of expected future cash flows
discounted at the loan's effective interest rate. The determination of
impairment involves management's judgment and the use of market and third party
estimates regarding collateral values. Valuations in the level of impaired loans
and corresponding impairment as defined under SFAS 114 affect the level of the
reserve for credit losses.
Reserve for Credit Losses -- Our consolidated reserve for credit losses is
reviewed for adequacy based on portfolio collateral values and credit quality
indicators, including charge-off experience, levels of past due loans and
non-performing assets, evaluation of portfolio diversification/concentration and
economic conditions. We review finance receivables periodically to determine the
probability of loss, and record charge-offs after considering such factors as
delinquencies, the financial condition of obligors, the value of underlying
collateral, as well as third party credit enhancements such as guarantees and
recourse from manufacturers. This information is reviewed formally on a
quarterly basis with senior management, including the CEO, COO, CFO, Chief
Credit Officer and Controller, among others, in conjunction with setting the
reserve for credit losses.
The reserve for credit losses is determined based on three key components:
(1) specific reserves for collateral dependent loans which are impaired under
SFAS 114, (2) reserves for estimated losses inherent in the portfolio
43
based upon historical and projected credit trends and (3) reserves for general
economic environment and other factors. Historical loss rates are based on a
three-year average, which is consistent with our portfolio life and provides
what we believe to be appropriate weighting to current loss rates. The process
involves the use of estimates and a high degree of management judgment. As of
December 31, 2003, the reserve for credit losses was $643.7 million or 2.06% of
finance receivables. A 5% change to the three-year historic loss rates utilized
in our reserve determination at December 31, 2003 equates to the following
variances: $19.4 million, or 6 basis points (0.06%) in the percentage of
reserves to finance receivables; and $0.06 in diluted earnings earnings per
share.
Retained Interests in Securitizations -- Significant financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates, are utilized to determine the fair values of retained interests, both at
the date of the securitization and in the subsequent quarterly valuations of
retained interests. These assumptions reflect both the historical experience and
anticipated trends relative to the products securitized. Any resulting losses,
representing the excess of carrying value over estimated fair value, are
recorded against current earnings. However, unrealized gains are reflected in
stockholders' equity as part of other comprehensive income. See Note 6 --
Investments in Debt and Equity Securities for additional information regarding
securitization retained interests and related sensitivity analysis.
Lease Residual Values -- Operating lease equipment is carried at cost less
accumulated depreciation and is depreciated to estimated residual value using
the straight-line method over the lease term or projected economic life of the
asset. Direct financing leases are recorded at the aggregated future minimum
lease payments plus estimated residual values less unearned finance income. We
generally bear greater risk in operating lease transactions (versus finance
lease transactions) as the duration of an operating lease is shorter relative to
the equipment useful life than a finance lease. Management performs periodic
reviews of the estimated residual values, with non-temporary impairment
recognized in the current period. Data regarding equipment values, including
appraisals, and our historical residual realization experience are among the
factors considered in evaluating estimated residual values. As of December 31,
2003, our direct financing lease residual balance was $2,419.5 million and our
operating lease equipment balance was $7,615.5 million. A 10 basis points (0.1%)
fluctuation in the total of these amounts equates to $0.03 in earnings per
share.
Goodwill -- CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective October 1, 2001. The Company determined at October 1, 2001
that there was no impact of adopting this new standard under the transition
provisions of SFAS No. 142. Since adoption, goodwill is no longer amortized, but
instead is assessed for impairment at least annually. During this assessment,
management relies on a number of factors, including operating results, business
plans, economic projections, anticipated future cash flows, and market place
data. See "-- Goodwill and Other Intangible Assets Amortization" for a
discussion of our impairment analysis.
Intangible assets consist primarily of customer relationships acquired
during the 2003 factoring acquisitions, which are being amortized over a 20-year
period, and computer software and related transaction processes, which are being
amortized over a 5-year life. An evaluation of the remaining useful lives and
the amortization methodology of the intangible assets is performed periodically
to determine if any change is warranted.
Goodwill and Other Intangibles Assets was $487.7 million at December 31,
2003. A 10% fluctuation in the value equates to $0.21 in earnings per share.
Deferred Income Taxes -- Deferred tax assets and liabilities are
recognized for the future tax consequences of transactions that have been
reflected in the Consolidated Financial Statements. Our ability to realize
deferred tax assets is dependent on prospectively generating taxable income by
corresponding tax jurisdiction, and in some cases on the timing and amount of
specific types of future transactions. Management's judgment, regarding
uncertainties and the use of estimates and projections, is required in assessing
our ability to realize net operating loss ("NOL's") and other tax benefit
carry-forwards, as these assets begin to expire at various dates beginning in
2011. Management utilizes historical and projected data, budgets and business
plans in making these estimates and assessments. Deferred tax assets relating to
NOL's were $834 million at December 31, 2003. A 1% fluctuation in the value of
deferred tax assets relating to NOL's equates to $0.04 in diluted earnings per
share.
44
Accounting and Technical Pronouncements
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). The FSP permits
employers that sponsor postretirement benefit plans providing prescription drug
benefits to retirees to make a one-time election to defer accounting for any
effects of the Medicare Prescription Drug, Improvement, and Modernization Act of
2003. CIT has elected to defer the related accounting pending further guidance
from the FASB.
In December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revision requires
additional disclosures regarding defined benefit pension plan assumptions,
assets, obligations, cash flows and costs for fiscal years ending after December
15, 2003. The additional required disclosures are included in Note 16 -- Post
Retirement and Other Benefit Plans.
In December 2003, the SEC announced that it will release a Staff
Accounting Bulletin that will require issued loan commitments to be accounted
for as written options that would be reported as liabilities until the loan is
made or they expire unexercised. We are evaluating the impact of this proposed
accounting pending further guidance from the SEC and the FASB.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement was effective immediately for
financial instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning after June
15, 2003. Prior period restatement is not permitted. On November 7, 2003,
certain measurement and classification provisions of SFAS 150, relating to
certain mandatorily redeemable non-controlling interests, were deferred
indefinitely. The adoption of these delayed provisions, which relate primarily
to minority interests associated with finite-lived entities, is not expected to
have a significant impact on the financial position or results of operations.
Consistent with rating agency measurements, preferred capital securities are
included in tangible equity in our leverage ratios. See "Non-GAAP Financial
Measurements" for additional information.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This pronouncement amends and
clarifies financial accounting and reporting for certain derivative instruments,
including certain derivative instruments embedded in other contracts. This
pronouncement is effective for all contracts entered into or modified after June
30, 2003. The implementation of SFAS No. 149 did not have a significant impact
on our financial position or results of operations.
In January 2003, the FASB issued FIN 46, which requires the consolidation
of VIEs by their primary beneficiaries if they do not effectively disperse the
risks among the parties involved. On October 9, 2003, the FASB announced the
delay in implementation of FIN 46 for VIEs in existence as of February 1, 2003.
VIEs are certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The primary beneficiary is
the entity that has the majority of the economic risks and rewards of ownership
of the VIE. See Note 1 -- Business and Summary of Significant Accounting
Policies for additional information regarding the implementation of FIN 46.
The FIN 46 impact to CIT is primarily related to three types of
transactions: 1) strategic vendor partner joint ventures, 2) securitizations,
and 3) selected financing and private equity transactions. The implementation of
this standard did not change the equity method of accounting for our strategic
vendor partner joint ventures (see Note 20 -- Certain Relationships and Related
Transactions). Our securitization transactions outstanding at December 31, 2003
continue to qualify as off-balance sheet transactions. The Company may structure
certain future securitization transactions, including factoring trade account
receivables transactions, as on-balance sheet financings. Certain VIEs acquired
primarily in conjunction with selected financing and/or private equity
45
transactions may be consolidated under FIN 46. The consolidation of these
entities will not have a significant impact on our financial position or results
of operations. In December 2003, the FASB revised FIN 46. This revision
clarified certain provisions within FIN 46 and delayed implementation for
selected transactions until reporting periods ending after March 15, 2004. The
revisions to FIN 46 do not have a significant impact on our previous
assessments.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing certain guarantees. The expanded disclosure
requirements were required for financial statements ending after December 15,
2002, while the liability recognition provisions were applicable to all
guarantee obligations modified or issued after December 31, 2002.
Non-GAAP Financial Measurements
The U.S. Securities and Exchange Commission ("SEC") adopted Regulation G,
which applies to any public disclosure or release of material information that
includes a non-GAAP financial measure. The accompanying Management's Discussion
and Analysis of Financial Condition and Results of Operations and Quantitative
and Qualitative Disclosure about Market Risk contain certain non-GAAP financial
measures. The SEC defines a non-GAAP financial measure as a numerical measure of
a company's historical or future financial performance, financial position, or
cash flows that excludes amounts, or is subject to adjustments that have the
effect of excluding amounts, that are included in the most directly comparable
measure calculated and presented in accordance with GAAP in the financial
statements or includes amounts, or is subject to adjustments that have the
effect of including amounts, that are excluded from the most directly comparable
measure so calculated and presented.
Non-GAAP financial measures disclosed in this report are meant to provide
additional information and insight relative to historical operating results and
financial position of the business and in certain cases to provide financial
information that is presented to rating agencies and other users of financial
information. These measures are not in accordance with, or a substitute for,
GAAP and may be different from or inconsistent with non-GAAP financial measures
used by other companies.
46
Selected non-GAAP disclosures are presented and reconciled in the table
below ($ in millions):
December 31, December 31, September 30, September 30,
2003 2002 2002 2001
------------ ------------ ------------- -------------
Managed assets(1):
Finance receivables ............................... $31,300.2 $27,621.3 $28,459.0 $31,969.3
Operating lease equipment, net .................... 7,615.5 6,704.6 6,567.4 6,402.8
Finance receivables held for sale ................. 918.3 1,213.4 1,019.5 2,014.9
Equity and venture capital investments
(included in other assets) ..................... 249.9 335.4 341.7 342.2
--------- --------- --------- ---------
Total financing and leasing portfolio assets ... 40,083.9 35,874.7 36,387.6 40,729.2
Securitized assets ................................ 9,651.7 10,482.4 11,234.7 10,147.9
--------- --------- --------- ---------
Managed assets (Non-GAAP) ...................... $49,735.6 $46,357.1 $47,622.3 $50,877.1
========= ========= ========= =========
Earning assets(2):
Total financing and leasing portfolio assets ...... $40,083.9 $35,874.7 $36,387.6 $40,729.2
Credit balances of factoring clients .............. (3,894.6) (2,270.0) (2,513.8) (2,392.9)
--------- --------- --------- ---------
Earning assets (Non-GAAP) ......................... $36,189.3 $33,604.7 $33,873.8 $38,336.3
========= ========= ========= =========
Tangible equity(3):
Total equity ...................................... $ 5,394.2 $ 4,870.7 $ 4,757.8 $ 5,947.6
Due from former parent ............................ -- -- -- 4,650.4
Other comprehensive loss relating to derivative
financial instruments ............................. 41.3 118.3 120.5 63.4
Unrealized gain on securitization investments ..... (7.7) (20.5) (23.6) --
Goodwill and intangible assets .................... (487.7) (400.9) (402.0) (6,569.5)
--------- --------- --------- ---------
Tangible common equity ............................ 4,940.1 4,567.6 4,452.7 4,091.9
Preferred capital securities ...................... 255.5 257.2 257.7 260.0
--------- --------- --------- ---------
Tangible equity (Non-GAAP) ..................... $ 5,195.6 $ 4,824.8 $ 4,710.4 $ 4,351.9
========= ========= ========= =========
Debt, net of overnight deposits(4):
Total debt ........................................ $33,668.6 $31,681.3 $32,456.0 $35,697.7
Overnight deposits ................................ (1,529.4) (1,578.7) (1,550.6) (333.4)
Preferred capital securities ...................... (255.5) -- -- --
--------- --------- --------- ---------
Debt, net of overnight deposits (Non-GAAP) ..... $31,883.7 $30,102.6 $30,905.4 $35,364.3
========= ========= ========= =========
- --------------------------------------------------------------------------------
(1) Managed assets are utilized in certain credit and expense ratios.
Securitized assets are included in managed assets because CIT retains
certain credit risk and the servicing related to assets that are funded
through securitizations.
(2) Earning assets are utilized in certain revenue and earnings ratios.
Earning assets are net of credit balances of factoring clients. This net
amount, which corresponds to amounts funded, is a basis for revenues
earned, such as finance income and factoring commissions.
(3) Tangible equity is utilized in leverage ratios, and is consistent with our
presentation to rating agencies. Other comprehensive losses and unrealized
gains on securitization investments (both included in the separate
component of equity) are excluded from the calculation, as these amounts
are not necessarily indicative of amounts which will be realized.
(4) Debt, net of overnight deposits is utilized in certain leverage ratios.
Overnight deposits are excluded from these calculations, as these amounts
are retained by the Company to repay debt. Overnight deposits are
reflected in both debt and cash and cash equivalents.
Background -- 2002 IPO and Ownership Change
The accompanying Consolidated Financial Statements include the
consolidated accounts of CIT Group Inc., a Delaware corporation ("we," "CIT" or
the "Company). On July 8, 2002, Tyco International Ltd. ("Tyco") completed a
sale of 100% of CIT's outstanding common stock in an initial public offering
("IPO"). Immediately prior to the IPO, our predecessor, CIT Group Inc., a Nevada
corporation, was merged with and into its parent Tyco Capital Holding, Inc.
("TCH"), a Nevada corporation and that combined entity was further merged with
and into CIT Group Inc. (Del), a Delaware corporation, which was renamed CIT
Group Inc. CIT is the successor to CIT Group Inc. (Nevada)'s business,
operations and obligations. Accordingly, the financial results of TCH are
included in the consolidated CIT financial statements.
Prior to the IPO, the activity of TCH consisted primarily of interest
expense and related fees to an affiliate of Tyco from June 1, 2001 to June 30,
2002. The TCH accumulated net deficit was relieved via a capital contribution
from Tyco. TCH had no operations subsequent to June 30, 2002. Although the
audited financial statements and notes include the activity of TCH in conformity
with accounting principles generally accepted in the U.S., certain analysis of
results exclude the impact of TCH, as management believes that it is more
meaningful to
47
discuss our financial results excluding TCH, due to its temporary status as a
Tyco acquisition company with respect to CIT. Consolidating income statements
for CIT, TCH and CIT consolidated are displayed in Item 8. Financial Statements
and Supplementary Data, Note 24.
On June 1, 2001, CIT's predecessor was acquired by Tyco, resulting in a
new basis of accounting for the "successor" period beginning June 2, 2001.
Information relating to all "predecessor" periods prior to the acquisition are
presented using CIT's historical basis of accounting. To assist in the
comparability of our financial results and discussions, results of operations
for the nine months ended September 30, 2001 include results for five months of
the predecessor and four months of the successor.
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements contained herein, in
press releases, written statements or other documents filed with the Securities
and Exchange Commission or in communications and discussions with investors and
analysts in the normal course of business through meetings, webcasts, phone
calls and conference calls, concerning our operations, economic performance and
financial condition are subject to known and unknown risks, uncertainties and
contingencies. Forward-looking statements are included, for example, in the
discussions about:
o our liquidity risk management,
o our credit risk management,
o our asset/liability risk management,
o our funding, borrowing costs and net finance margin
o our capital, leverage and credit ratings,
o our operational and legal risks,
o our commitments to extend credit or purchase equipment, and
o how we may be affected by legal proceedings.
All forward-looking statements involve risks and uncertainties, many of
which are beyond our control, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Also, forward-looking statements are based upon management's
estimates of fair values and of future costs, using currently available
information. Therefore, actual results may differ materially from those
expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o risks of economic slowdown, downturn or recession,
o industry cycles and trends,
o risks inherent in changes in market interest rates and quality
spreads,
o funding opportunities and borrowing costs,
o changes in funding markets, including commercial paper, term debt
and the asset-backed securitization markets,
o uncertainties associated with risk management, including credit,
prepayment, asset/liability, interest rate and currency risks,
o adequacy of reserves for credit losses,
o risks associated with the value and recoverability of leased
equipment and lease residual values,
o changes in laws or regulations governing our business and
operations,
o changes in competitive factors, and
o future acquisitions and dispositions of businesses or asset
portfolios.
48
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
CIT Group Inc.:
In our opinion, the accompanying consolidated balance sheets as of December 31,
2003 and 2002 and September 30, 2002, and the related consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of CIT Group Inc. and its subsidiaries
at December 31, 2003 and 2002 and September 2002, and the results of their
operations and their cash flows for the year ended December 31, 2003, the three
months ended December 31, 2002, the fiscal year ended September 30, 2002 and for
the period from June 2, 2001 through September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on June 2, 2001 the Company
changed its basis of accounting for purchased assets and liabilities, and on
October 1, 2001 the Company changed the manner in which it accounts for goodwill
and other intangible assets.
PricewaterhouseCoopers LLP
New York, New York
January 22, 2004
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIT Group Inc.:
In our opinion, the accompanying consolidated statements of income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of CIT Group Inc. and its subsidiaries
for the period from January 1, 2001 through June 1, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company changed the manner in which it accounts for derivative instruments and
hedging activities.
PricewaterhouseCoopers LLP
New York, New York
October 18, 2001, except as to the reacquisition
of international subsidiaries described in Note 25
and the reorganization of Tyco Capital Holding Inc.
described in Note 24, which are as of
February 11, 2002 and July 1, 2002, respectively.
50
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
ASSETS
Financing and leasing assets:
Finance receivables ........................................ $31,300.2 $27,621.3 $28,459.0
Reserve for credit losses ..................................... (643.7) (760.8) (777.8)
--------- --------- ---------
Net finance receivables .................................... 30,656.5 26,860.5 27,681.2
Operating lease equipment, net ............................. 7,615.5 6,704.6 6,567.4
Finance receivables held for sale .......................... 918.3 1,213.4 1,019.5
Cash and cash equivalents ..................................... 1,973.7 2,036.6 2,274.4
Retained interests in securitizations ......................... 1,380.8 1,451.4 1,410.4
Goodwill and intangible assets ................................ 487.7 400.9 402.0
Other assets .................................................. 3,310.3 3,265.0 3,355.6
--------- --------- ---------
Total Assets .................................................. $46,342.8 $41,932.4 $42,710.5
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ........................................... $ 4,173.9 $ 4,974.6 $ 4,654.2
Variable-rate bank credit facilities ....................... -- 2,118.0 4,037.4
Variable-rate senior notes ................................. 9,408.4 4,906.9 5,379.0
Fixed-rate senior notes .................................... 19,830.8 19,681.8 18,385.4
Preferred capital securities ............................... 255.5 -- --
--------- --------- ---------
Total debt .................................................... 33,668.6 31,681.3 32,456.0
Credit balances of factoring clients .......................... 3,894.6 2,270.0 2,513.8
Accrued liabilities and payables .............................. 3,346.4 2,853.2 2,725.2
--------- --------- ---------
Total Liabilities ............................................. 40,909.6 36,804.5 37,695.0
--------- --------- ---------
Commitments and Contingencies (Note 17)
Minority interest ............................................. 39.0 -- --
Preferred capital securities .................................. -- 257.2 257.7
Stockholders' Equity:
Preferred stock, $0.01 par value,
100,000,000 authorized; none issued ...................... -- -- --
Common stock, $0.01 par value,
600,000,000 authorized; 211,848,997
issued and 211,805,468 outstanding ....................... 2.1 2.1 2.1
Paid-in capital, net of deferred
compensation of $30.6, $5.5 and $6.4 ..................... 10,677.0 10,676.2 10,674.8
Contributed capital ........................................ --
Accumulated (deficit) ...................................... (5,141.8) (5,606.9) (5,722.8)
Accumulated other comprehensive loss ....................... (141.6) (200.7) (196.3)
Less: Treasury stock, 43,529 shares, at cost .................. (1.5) -- --
--------- --------- ---------
Total Stockholders' Equity .................................... 5,394.2 4,870.7 4,757.8
--------- --------- ---------
Total Liabilities and Stockholders' Equity .................... $46,342.8 $41,932.4 $42,710.5
========= ========= =========
See Notes to Consolidated Financial Statements.
51
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- ------------
(successor) (successor) (successor) (successor) (predecessor)
Finance income .................................. $ 3,729.5 $ 971.7 $ 4,342.8 $ 1,676.5 $ 2,298.8
Interest expense ................................ 1,319.3 340.0 1,439.3 597.1 1,022.7
--------- --------- --------- --------- ---------
Net finance income .............................. 2,410.2 631.7 2,903.5 1,079.4 1,276.1
Depreciation on operating lease
equipment ..................................... 1,053.0 277.3 1,241.0 448.6 588.1
--------- --------- --------- --------- ---------
Net finance margin .............................. 1,357.2 354.4 1,662.5 630.8 688.0
Provision for credit losses ..................... 387.3 133.4 788.3 116.1 216.4
--------- --------- --------- --------- ---------
Net finance margin after provision
for credit losses ............................. 969.9 221.0 874.2 514.7 471.6
Other revenue ................................... 947.6 263.5 972.6 336.2 230.4
(Loss) gain on venture capital
investments ................................... (88.3) (6.4) (40.3) (1.1) 7.1
--------- --------- --------- --------- ---------
Operating margin ................................ 1,829.2 478.1 1,806.5 849.8 709.1
--------- --------- --------- --------- ---------
Salaries and general operating
expenses ...................................... 942.3 242.1 946.4 348.5 446.0
Interest expense -- TCH ......................... -- -- 662.6 97.7 1.1
Goodwill impairment ............................. -- -- 6,511.7 -- --
Goodwill amortization ........................... -- -- -- 59.8 37.8
Acquisition-related costs ....................... -- -- -- -- 54.0
--------- --------- --------- --------- ---------
Operating expenses .............................. 942.3 242.1 8,120.7 506.0 538.9
--------- --------- --------- --------- ---------
Gain on redemption of debt ...................... 50.4 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes .................................. 937.3 236.0 (6,314.2) 343.8 170.2
Provision for income taxes ...................... (365.0) (92.0) (374.0) (157.4) (84.8)
Dividends on preferred capital
securities, after tax ......................... (5.4) (2.7) (10.5) (3.6) (4.9)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
========= ========= ========= ========= =========
Net income (loss) per basic share ............... $ 2.68 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Net income (loss) per diluted share ............. $ 2.66 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Note: Per share calculations for the periods June 2 through September 30, 2001
and January 1 through June 1, 2001 assume that the shares for the twelve months
ended September 30, 2002 were outstanding for the respective periods.
See Notes to Consolidated Financial Statements.
52
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated Total Total
Common Paid-in Contributed Treasury Earnings/ Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income/(Loss) Equity
------ ------- ----------- -------- --------- ------------- -------------
December 31, 2000 (predecessor) ............ $ 2.7 $ 3,527.2 $ -- $ (137.7) $ 2,603.3 $ 11.7 $ 6,007.2
Net income ................................. 80.5 80.5
Foreign currency translation adjustments ... (33.7) (33.7)
Cumulative effect of new accounting
principle ................................ (146.5) (146.5)
Change in fair values of derivatives
qualifying as cash flow hedges ........... 0.6 0.6
---------
Total comprehensive loss ................... (99.1)
---------
Cash dividends ............................. (52.9) (52.9)
Issuance of treasury stock ................. 27.6 27.6
Restricted common stock grants ............. 12.4 12.4
Merger of TCH .............................. (4,579.9) (4,579.9)
--------- --------- --------- --------- --------- --------- ---------
June 1, 2001 (predecessor) ................. 2.7 3,539.6 (4,579.9) (110.1) 2,630.9 (167.9) 1,315.3
Recapitalization at acquisition ............ (3,539.6) 3,539.6 --
Effect of push-down accounting of
Tyco's purchase price on CIT's net assets. (2.7) 5,945.1 110.1 (2,631.7) 167.9 3,588.7
--------- --------- --------- --------- --------- --------- ---------
June 2, 2001 (successor) ................... -- -- 4,904.8 -- (0.8) -- 4,904.0
Net income ................................. 182.8 182.8
Foreign currency translation adjustments ... (13.4) (13.4)
Change in fair values of derivatives
qualifying as cash flow hedges ........... (63.4) (63.4)
---------
Total comprehensive income ................. 106.0
---------
Cash dividends ............................. (0.1) (0.1)
Tax benefit on stock transactions .......... 39.4 39.4
Capital contribution from Tyco ............. 898.3 898.3
--------- --------- --------- --------- --------- --------- ---------
September 30, 2001 (successor) ............. -- -- 5,842.5 -- 181.9 (76.8) 5,947.6
Net loss ................................... (6,698.7) (6,698.7)
Foreign currency translation adjustments ... (62.4) (62.4)
Change in fair values of derivatives
qualifying as cash flow hedges ........... (57.1) (57.1)
Unrealized gain on equity and
securitization investments, net .......... 21.0 21.0
Minimum pension liability adjustment ....... (21.0) (21.0)
---------
Total comprehensive loss ................... (6,818.2)
---------
Issuance of common stock in connection
with the initial public offering ......... 2.0 10,420.4 (10,422.4) --
Common stock issued -- overallotment ....... 0.1 249.2 249.3
Capital contribution from Tyco
for TCH .................................. 4,579.9 794.0 5,373.9
Restricted common stock grants ............. 5.2 5.2
--------- --------- --------- --------- --------- --------- ---------
September 30, 2002 (successor) ............. 2.1 10,674.8 -- -- (5,722.8) (196.3) 4,757.8
Net income ................................. 141.3 141.3
Foreign currency translation adjustments ... 0.2 0.2
Change in fair values of derivatives
qualifying as cash flow hedges ........... 2.2 2.2
Unrealized losses on equity and
securitization investments, net .......... (6.8) (6.8)
---------
Total comprehensive income ................. 136.9
---------
Cash dividends ............................. (25.4) (25.4)
Restricted common stock grants ............. 1.4 1.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2002 (successor) .............. 2.1 10,676.2 -- -- (5,606.9) (200.7) 4,870.7
Net income ................................. 566.9 566.9
Foreign currency translation adjustments ... (30.2) (30.2)
Change in fair values of derivatives
qualifying as cash flow hedges ........... 77.0 77.0
Unrealized losses on equity and
securitization investments, net .......... (7.4) (7.4)
Minimum pension liability adjustment ....... 19.7 19.7
---------
Total comprehensive income ................. 626.0
---------
Cash dividends ............................. (101.8) (101.8)
Restricted common stock grants ............. 8.8 8.8
Treasury stock purchased, at cost .......... (28.9) (28.9)
Exercise of stock option awards ............ (8.0) 27.4 19.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2003 (successor) .............. $ 2.1 $10,677.0 $ -- $ (1.5) $(5,141.8) $ (141.6) $ 5,394.2
========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
53
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
--------- --------- --------- --------- ---------
(successor) (successor) (successor) (successor) (predecessor)
Cash Flows From Operations:
Net income (loss) .................................. $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
Adjustments to reconcile net income
(loss) to net cash flows from operations:
Provision for credit losses ........................ 387.3 133.4 788.3 116.1 216.4
Depreciation and amortization ...................... 1,086.6 287.5 1,286.5 521.3 642.4
Provision for deferred federal
income taxes ..................................... 265.1 71.9 276.9 113.6 63.7
Gains on equipment, receivable and
investment sales, net ............................ (253.0) (58.2) (243.4) (120.2) (11.1)
Gain on debt redemption ............................ (50.4) -- -- -- --
Loss (gain) on venture capital investments ......... 88.3 6.4 40.3 1.1 (7.1)
Increase (decrease) in accrued
liabilities and payables ......................... 279.2 55.4 57.0 (349.8) (28.2)
(Increase) decrease in other assets ................ (174.2) 26.7 (626.7) (429.7) 69.9
Goodwill impairment ................................ -- -- 6,511.7 -- --
Other .............................................. (8.7) (52.0) 4.0 (67.3) 34.9
--------- --------- --------- --------- ---------
Net cash flows provided by (used for)
operations ....................................... 2,187.1 612.4 1,395.9 (32.1) 1,061.4
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Loans extended ..................................... (53,157.8) (12,873.8) (48,300.6) (15,493.1) (20,803.0)
Collections on loans ............................... 45,123.9 12,089.7 42,584.2 12,750.6 18,520.2
Proceeds from asset and receivable
sales ............................................ 7,714.1 1,085.4 10,992.4 5,213.0 2,879.6
Purchases of assets to be leased ................... (2,096.3) (449.1) (1,877.2) (756.9) (694.0)
Purchases of finance receivable portfolios ......... (1,097.5) (254.7) (372.7) -- --
Net (increase) decrease in short-term
factoring receivables ............................ (396.1) 391.7 (651.9) (471.2) (131.0)
Intangible assets acquired with portfolio
purchases ....................................... (92.6) -- -- -- --
Other .............................................. 14.8 (4.3) (52.5) 3.2 (24.4)
--------- --------- --------- --------- ---------
Net cash flows (used for) provided
by investing activities .......................... (3,987.5) (15.1) 2,321.7 1,245.6 (252.6)
--------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from the issuance of variable
and fixed rate notes ............................. 13,034.6 2,463.2 13,093.4 1,000.0 6,246.6
Repayments of variable and
fixed-rate notes ................................. (10,265.6) (3,558.3) (12,148.8) (3,272.2) (6,491.5)
Net (decrease) increase in commercial
paper ............................................ (800.7) 320.4 (4,186.2) (1,007.8) 813.6
Net repayments of non-recourse
leveraged lease debt ............................. (125.4) (35.0) (187.7) (26.6) (8.7)
Cash dividends paid ................................ (101.8) (25.4) -- -- (52.9)
Other .............................................. (3.6) -- -- -- 27.6
Capital contributions from former Parent ........... -- -- 923.5 744.7 0.8
Proceeds from issuance of common stock ............. -- -- 254.6 -- --
--------- --------- --------- --------- ---------
Net cash flows provided by (used for)
financing activities ............................. 1,737.5 (835.1) (2,251.2) (2,561.9) 535.5
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ...................................... (62.9) (237.8) 1,466.4 (1,348.4) 1,344.3
Cash and cash equivalents, beginning
of period ........................................ 2,036.6 2,274.4 808.0 2,156.4 812.1
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........... $ 1,973.7 $ 2,036.6 $ 2,274.4 $ 808.0 $ 2,156.4
========= ========= ========= ========= =========
Supplementary Cash Flow Disclosure:
Interest paid ...................................... $ 1,517.6 $ 418.5 $ 1,713.9 $ 652.9 $ 1,067.6
Federal, foreign and state and local
income taxes (refunded) paid -- net ............... $ 80.6 $ 44.2 $ (43.9) $ 31.4 $ 14.7
Supplementary Non-cash Disclosure:
Push-down of purchase price by Parent .............. -- -- -- $ 9,484.7 --
See Notes to Consolidated Financial Statements.
54
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Business and Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global source of financing and leasing capital for companies in a wide
variety of industries, including many of today's leading industries and emerging
businesses, offering vendor, equipment, commercial, factoring, consumer, and
structured financing products. CIT operates primarily in North America, with
locations in Europe, Latin America, Australia and the Asia-Pacific region.
Basis of Presentation
The Consolidated Financial Statements include the results of CIT and its
subsidiaries and have been prepared in U.S. dollars in accordance with
accounting principles generally accepted in the United States. Certain prior
period amounts have been reclassified to conform to the current presentation. On
June 1, 2001, The CIT Group, Inc. was acquired by a wholly-owned subsidiary of
Tyco International Ltd. ("Tyco"), in a purchase business combination recorded
under the "push-down" method of accounting, resulting in a new basis of
accounting for the "successor" period beginning June 2, 2001 and the recognition
of related goodwill. On July 8, 2002, Tyco completed a sale of 100% of CIT's
outstanding common stock in an initial public offering ("IPO"). Immediately
prior to the offering, CIT was merged with its parent Tyco Capital Holding, Inc.
("TCH"), a company used to acquire CIT. As a result, the historical financial
results of TCH are included in the historical consolidated CIT financial
statements.
Following the acquisition by Tyco, our fiscal year end was changed from
December 31 to September 30, to conform to Tyco's fiscal year end. On November
5, 2002, the CIT Board of Directors approved the return to a calendar year end
effective December 31, 2002. As a result, the three months ended December 31,
2002 constitutes a transitional fiscal period.
In accordance with the provisions of FASB Interpretation No. 46R ("FIN
46"), "Consolidation of Variable Interest Entities," CIT consolidates variable
interest entities for which management has concluded that CIT is the primary
beneficiary. Entities that do not meet the definition of a variable interest
entity are subject to the provisions of Accounting Research Bulletin No. 51
("ARB 51"), "Consolidated Financial Statements" and are consolidated when
management has determined that it has the controlling financial interest.
Entities which do not meet the consolidation criteria in either FIN 46 or ARB 51
but which are significantly influenced by the Company, generally those entities
that are twenty to fifty percent owned by CIT, are included in other assets at
cost for securities not readily marketable and presented at the corresponding
share of equity plus loans and advances. Investments in entities which
management does not have significant influence are included in other assets at
cost, less declines in value that are other than temporary. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
qualifying special purpose entities utilized in securitizations are not
consolidated. Inter-company transactions have been eliminated.
Financing and Leasing Assets
CIT provides funding through a variety of financing arrangements,
including term loans, lease financing and operating leases. The amounts
outstanding on loans and direct financing leases are referred to as finance
receivables and, when combined with finance receivables held for sale, net book
value of operating lease equipment, and certain investments, represent financing
and leasing assets.
At the time of designation for sale, securitization or syndication by
management, assets are classified as finance receivables held for sale. These
assets are carried at the lower of cost or fair value.
Income Recognition
Finance income includes interest on loans, the accretion of income on
direct financing leases, and rents on operating leases. Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is
recognized on an accrual basis commencing in the month of origination
55
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
using methods that generally approximate the interest method. Leveraged lease
income is recognized on a basis calculated to achieve a constant after-tax rate
of return for periods in which CIT has a positive investment in the transaction,
net of related deferred tax liabilities. Rental income on operating leases is
recognized on an accrual basis.
The accrual of finance income on commercial finance receivables is
generally suspended and an account is placed on non-accrual status when payment
of principal or interest is contractually delinquent for 90 days or more, or
earlier when, in the opinion of management, full collection of all principal and
interest due is doubtful. Given the nature of revolving credit facilities,
including those combined with term loan facilities (advances and interest
accruals increase revolving loan balances and payments reduce revolving loan
balances), the placement of revolving credit facilities on non-accrual status
includes the review of other qualitative and quantitative credit-related
factors, and generally does not result in the reversal of significant amounts of
accrued interest. To the extent the estimated fair value of collateral does not
satisfy both the principal and accrued interest outstanding, accrued but
uncollected interest at the date an account is placed on non-accrual status is
reversed and charged against income. Subsequent interest received is applied to
the outstanding principal balance until such time as the account is collected,
charged-off or returned to accrual status. The accrual of finance income on
consumer loans is suspended, and all previously accrued but uncollected income
is reversed, when payment of principal and/or interest is contractually
delinquent for 90 days or more.
Other revenue includes the following: (1) factoring commissions, (2)
commitment, facility, letters of credit and syndication fees, (3) servicing
fees, (4) gains and losses from sales of leasing equipment and sales and
securitizations of finance receivables, and (5) equity in earnings of joint
ventures and unconsolidated subsidiaries.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. Lease
receivables include leveraged leases, for which a major portion of the funding
is provided by third party lenders on a nonrecourse basis, with CIT providing
the balance and acquiring title to the property. Leveraged leases are recorded
at the aggregate value of future minimum lease payments plus estimated residual
value, less nonrecourse third party debt and unearned finance income. Management
performs periodic reviews of the estimated residual values with impairment,
other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables
The consolidated reserve for credit losses is periodically reviewed for
adequacy considering economic conditions, collateral values and credit quality
indicators, including historical and expected charge-off experience and levels
of and trends in past due loans and non-performing assets. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses. In management's judgment, the consolidated reserve for credit losses is
adequate to provide for credit losses inherent in the portfolio.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance receivables. To the extent that
an unrecovered balance remains due, a final charge-off is taken at the time
collection efforts are deemed no longer useful. Charge-offs are recorded on
consumer and certain small ticket commercial finance receivables beginning at
180 days of contractual delinquency based upon historical loss severity.
Collections on accounts previously charged off are recorded as recoveries.
56
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impaired Loans
Impaired loans include any loans for $500 thousand or greater, other than
homogeneous pools of loans, that are placed on non-accrual status or any
troubled debt restructuring that is subject to periodic individual review by
CIT's Asset Quality Review Committee ("AQR"). The AQR, which is comprised of
members of senior management, reviews overall portfolio performance, as well as
individual accounts meeting certain credit risk grading parameters. Excluded
from impaired loans are: 1) certain individual commercial non-accrual loans for
which the collateral value supports the outstanding balance and the continuation
of earning status, 2) consumer loans, which are subject to automatic charge-off
procedures, and 3) short-term factoring customer receivables, generally having
terms of no more than 30 days. Loan impairment is defined as any shortfall
between the estimated value and the recorded investment in the loan, with the
estimated value determined using the fair value of the collateral and other cash
flows if the loan is collateral dependent, or the present value of expected
future cash flows discounted at the loan's effective interest rate.
Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease
equipment, is performed at least annually and whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Impairment of assets is determined by comparing the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair value is based upon discounted cash
flow analysis and available market data. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Goodwill and Other Identified Intangibles
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets acquired, less the fair value of liabilities assumed from
business combinations. CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. The Company determined that there was no
impact of adopting this standard under the transition provisions of SFAS No.
142. Since adoption, goodwill is no longer amortized, but instead is assessed
for impairment at least annually. During this assessment, management relies on a
number of factors, including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data.
Other intangible assets are comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes.
Other intangible assets are being amortized over periods ranging from five to
twenty years on a straight-line basis, and are assessed for impairment at least
annually.
Other Assets
Assets received in satisfaction of loans are carried at the lower of
carrying value or estimated fair value less selling costs, with write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets, which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.
Realized and unrealized gains (losses) on marketable equity securities
included in CIT's venture capital investment companies are recognized currently
in operations. Unrealized gains and losses, representing the difference between
carrying value and estimated current fair market value, for all other debt and
equity securities are recorded in other accumulated comprehensive income, a
separate component of equity.
Investments in joint ventures are accounted for using the equity method,
whereby the investment balance is carried at cost and adjusted for the
proportionate share of undistributed earnings or losses. Unrealized intercompany
profits and losses are eliminated until realized, as if the joint venture were
consolidated.
Investments in debt and equity securities of non-public companies are
carried at fair value. Gains and losses are recognized upon sale or write-down
of these investments as a component of operating margin.
57
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securitizations
Pools of assets are originated and sold to special purpose entities which,
in turn, issue debt securities backed by the asset pools or sell individual
interests in the assets to investors. CIT retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected
net cash flows (after payment of principal and interest to certificate and/or
note holders and credit-related disbursements) that exceeds the estimated cost
of servicing is recorded at the time of sale as a "retained interest." Retained
interests in securitized assets are classified as available-for-sale securities
under SFAS No. 115. CIT, in its estimation of those net cash flows and retained
interests, employs a variety of financial assumptions, including loan pool
credit losses, prepayment speeds and discount rates. These assumptions are
supported by both CIT's historical experience, market trends and anticipated
performance relative to the particular assets securitized. Subsequent to the
recording of retained interests, CIT reviews such values quarterly. Fair values
of retained interests are calculated utilizing current and anticipated credit
losses, prepayment speeds and discount rates and are then compared to the
respective carrying values. Unrealized losses, representing the excess of
carrying value over estimated current fair value, are recorded as an impairment
in current earnings. Unrealized gains are not credited to current earnings, but
are reflected in stockholders' equity as part of other comprehensive income.
Derivative Financial Instruments
CIT uses interest rate swaps, currency swaps and foreign exchange forward
contracts as part of a worldwide market risk management program to hedge against
the effects of future interest rate and currency fluctuations. CIT does not
enter into derivative financial instruments for trading or speculative purposes.
On January 1, 2001, CIT adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative instruments are recognized in
the balance sheet at their fair values in other assets and accrued liabilities
and payables, and changes in fair values are recognized immediately in earnings,
unless the derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in accumulated other comprehensive income as
a separate component of equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any
ineffective portion of a hedge is reported in current earnings. Amounts
accumulated in other comprehensive income are reclassified to earnings in the
same period that the hedged transaction impacts earnings.
The net interest differential, including premiums paid or received, if
any, on interest rate swaps, is recognized on an accrual basis as an adjustment
to finance income or as interest expense to correspond with the hedged position.
In the event of early termination of a derivative instrument classified as a
cash flow hedge, the gain or loss remains in accumulated other comprehensive
income until the hedged transaction is recognized in earnings.
CIT utilizes foreign exchange forward contracts or cross-currency swaps to
convert U.S. dollar borrowings into local currency when local borrowings are not
cost effective or available. CIT also utilizes foreign exchange forward
contracts to hedge its net investments in foreign operations. These instruments
are designated as hedges and resulting gains and losses are reflected in
accumulated other comprehensive income as a separate component of equity.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is the local
currency. The value of the assets and liabilities of these operations is
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenue and expense items are translated at the average exchange
rates effective during the year. The resulting foreign currency translation
gains and losses, as well as offsetting gains and losses on hedges of net
investments in foreign operations, are reflected in accumulated other
comprehensive loss.
58
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been reflected in the Consolidated
Financial Statements. Deferred tax liabilities and assets are determined based
on the differences between the book values and the tax basis of particular
assets and liabilities, using tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided to offset
any net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. U.S. income taxes are generally not provided on undistributed earnings
of foreign operations as such earnings are permanently invested. Income tax
reserves are included in current taxes payable, which is reflected in accrued
liabilities and payables.
Other Comprehensive Income/Loss
Other comprehensive income/loss includes unrealized gains on
securitization retained interests and other investments, foreign currency
translation adjustments pertaining to both the net investment in foreign
operations and the related derivatives designated as hedges of such investments,
the changes in fair values of derivative instruments designated as hedges of
future cash flows and minimum pension liability adjustments.
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
maintained for liquidity purposes. Cash inflows and outflows from commercial
paper borrowings and most factoring receivables are presented on a net basis in
the Statements of Cash Flows, as their original term is generally less than 90
days.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make extensive use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" in accounting for its
stock-based compensation plans. Under APB 25, CIT does not recognize
compensation expense on the issuance of its stock options because the option
terms are fixed and the exercise price equals the market price of the underlying
stock on the grant date. The following table presents the pro forma information
required by SFAS 123 as if CIT had accounted for stock options granted under the
fair value method of SFAS 123, as amended ($ in millions, except per share
data):
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- ----------
(successor) (successor) (successor) (successor) (predecessor)
Net income (loss) as reported ................. $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
Stock-based compensation expense
-- fair value method, after tax ............. (23.0) (5.7) (5.7) -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss) ................... $ 543.9 $ 135.6 $(6,704.4) $ 182.8 $ 80.5
========= ========= ========= ========= =========
Basic earnings per share as reported .......... $ 2.68 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Basic earnings per share pro forma ............ $ 2.57 $ 0.64 $ (31.69) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Diluted earnings per share
as reported ................................. $ 2.66 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Diluted earnings per share pro forma .......... $ 2.55 $ 0.64 $ (31.69) $ 0.86 $ 0.38
========= ========= ========= ========= =========
59
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Pronouncements
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003" (FSP 106-1). FSP 106-1 permits
employers that sponsor postretirement benefit plans providing prescription drug
benefits to retirees to make a one-time election to defer accounting for any
effects of the Medicare Prescription Drug Improvement and Modernization Act of
2003. CIT has elected to defer the related accounting pending further guidance
from the FASB.
In December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revision requires
additional disclosures regarding defined benefit pension plan assumptions,
assets, obligations, cash flows and costs for fiscal years ending after December
15, 2003. The additional required disclosures are included in Note 16 -- Post
Retirement and Other Benefit Plans.
In December 2003, the SEC announced that it will release a Staff
Accounting Bulletin that will require issued loan commitments to be accounted
for as written options that would be reported as liabilities until the loan is
made or they expire unexercised. Management is evaluating the impact of this
proposed accounting pending further guidance from the SEC and the FASB.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Prior period restatement is not permitted. On November 7, 2003, certain
measurement and classification provisions of SFAS 150, relating to certain
mandatorily redeemable non-controlling interests, were deferred indefinitely.
The adoption of these delayed provisions, which relate primarily to minority
interests associated with finite-lived entities, is not expected to have a
significant impact on the financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This pronouncement amends and
clarifies financial accounting and reporting for certain derivative instruments,
including certain derivative instruments embedded in other contracts. This
pronouncement is effective for all contracts entered into or modified after June
30, 2003. The implementation of SFAS No. 149 did not have a significant impact
on our financial position or results of operations.
In January 2003, the FASB issued FIN 46, which requires the consolidation
of VIEs by their primary beneficiaries if they do not effectively disperse the
risks among the parties involved. On October 9, 2003, the FASB announced the
delay in implementation of FIN 46 for VIEs in existence as of February 1, 2003.
VIEs are certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The primary beneficiary is
the entity that has the majority of the economic risks and rewards of ownership
of the VIE.
The FIN 46 impact to CIT is primarily related to three types of
transactions: 1) strategic vendor partner joint ventures, 2) securitizations,
and 3) selected financing and private equity transactions. The implementation of
this standard did not change the current equity method of accounting for our
strategic vendor partner joint ventures (see Note 20). Our securitization
transactions outstanding at December 31, 2003 will continue to qualify as
off-balance sheet transactions. The Company may structure certain future
securitization transactions, including factoring trade account receivables
transactions, as on-balance sheet financings. Certain VIEs acquired primarily in
conjunction with selected financing and/or private equity transactions may be
consolidated under FIN 46.
60
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidation of these entities will not have a significant impact on our
financial position or results of operations. In December 2003, the FASB revised
FIN 46. This revision clarified certain provisions within FIN 46 and delayed
implementation for selected transactions until reporting periods ending after
March 15, 2004. The revisions to FIN 46 do not have a significant impact on our
previous assessments.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing certain guarantees. The expanded disclosure
requirements were required for financial statements ending after December 15,
2002, while the liability recognition provisions were applicable to all
guarantee obligations modified or issued after December 31, 2002.
Note 2 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Loans .................. $25,137.1 $21,030.2 $21,633.8
Leases ................. 6,163.1 6,591.1 6,825.2
--------- --------- ---------
Finance receivables.. $31,300.2 $27,621.3 $28,459.0
========= ========= =========
Finance receivables include unearned income of $3.3 billion, $ 3.2 billion
and $3.3 billion at December 31, 2003, December 31, 2002, and September 30,
2002, respectively. Included in finance receivables are equipment residual
values of $2.4 billion at both December 31, 2003 and December 31, 2002 and $2.3
billion at September 30, 2002. Included in lease receivables at December 31,
2003, December 31, 2002, and September 30, 2002 are leveraged leases of $1.1
billion, $1.2 billion, and $1.1 billion, respectively. Leveraged leases exclude
the portion funded by third party non-recourse debt payable of $3.3 billion at
December 31, 2003, $3.7 billion at December 31, 2002, and $3.6 billion at
September 30, 2002.
Additionally, CIT still managed finance receivables previously securitized
totaling $9.7 billion at December 31, 2003, $10.5 billion at December 31, 2002,
and $11.2 billion at September 30, 2002.
The following table sets forth the contractual maturities of finance
receivables due in the respective fiscal period. The 2003 decline in maturities
for the 'due within one year' category reflects a refinement in the presentation
relating to certain revolving loans. Current year maturities for these loans are
reflected in their contractual maturity date, but in prior years the current
year maturities were grouped in the first year total. Prior year balances have
not been conformed ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- --------- ------- ------- -------
Due within one year ................... $11,698.9 37.4% $12,076.3 43.7% $13,136.8 46.2%
Due within one to two years ........... 4,503.7 14.4 3,598.8 13.0 3,541.2 12.4
Due within two to four years .......... 5,639.0 18.0 4,181.2 15.2 4,375.7 15.4
Due after four years .................. 9,458.6 30.2 7,765.0 28.1 7,405.3 26.0
--------- ----- --------- ----- --------- -----
Total .............................. $31,300.2 100.0% $27,621.3 100.0% $28,459.0 100.0%
========= ===== ========= ===== ========= =====
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth certain information regarding total non-performing assets ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Non-accrual finance receivables .................... $ 566.5 $ 946.4 $ 976.6
Assets received in satisfaction of loans ........... 110.0 139.4 163.2
--------- --------- ---------
Total non-performing assets ........................ $ 676.5 $ 1,085.8 $ 1,139.8
========= ========= =========
Percentage of finance receivables .................. 2.16% 3.93% 4.01%
61
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2003, December 31, 2002, and September 30, 2002, the
recorded investment in loans considered for impairment totaled $516.5 million,
$959.9 million, and $1,001.2 million, respectively. Loans whose estimated fair
market value is less than current recorded value totaled $279.8 million, $522.3
million, and $449.8 million at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively. The corresponding specific reserve for credit
loss allocations were $120.7 million, $156.9 million, and $197.4 million and is
included in the reserve for credit losses. The average monthly recorded
investment in loans considered for impairment was $690.5 million (including
$316.0 million relating to telecommunications), $980.6 million (including $327.3
million relating to telecommunications), and $818.9 million (including $185.5
million relating to telecommunications) for the year ended December 31, 2003,
three months ended December 31, 2002, and twelve months ended September 30,
2002, respectively. After being classified as impaired, there was no finance
income recognized on these loans because our definition of an impaired loan is
based upon non-accrual classification. The amount of finance income that would
have been recorded under contractual terms for impaired loans would have been
$33.3 million, $19.2 million, $65.2 million, and $46.1 million for the year
ended December 31, 2003, for the three months ended December 31, 2002, for the
twelve months ended September 30, 2002, and for the nine months ended September
30, 2001, respectively.
Note 3 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
For the For the Three For the June 2 January 1
Year Ended Months Ended Year Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -----------
(successor) (successor) (successor) (successor) (predecessor)
Balance, beginning of period .................. $ 760.8 $ 777.8 $ 492.9 $ 462.7 $ 468.5
------- ------- ------- ------- -------
Provision for credit losses ................... 408.8 133.4 453.3 116.1 126.9
Provision for credit losses --
specific reserving actions(1) ............... (21.5) -- 335.0 -- 89.5
Reserves relating to dispositions,
acquisitions, other ......................... 17.5 4.1 (11.1) 0.9 (17.2)
------- ------- ------- ------- -------
Additions to the reserve for
credit losses ............................. 404.8 137.5 777.2 117.0 199.2
------- ------- ------- ------- -------
Finance receivables charged-off ............... (572.9) (173.2) (539.1) (93.7) (215.8)
Recoveries on finance receivables
previously charged-off ...................... 51.0 18.7 46.8 6.9 10.8
------- ------- ------- ------- -------
Net credit losses ........................... (521.9) (154.5) (492.3) (86.8) (205.0)
------- ------- ------- ------- -------
Balance, end of period ........................ $ 643.7 $ 760.8 $ 777.8 $ 492.9 $ 462.7
======= ======= ======= ======= =======
Reserve for credit losses as a
percentage of finance
receivables ................................. 2.06% 2.75% 2.73% 1.55% 1.50%
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
(1) The 2002 amounts consist of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2001 amount consists of a provision for under-performing
loans and leases, primarily in the telecommunications portfolio.
62
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of $1.5 billion, $1.3 billion, and $1.2 billion) of
operating lease equipment by equipment type at December 31, 2003, December 31,
2002, and September 30, 2002 ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Commercial aircraft .......................... $4,141.1 $3,185.4 $3,005.5
Railcars and locomotives ..................... 1,987.3 1,507.7 1,373.9
Communications ............................... 320.6 507.5 554.5
Business aircraft ............................ 242.5 292.6 341.3
Office equipment ............................. 235.0 132.7 124.9
Information technology ....................... 229.3 337.6 370.3
Other ........................................ 459.7 741.1 797.0
-------- -------- --------
Total ..................................... $7,615.5 $6,704.6 $6,567.4
======== ======== ========
Equipment not currently subject to lease agreements totaled 265.9 million,
$385.9 million and $267.3 million at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively.
Rental income on operating leases, which is included in finance income,
totaled $1.5 billion for the twelve months ended December 31, 2003, $0.4 billion
for the three months ended December 31, 2002, $1.7 billion for the twelve months
ended September 30, 2002, and $1.5 billion for the combined nine months ended
September 30, 2001. The following table presents future minimum lease rentals on
non-cancelable operating leases as of December 31, 2003. Excluded from this
table are variable rentals calculated on the level of asset usage, re-leasing
rentals, and expected sales proceeds from remarketing operating lease equipment
at lease expiration, all of which are components of operating lease
profitability ($ in millions).
Years Ended December 31, Amount
- ------------------------ ------
2004 ............................................................. $ 997.1
2005 ............................................................. 666.5
2006 ............................................................. 411.0
2007 ............................................................. 269.9
2008 ............................................................. 207.1
Thereafter ....................................................... 320.2
--------
Total ..................................................... $2,871.8
========
Note 5 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets at December 31, 2003,
December 31, 2002, and September 30, 2002 ($ in millions):
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Geographic Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- --------
North America:
Northeast .................................... $ 8,319.8 20.8% $ 7,833.8 21.8% $ 8,047.0 22.1%
West ......................................... 7,485.5 18.7 6,223.8 17.4 6,339.1 17.4
Midwest ...................................... 5,996.2 14.9 5,748.3 16.0 5,941.0 16.3
Southeast .................................... 5,558.6 13.9 4,946.8 13.8 4,854.1 13.3
Southwest .................................... 4,423.1 11.0 3,691.9 10.3 3,932.0 10.8
Canada ....................................... 2,055.5 5.1 1,804.9 5.0 1,688.4 4.7
--------- ----- --------- ----- --------- -----
Total North America .......................... 33,838.7 84.4 30,249.5 84.3 30,801.6 84.6
Other foreign ................................ 6,245.2 15.6 5,625.2 15.7 5,586.0 15.4
--------- ----- --------- ----- --------- -----
Total ..................................... $40,083.9 100.0% $35,874.7 100.0% $36,387.6 100.0%
========= ===== ========= ===== ========= =====
63
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Industry Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- --------
Manufacturing(1) (no industry
greater than 2.7%) ........................ $ 7,340.6 18.3% $ 7,114.3 19.8% $ 7,115.1 19.6%
Retail(2) .................................... 5,630.9 14.0 4,053.6 11.3 4,892.2 13.5
Commercial airlines
(including regional airlines) ............. 5,039.3 12.6 4,570.3 12.7 4,266.2 11.7
Transportation(3) ............................ 2,934.9 7.3 2,703.9 7.5 2,647.7 7.3
Consumer based lending -- Home
mortgage .................................. 2,830.8 7.1 1,292.7 3.6 1,314.2 3.6
Service industries ........................... 2,608.3 6.5 1,571.1 4.4 1,468.1 4.0
Consumer based lending -- non-real
estate(4) ................................. 1,710.9 4.3 2,435.0 6.8 1,858.5 5.1
Construction equipment ....................... 1,571.2 3.9 1,712.7 4.8 1,756.6 4.8
Communications(5) ............................ 1,386.5 3.5 1,662.6 4.6 1,746.8 4.8
Wholesaling .................................. 1,374.7 3.4 1,305.2 3.6 1,248.4 3.4
Automotive Services .......................... 1,152.3 2.9 1,138.8 3.2 1,113.6 3.1
Other (no industry greater
than 2.9%)(6) ............................. 6,503.5 16.2 6,314.5 17.7 6,960.2 19.1
--------- ----- --------- ----- --------- -----
Total ..................................... $40,083.9 100.0% $35,874.7 100.0% $36,387.6 100.0%
========= ===== ========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (6.0%) and general merchandise (4.3%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers for products in various industries
such as manufactured housing, recreational vehicles, marine and computers
and related equipment.
(5) Includes $556.3 million, $685.8 million and $707.2 million of equipment
financed for the telecommunications industry at December 31, 2003,
December 31, 2002 and September 30, 2002, respectively, but excludes
telecommunications equipment financed for other industries.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $949.8 million, or 2.4% of
total financing and leasing assets at December 31, 2003. This amount
includes approximately $651.2 million in project financing and $256.1
million in rail cars on lease.
Note 6 -- Retained Interests in Securitizations
Retained interests in securitizations and other investments designated as
available for sale are shown in the following table ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Retained interests in securitized
commercial loans ...................................... $1,129.7 $1,042.1 $1,039.7
Retained interests in securitized
consumer loans ........................................ 179.6 313.8 274.0
Aerospace equipment trust certificates ................... 71.5 95.5 96.7
-------- -------- --------
Total ................................................. $1,380.8 $1,451.4 $1,410.4
======== ======== ========
Retained interests in securitizations include interest-only strips,
retained subordinated securities and cash reserves related to securitizations.
The composition of retained interests in securitizations was as follows ($ in
millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Retained subordinated securities ......................... $ 623.3 $ 698.2 $ 658.9
Interest-only strips ..................................... 425.7 383.1 362.2
Cash reserve accounts .................................... 260.3 274.6 292.6
-------- -------- --------
Total .................................................. $1,309.3 $1,355.9 $1,313.7
======== ======== ========
The carrying value of the retained interests in securitized assets is
reviewed quarterly for valuation impairment. During the year ended December 31,
2003, net accretion of $81.5 million was recognized in pretax earnings,
including $66.6 million of impairment charges. For the three months ended
December 31, 2002,
64
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accretion of $33.2 million was recognized in pretax earnings, net of $10.6
million impairment charges. For the twelve months ended September 30, 2002, net
accretion of $97.1 million was recognized in pretax earnings, including $49.9
million in impairment charges. Unrealized after tax gains totaled $7.7 million,
$20.5 million and $25.8 million at December 31, 2003, December 31, 2002 and
September 30, 2002, respectively, and are reflected as a part of accumulated
other comprehensive loss.
The securitization programs cover a wide range of products and collateral
types with different prepayment and credit risk characteristics. The prepayment
speed, in the tables below, is based on Constant Prepayment Rate, which
expresses payments as a function of the declining amount of loans at a compound
annual rate. Weighted average expected credit losses are expressed as annual
loss rates.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2003 were as follows:
Commercial Equipment
---------------------
Specialty Equipment Consumer
Finance Finance Home Equity
--------- --------- -----------
Weighted average prepayment speed ........ 34.11% 12.20% 24.40%
Weighted average expected credit losses .. 0.47% 1.08% 0.90%
Weighted average discount rate ........... 9.13% 9.00% 13.00%
Weighted average life (in years) ......... 1.37 1.92 3.51
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at December 31, 2003 were as
follows:
Commercial Equipment Consumer
------------------------- ------------------------------
Manufactured Recreational
Specialty Equipment Housing & Vehicle &
Finance Finance Home Equity Boat
--------- --------- ------------ ------------
Weighted average prepayment speed .......... 26.57% 12.57% 26.50% 18.26%
Weighted average expected credit losses .... 1.02% 1.44% 1.29% 0.83%
Weighted average discount rate ............. 8.03% 9.86% 13.08% 14.18%
Weighted average life (in years) ........... 1.14 1.41 3.04 3.05
The impact of 10 percent and 20 percent adverse changes to the key
assumptions on the fair value of retained interests as of December 31, 2003 is
shown in the following tables ($ in millions).
Consumer
--------------------------
Manufactured Recreational
Commercial Housing & Vehicle &
Equipment Home Equity Boat
---------- ------------ ------------
Prepayment speed:
10 percent adverse change .......... $ (27.1) $ (11.1) $ (0.6)
20 percent adverse change .......... (51.0) (20.5) (1.3)
Expected credit losses:
10 percent adverse change .......... (11.9) (6.0) (1.3)
20 percent adverse change .......... (23.8) (11.4) (2.7)
Weighted average discount rate:
10 percent adverse change .......... (10.5) (3.5) (1.5)
20 percent adverse change .......... (20.9) (6.8) (2.9)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent or 20 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumptions to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
65
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize static pool credit losses, which represent
the sum of actual losses (life to date) and projected future credit losses,
divided by the original balance of each pool of the respective assets for the
securitizations during the period.
Commercial Equipment
Securitizations During
--------------------------------
2003 2002 2001
---- ---- ----
(successor) (successor) (combined)
Actual and projected losses at:
December 31, 2003 ..................... 1.74% 2.04% 3.39%
December 31, 2002 ..................... -- 1.96% 2.94%
September 30, 2002 .................... -- 1.92% 2.87%
September 30, 2001 .................... -- -- 1.92%
Home Equity Securitizations During
----------------------------------
2003 2002 2001
---- ---- ----
(successor) (successor) (combined)
Actual and projected losses at:
December 31, 2003 ..................... 3.07% 2.72% --
December 31, 2002 ..................... -- 2.65% --
September 30, 2002 .................... -- 2.68% --
September 30, 2001 .................... -- -- --
The tables that follow summarize the roll-forward of retained interest
balances and certain cash flows received from and paid to securitization trusts
($ in millions).
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ------------------ ------------------
Retained Interests
- ------------------
Retained interest at beginning of period ...... $1,355.9 $1,313.7 $ 970.1
New sales ..................................... 640.9 154.9 792.9
Distributions from trusts ..................... (728.6) (175.3) (512.6)
Change in fair value .......................... (21.1) (4.4) 43.1
Other, including net accretion, and
clean-up calls ............................. 62.2 67.0 20.2
-------- -------- --------
Retained interest at end of period ............ $1,309.3 $1,355.9 $1,313.7
======== ======== ========
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Cash Flows During the Periods
- -----------------------------
Proceeds from new securitizations ............ $4,589.5 $1,060.2 $6,603.9
Other cash flows received on
retained interests ........................ 688.2 175.3 551.5
Servicing fees received ...................... 80.2 19.7 72.3
Reimbursable servicing advances, net ......... 7.3 (4.0) (21.9)
Repurchases of delinquent or foreclosed
assets and ineligible contracts ........... (63.0) (3.7) (104.7)
Purchases of contracts through clean
up calls .................................. (439.8) (8.2) (456.9)
Guarantee draws .............................. (2.1) (0.2) (1.2)
-------- -------- --------
Total, net ................................. $4,860.3 $1,239.1 $6,643.0
======== ======== ========
66
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total net charge-offs, for both finance receivables and managed
receivables, and net charge-offs as a percentage of average finance receivables
and managed receivables, are set forth below. Managed receivables include
finance receivables plus finance receivables previously securitized and still
managed by us ($ in millions).
Net Charge-offs of Finance Receivables
------------------------------------------------------------------------------------------
Combined
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
-------------------- ------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
Commercial ........ $466.4 1.75% $143.3 2.33% $445.9 1.65% $243.5 1.13%
Consumer .......... 55.5 2.01% 11.2 2.24% 46.4 1.78% 48.3 1.72%
------ ------ ------ ------
Total ........... $521.9 1.77% $154.5 2.32% $492.3 1.67% $291.8 1.20%
====== ====== ====== ======
Net Charge-offs of Managed Receivables
------------------------------------------------------------------------------------------
Combined
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
-------------------- ------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
Commercial ....... $578.8 1.72% $187.5 2.29% $701.6 2.71% $351.6 1.87%
Consumer ......... 101.3 1.76% 18.7 1.62% 78.8 1.35% 71.5 1.04%
------ ------ ------ ------
Total .......... $680.1 1.72% $206.2 2.21% $780.4 1.94% $423.1 1.64%
====== ====== ====== ======
Receivables past due 60 days or more, for both finance receivables and
managed receivables, and receivables past due 60 days or more as a percentage of
finance receivables and managed receivables are set forth below. Managed
receivables include finance receivables plus finance receivables previously
securitized and still managed by us ($ in millions).
Finance Receivables Past Due 60 Days or More
------------------------------------------------------------------
December 31, 2003 December 31, 2002 September 30, 2002
------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial.. $526.7 1.90% $ 867.6 3.39% $ 942.8 3.53%
Consumer ... 149.6 4.26% 133.7 6.66% 127.2 7.20%
------ -------- --------
Total ... $676.3 2.16% $1,001.3 3.63% $1,070.0 3.76%
====== ======== ========
Managed Receivables Past Due 60 Days or More
------------------------------------------------------------------
December 31, 2003 December 31, 2002 September 30, 2002
------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial.. $ 727.2 2.04% $1,136.2 3.36% $1,289.1 3.64%
Consumer ... 294.8 4.78% 259.4 4.71% 249.5 4.71%
-------- -------- --------
Total .... $1,022.0 2.44% $1,395.6 3.55% $1,538.6 3.78%
======== ======== ========
Note 7 -- Other Assets
Other assets totaled $3.3 billion at both December 31, 2003 and December
31, 2002, and $3.4 billion at September 30, 2002. Other assets primarily
consisted of the following at December 31, 2003: accrued interest and
receivables from derivative counterparties of $0.9 billion, investments in and
receivables from non-consolidated subsidiaries of $0.6 billion, deposits on
commercial aerospace flight equipment of $0.3 billion, direct and private fund
equity investments of $0.2 billion, prepaid expenses of $0.2 billion, and
repossessed assets and off-lease equipment of $0.1 billion. The remaining
balance includes furniture and fixtures, miscellaneous receivables and other
assets.
67
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Borrowings outstanding ...................... $4,173.9 $4,974.6 $4,654.2
Weighted average interest rate .............. 1.19% 1.62% 1.87%
Weighted average number of days
to maturity ............................... 50 days 38 days 37 days
Three Combined Nine
Year Ended Months Ended Year Ended Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Daily average borrowings ........ $4,648.2 $4,758.7 $ 4,564.7 $10,142.5
Maximum amount outstanding ...... 4,999.1 4,994.1 10,713.5 11,726.4
Weighted average interest rate .. 1.25% 1.75% 2.25% 4.67%
The consolidated weighted average interest rates on variable-rate senior
notes at December 31, 2003, December 31, 2002, and September 30, 2002 were
1.87%, 2.08%, and 2.31%, respectively. Fixed-rate senior debt outstanding at
December 31, 2003 matures at various dates through 2028. The consolidated
weighted-average interest rates on fixed-rate senior debt at December 31, 2003,
December 31, 2002, and September 30, 2002 was 6.12%, 6.74%, and 6.82%,
respectively. Foreign currency-denominated debt (stated in U.S. Dollars) totaled
$1,601.4 million at December 31, 2003, all of which was fixed-rate. Foreign
currency-denominated debt (stated in U.S. Dollars) totaled $1,652.4 million at
December 31, 2002, of which $1,334.4 was fixed-rate and $318.0 was
variable-rate. Foreign currency-denominated debt at September 30, 2002 totaled
$1,627.9 million, of which $1,290.5 million was fixed-rate and $337.4 million
was variable-rate debt.
The following tables present calendar year contractual maturities and the
high and low interest rates for total variable-rate and fixed-rate debt at
December 31, 2003 and 2002, and fiscal year contractual maturities at September
30, 2002 ($ in millions).
Commercial Variable-rate December 31, December 31, September 30,
Variable-Rate Paper Senior Notes 2003 Total 2002 2002
- ------------ ---------- ----------- ----------- ------------ -------------
Due in 2003 ................... $ -- $ -- $ -- $10,999.0 $12,601.9
Due in 2004 (rates ranging
from 1.25% to 2.67%) ....... 4,173.9 4,806.4 8,980.3 727.3 1,247.0
Due in 2005 (rates ranging
from 1.39% to 2.66%) ....... -- 3,333.3 3,333.3 29.1 23.4
Due in 2006 (rates ranging
from 1.39% to 2.02%) ....... -- 985.3 985.3 31.0 25.0
Due in 2007 (rates ranging
from 1.93% to 2.02%) ....... -- 37.5 37.5 33.0 26.6
Due in 2008 (rates ranging
from 1.93% to 2.02%) ....... -- 39.8 39.8 35.1 28.5
Due after 2008 (rates ranging
from 1.93% to 2.02%) ....... -- 206.1 206.1 145.0 118.2
-------- -------- --------- --------- ---------
$4,173.9 $9,408.4 $13,582.3 $11,999.5 $14,070.6
======== ======== ========= ========= =========
68
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, December 31, September 30,
Fixed-Rate 2003 2002 2002
- ---------- ------------ ------------ -------------
Due in 2003 ..................................................... $ -- $ 4,245.8 $ 2,784.9
Due in 2004 (rates ranging from 1.85% to 8.26%) ................. 3,930.2 3,231.0 4,321.5
Due in 2005 (rates ranging from 1.85% to 8.26%) ................. 4,328.6 3,939.7 4,704.1
Due in 2006 (rates ranging from 2.10% to 7.80%) ................. 2,639.4 1,137.1 1,179.1
Due in 2007 (rates ranging from 2.70% to 7.80%) ................. 3,498.9 3,386.8 2,307.1
Due in 2008 (rates ranging from 2.90% to 7.80%) ................. 1,740.5 212.1 212.1
Due after 2008 (rates ranging from 4.45% to 7.80%) .............. 3,693.2 3,529.3 2,876.6
--------- --------- ---------
Total ........................................................ $19,830.8 $19,681.8 $18,385.4
========= ========= =========
At December 31, 2003, $10.1 billion of unissued debt securities remained
under a shelf registration statement.
The following table represents information on unsecured committed lines of
credit at December 31, 2003 that can be drawn upon to support commercial paper
borrowings ($ in millions).
Expiration Total Drawn Available
- ---------- ----- ----- ---------
October 13, 2004 .................. $2,100.0 $ -- $2,100.0
March 28, 2005 .................... 2,000.0 -- 2,000.0
October 14, 2008 .................. 2,100.0 281.2 1,818.8
-------- ------ --------
Total credit lines ................ $6,200.0 $281.2 $5,918.8
======== ====== ========
CIT has the ability to issue up to $400 million of letters of credit under
the $2.1 billion facility expiring in 2008, which, when utilized, reduces
available borrowings under this facility. At December 31, 2003, $281.2 million
letters of credit were issued under this facility. The credit line agreements
contain clauses that permit extensions beyond the expiration dates upon written
consent from the participating lenders. Certain foreign operations utilize local
financial institutions to fund operations. At December 31, 2003, local credit
facilities totaled $84.7 million, of which $55.7 million was undrawn and
available.
CIT had $1.25 billion of debt securities outstanding that were callable at
par in December 2003 and January 2004. These notes were listed on the New York
Stock Exchange under the ticker symbols CIC and CIP and are commonly known as
PINEs ("Public Income Notes"). The securities' coupon rates of 8.125% and 8.25%,
were marked down to a yield of approximately 7.5% in CIT's financial statements
through purchase accounting adjustments. In light of the high coupon rates, we
called the securities for redemption pursuant to the terms outlined in the
prospectuses. Once called, we recorded pre-tax gains totaling $50.4 million in
December 2003 and $41.8 million in January 2004 ($30.8 million and $25.5 million
after-tax, respectively), as the cash outlay was less than the carrying value of
the securities.
Preferred Capital Securities
In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned
subsidiary of CIT, issued in a private offering $250.0 million liquidation value
of 7.70% Preferred Capital Securities (the "Capital Securities"), which were
subsequently registered with the Securities and Exchange Commission pursuant to
an exchange offer. Each capital security was recorded at the liquidation value
of $1,000. The Trust subsequently invested the offering proceeds in $250.0
million principal amount Junior Subordinated Debentures (the "Debentures") of
CIT, having identical rates and payment dates. The Debentures of CIT represent
the sole assets of the Trust. Holders of the Capital Securities are entitled to
receive cumulative distributions at an annual rate of 7.70% through either the
redemption date or maturity of the Debentures (February 15, 2027). Both the
Capital Securities issued by the Trust and the Debentures of CIT owned by the
Trust are redeemable in whole or in part on or after February 15, 2007 or at any
time in whole upon changes in specific tax legislation, bank regulatory
guidelines or securities law at the option of CIT at their liquidation value or
principal amount. The securities are redeemable at a specified premium through
February 15, 2017, at which time the redemption price will be at par, plus
accrued interest. Distributions
69
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by the Trust are guaranteed by CIT to the extent that the Trust has funds
available for distribution. The Capital Securities were valued at $260.0 million
on June 1, 2001, the date of acquisition by Tyco, in new basis accounting and
the current balance reflects accretion of the premium.
Note 9 -- Derivative Financial Instruments
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows are presented in the
following table ($ in millions).
Adjustment of Income Total
Fair Value of Tax Unrealized
Derivatives Effects Loss
------------- ------- ----------
Balance at September 30, 2002 -- unrealized loss ................... $ 194.4 $(73.9) $120.5
Changes in values of derivatives qualifying as cash flow hedges .... (3.6) 1.4 (2.2)
------- ------ ------
Balance at December 31, 2002 -- unrealized loss .................... 190.8 (72.5) 118.3
Changes in values of derivatives qualifying as cash flow hedges .... (126.2) 49.2 (77.0)
------- ------ ------
Balance at December 31, 2003 -- unrealized loss .................... $ 64.6 $(23.3) $ 41.3
======= ====== ======
The unrealized loss as of December 31, 2003, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, followed by lower market interest rates.
For the year ended December 31, 2003, the ineffective portion of changes in the
fair value of cash flow hedges amounted to $0.2 million and has been recorded as
an increase to interest expense. For the three months ended December 31, 2002,
the ineffective portion of changes in the fair value of cash flow hedges
amounted to $0.4 million and had been recorded as a decrease to interest
expense. For the year ended September 30, 2002, the ineffective portion of
changes in the fair value of cash flow hedges amounted to $1.4 million and was
recorded as an increase to interest expense. For the combined nine months ended
September 30, 2001, the ineffective portion of changes in the fair value of cash
flow hedges amounted to $3.4 million and was recorded as a decrease to interest
expense. Assuming no change in interest rates, approximately $46.0 million, net
of tax, of Accumulated Other Comprehensive Loss is expected to be reclassified
to earnings over the next twelve months as contractual cash payments are made.
The Accumulated Other Comprehensive Loss (along with the corresponding swap
liability) will be adjusted as market interest rates change over the remaining
life of the swaps.
As part of managing the exposure to changes in market interest rates, CIT,
as an end-user, enters into various interest rate swap transactions, all of
which are transacted in over-the-counter markets with other financial
institutions acting as principal counterparties. We use derivatives for hedging
purposes only, and policy prohibits entering into derivative financial
instruments for trading or speculative purposes. To ensure both appropriate use
as a hedge and hedge accounting treatment, derivatives entered into are
designated according to a hedge objective against a specific liability,
including commercial paper, or a specifically underwritten debt issue or in
limited instances against assets. The notional amounts, rates, indices and
maturities of our derivatives closely match the related terms of our hedged
liabilities and certain assets. CIT exchanges variable-rate interest on certain
debt instruments for fixed-rate amounts. These interest rate swaps are
designated as cash flow hedges. We also exchange fixed-rate interest on certain
of our debt for variable-rate amounts. These interest rate swaps are designated
as fair value hedges.
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position ($ in
millions):
Notional Amount
---------------------------------
December 31, September 30,
---------------- --------------
Interest Rate Swaps 2003 2002 2002
- ------------------- ---- ---- ----
Floating to fixed-rate swaps -- Effectively converts the interest rate on an
cash flow hedges .................. $2,615.0 $3,280.5 $3,585.8 equivalent amount of commercial paper,
variable-rate notes and selected assets to
a fixed rate.
Fixed to floating-rate swaps -- Effectively converts the interest rate on an
fair value hedges ................. 6,758.2 4,489.8 3,479.8 equivalent amount of fixed-rate notes and
-------- -------- -------- selected assets to a variable rate.
Total interest rate swaps ........... $9,373.2 $7,770.3 $7,065.6
======== ======== ========
70
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with securitizations, CIT entered into $2.7 billion in
notional amount of hedge transactions to protect the related trusts against
interest rate risk. CIT is insulated from this risk by entering into offsetting
swap transactions with third parties totalling $2.7 billion in notional amount
at December 31, 2003.
Foreign exchange forward contracts or cross-currency swaps are used to
convert U.S. dollar borrowings into local currency to the extent that local
borrowings are not cost effective or available. We also use foreign exchange
forward contracts to hedge our net investment in foreign operations.
CIT is exposed to credit risk to the extent that the counterparty fails to
perform under the terms of a derivative instrument. This risk is measured as the
market value of interest rate swaps or foreign exchange forwards with a positive
fair value, which totaled $509.0 million at December 31, 2003, reduced by the
effects of master netting agreements as presented in Note 19 -- Fair Values of
Financial Instruments. We manage this credit risk by requiring that all
derivative transactions be conducted with counterparties rated investment grade
by nationally recognized rating agencies, with the majority of the
counterparties rated "AA" or higher, and by setting limits on the exposure with
any individual counterparty. Accordingly, counterparty credit risk at December
31, 2003 is not considered significant.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid on U.S.
dollar interest rate swaps at December 31, 2003 ($ in millions).
Maturity Floating to Fixed-rate Fixed to Floating-rate
- -------- --------------------------------- --------------------------------
Years Ending Notional Receive Pay Notional Receive Pay
December 31, Amount Rate Rate Amount Rate Rate
- ------------ ------ ---- ---- ------ ---- ----
2004 ............................ $ 399.5 1.17% 3.74% $ 11.0 7.85% 1.92%
2005 ............................ 433.5 1.17% 3.80% 257.8 6.92% 2.42%
2006 ............................ 211.9 1.19% 3.65% 340.7 3.15% 1.27%
2007 ............................ 182.6 1.20% 4.04% 3,222.7 6.25% 3.92%
2008 ............................ 146.3 1.20% 4.76% 747.9 4.54% 2.06%
2009 - Thereafter ............... 922.6 1.20% 6.21% 2,178.1 7.11% 3.40%
-------- --------
Total ......................... $2,296.4 1.19% 4.82% $6,758.2 6.21% 3.35%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid, of foreign
currency interest rate swaps that converted floating-rate debt to fixed rate
debt at December 31, 2003 ($ in million).
Foreign Currency Notional Amount Receive Rate Pay Rate Maturity Range
- ---------------- --------------- ------------ -------- --------------
Canadian Dollar ......................... $252.8 2.75% 6.21% 2004 -- 2009
Australian Dollar ....................... $ 48.9 5.45% 5.75% 2004 -- 2006
British Pound ........................... $ 16.9 3.83% 5.43% 2004
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
At December 31, 2003, CIT was party to foreign currency exchange forward
contracts and cross currency swaps. The following table presents the maturity
and notional principal amounts of foreign currency exchange forwards and cross
currency swaps at December 31, 2003 ($ in millions).
Notional Principal Amount
-----------------------------------
Maturity Years Ended Foreign Currency Cross-Currency
December 31, Exchange Forwards Swaps
- -------------------- ----------------- --------------
2004 ................................... $1,985.8 $ 135.5
2005 ................................... 440.7 1,082.3
2006 ................................... 56.7 57.5
2007 ................................... 103.0 14.7
2008 ................................... -- 348.6
2009 - Thereafter ...................... -- 134.3
-------- --------
Total ................................ $2,586.2 $1,772.9
======== ========
71
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10 -- Accumulated Other Comprehensive Loss
The following table details the December 31, 2003, December 31, 2002 and
September 30, 2002 components of accumulated other comprehensive loss, net of
tax ($ in millions):
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Changes in fair values of derivatives qualifying as cash
flow hedges ........................................................ $ (41.3) $(118.3) $(120.5)
Foreign currency translation adjustments ........................... (105.8) (75.6) (75.8)
Minimum pension liability adjustments .............................. (0.8) (20.5) (21.0)
Unrealized gain on equity and securitization investments ........... 6.3 13.7 21.0
------- ------- -------
Total accumulated other comprehensive loss ...................... $(141.6) $(200.7) $(196.3)
======= ======= =======
Note 11 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 17.4 million shares for the year ended December 31, 2003.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the year ended December 31, 2003 ($ in millions,
except per share amounts and shares, which are in whole dollars and thousands,
respectively).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
Income available to common
stockholders ................. $566.9 211,681 $2.68
Effect of Dilutive Securities:
Restricted shares .............. -- 396 --
Stock options .................. -- 1,066 --
------ -------
Diluted EPS ....................... $566.9 213,143 $2.66
====== =======
The following table summarizes the earnings per share amounts for the
three months ended December 31, 2002, year ended September 30, 2002, and the
periods June 2 through September 30, 2001, and January 1 through June 1, 2001,
assuming that the shares outstanding at September 30, 2002 were outstanding for
all historical periods ($ in millions, except per share amounts).
Net (Loss) Diluted
Income Basic EPS(1) EPS(1)
---------- ------------ -------
Three months ended December 31, 2002
(successor) ............................. $ 141.3 $ 0.67 $ 0.67
Year ended September 30, 2002
(successor) ............................. $(6,698.7) $(31.66) $(31.66)
June 2 through September 30, 2001
(successor) ............................. $ 182.8 $ 0.86 $ 0.86
January 1 through June 1, 2001
(predecessor) ........................... $ 80.5 $ 0.38 $ 0.38
- --------------------------------------------------------------------------------
(1) Based on 211.6 million and 211.8 million shares for basic and diluted EPS
for the three months ended December 31, 2002 and 211.6 million and 211.7
million shares for basic and diluted EPS for all prior periods.
72
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12 -- Common Stock
The following table summarizes changes in common stock outstanding for the
respective periods:
Common Stock
----------------------------------------
Issued Less Treasury Outstanding
----------- ------------- -----------
Balance at September 30, 2002 ....... 211,573,200 -- 211,573,200
Activity for the three months ended
December 31, 2002 ................ -- -- --
----------- -------- -----------
Balance at December 31, 2002 ........ 211,573,200 -- 211,573,200
Treasury shares purchased ........... -- (913,886) (913,886)
Stock options exercised ............. -- 870,357 870,357
Restricted shares issued ............ 275,797 -- 275,797
----------- -------- -----------
Balance at December 31, 2003 ........ 211,848,997 (43,529) 211,805,468
=========== ======== ===========
Note 13 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Fees and other income ................ $586.2 $169.2 $644.5 $212.3 $174.9
Factoring commissions ................ 189.8 55.1 165.5 50.7 61.2
Gains on securitizations ............. 100.9 30.5 149.0 59.0 38.7
Gains on sales of leasing equipment .. 70.7 8.7 13.6 14.2 33.7
Other charges(1) ..................... -- -- -- -- (78.1)
------ ------ ------ ------ ------
Total .............................. $947.6 $263.5 $972.6 $336.2 $230.4
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) Write-downs of $78.1 million were recorded for certain equity investments
in the telecommunications industry and e-commerce markets, including $19.6
million relating to venture capital investments.
Note 14 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Year Three June 2 January 1
Ended Months Ended Year Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Salaries and employee benefits .... $529.6 $126.8 $517.4 $204.7 $262.0
Other operating expenses-- CIT .... 412.7 115.3 406.0 134.2 184.0
Other operating expenses-- TCH .... -- -- 23.0 9.6 --
------ ------ ------ ------ ------
Total ........................... $942.3 $242.1 $946.4 $348.5 $446.0
====== ====== ====== ====== ======
73
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows:
Percentage of Pretax Income
------------------------------------------------------------------------
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Federal income tax rate ............. 35.0% 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes, net of
federal income tax benefit ........ 3.7 2.6 (0.3) 2.2 2.2
Foreign income taxes ................ 1.0 1.6 (0.4) 2.2 2.2
Goodwill impairment ................. -- -- (36.1) -- --
Interest expense-- TCH .............. -- -- (4.2) -- --
Goodwill amortization ............... -- -- -- 6.2 7.8
Other ............................... (0.7) (0.2) 0.1 0.2 2.6
------- ------- -------- -------- --------
Effective tax rate .................. 39.0% 39.0% (5.9)% 45.8% 49.8%
======= ======= ======== ======== ========
The provision for income taxes is comprised of the following ($ in
millions):
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Current federal income
tax provision ................... $ -- $ -- $ -- $ -- $ --
Deferred federal income
tax provision ................... 265.1 71.9 276.9 113.6 63.7
------ ----- ------ ------ -----
Total federal income taxes ........ 265.1 71.9 276.9 113.6 63.7
State and local income taxes ...... 53.5 9.4 30.4 11.7 5.7
Foreign income taxes .............. 46.4 10.7 66.7 32.1 15.4
------ ----- ------ ------ -----
Total provision for income taxes $365.0 $92.0 $374.0 $157.4 $84.8
====== ===== ====== ====== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities are presented below
($ in millions).
December 31, December 31, September 30,
2003 2002 2002
----------- ----------- -------------
(successor) (successor) (successor)
Assets:
Net operating loss carryforwards .............. $ 834.1 $ 849.9 $ 834.4
Provision for credit losses ................... 202.4 254.8 282.1
Alternative minimum tax credits ............... 142.0 142.0 142.0
Purchase price adjustments .................... 67.9 176.9 207.7
Goodwill ...................................... 65.6 91.5 98.4
Other comprehensive income items .............. 47.6 84.3 86.0
Accrued liabilities and reserves .............. 43.8 46.5 59.9
Other ......................................... 14.1 -- --
--------- --------- ---------
Total deferred tax assets .................. 1,417.5 1,645.9 1,710.5
--------- --------- ---------
Liabilities:
Leasing transactions .......................... (1,311.7) (1,189.6) (1.215.6)
Securitization transactions ................... (633.0) (614.4) (590.0)
Market discount income ........................ -- (1.4) (1.5)
--------- --------- ---------
Total deferred tax liabilities ............. (1,944.7) (1,805.4) (1,807.1)
--------- --------- ---------
Net deferred tax (liability) .................. $ (527.2) $ (159.5) $ (96.6)
========= ========= =========
74
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The presentation of deferred tax assets and liabilities in prior years has
been modified to reflect amounts included on completed and amended income tax
returns. At December 31, 2003, CIT was continuing to develop an analysis of
deferred tax assets and liabilities. Future income tax return filings and the
completion of the aforementioned analysis of deferred tax assets and liabilities
could result in reclassifications to the deferred tax assets and liabilities
shown in the preceding table.
At December 31, 2003, CIT had U.S. federal net operating losses of
approximately $1,973.7 million, which expire in various years beginning in 2011.
In addition, CIT has various state net operating losses that will expire in
various years beginning in 2004. Federal and state net operating losses may be
subject to annual use limitations under section 382 of the Internal Revenue Code
of 1986, as amended, and other limitations under certain state laws. Management
believes that CIT will have sufficient taxable income in future years and can
avail itself of tax planning strategies in order to fully utilize these losses.
Accordingly, CIT does not believe a valuation allowance is required with respect
to these net operating losses.
Note 16 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
CIT has a number of funded and unfunded noncontributory defined benefit
pension plans covering certain of its U.S. and non-U.S. employees, designed in
accordance with conditions and practices in the countries concerned. The
retirement benefits under the defined benefit pension plans are based on the
employee's age, years of service and qualifying compensation. CIT's funding
policy is to make contributions to the extent such contributions are not less
than the minimum required by applicable laws and regulations, are consistent
with our long-term objective of ensuring sufficient funds to finance future
retirement benefits, and are tax deductible as actuarially determined. CIT made
cash contributions of $69.4 million to its pension plans for the year ended
December 31, 2003. Contributions are charged to the salaries and employee
benefits expense on a systematic basis over the expected average remaining
service period of employees expected to receive benefits.
The largest plan is the CIT Group Inc. Retirement Plan (the "Plan"), which
accounts for 77% of the total benefit obligation at December 31, 2003. The Plan
covers U.S. employees of CIT who have completed one year of service and have
attained the age of 21. The Company also maintains a Supplemental Retirement
Plan for employees whose benefit in the Plan is subject to Internal Revenue Code
limitations.
The Plan has a "cash balance" formula that became effective January 1,
2001. Certain eligible members had the option of remaining under the Plan
formula as in effect prior to January 1, 2001. Under the cash balance formula,
each member's accrued benefits as of December 31, 2000 were converted to a lump
sum amount, and every year thereafter, the balance is credited with a percentage
(5% to 8% depending on years of service) of the member's "Benefits Pay"
(comprised of base salary, plus certain annual bonuses, sales incentives and
commissions). These balances also receive annual interest credits, subject to
certain government limits. The interest credit was 5.01% and 5.76% for the plan
years ended December 31, 2003 and 2002, respectively. Upon termination or
retirement after five years of employment, the amount credited to a member is to
be paid in a lump sum or converted into an annuity at the option of the member.
CIT also provides certain healthcare and life insurance benefits to
eligible retired U.S. employees. The healthcare benefit is contributory for
eligible retirees; the life insurance benefit is noncontributory. Salaried
participants generally become eligible for retiree healthcare benefits after
reaching age 55 with 11 years of continuous CIT service immediately prior to
retirement. Generally, the medical plan pays a stated percentage of most medical
expenses, reduced by a deductible as well as by payments made by government
programs and other group coverage. The retiree health care benefit includes a
limit on CIT's share of costs for all employees who retired after January 31,
2002. The plans are funded on a pay as you go basis.
CIT uses its disclosure date as the measurement date for all Retirement
and Postretirement Medical and Life Insurance Benefit Plans. The measurement
dates included in this report for the Retirement and Postretirement Medical and
Life Insurance Plans are December 31, 2003, December 31, 2002, and September 30,
2002.
75
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the change in benefit obligation, plan
assets and funded status of the retirement plans as well as the net periodic
benefit cost ($ in millions). All periods presented include amounts and
assumptions relating to the Plan, the unfunded Supplemental Retirement Plan, an
Executive Retirement Plan and various international plans.
Retirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period .................. $225.2 $ 214.4 $184.4
Service cost ............................................... 15.6 4.0 12.6
Interest cost .............................................. 14.4 3.5 13.0
Actuarial loss ............................................. 23.9 6.2 15.6
Benefits paid .............................................. (4.6) (1.1) (4.2)
Plan settlements and curtailments .......................... (4.5) (2.3) (7.6)
Currency translation adjustment ............................ 2.2 0.5 0.6
Other ...................................................... 0.8 -- --
------ ------- ------
Benefit obligation at end of period ........................ $273.0 $ 225.2 $214.4
====== ======= ======
Change in Plan Assets
Fair value of plan assets at beginning of period ........... $123.1 $ 119.6 $126.5
Actual return on plan assets ............................... 28.7 6.1 (12.7)
Employer contributions ..................................... 69.4 0.6 16.9
Plan settlements ........................................... (4.5) (2.3) (7.1)
Benefits paid .............................................. (4.6) (1.1) (4.2)
Currency translation adjustment ............................ 0.7 0.2 0.2
------ ------- ------
Fair value of plan assets at end of period ................. $212.8 $ 123.1 $119.6
====== ======= ======
Reconciliation of Funded Status
Funded status .............................................. $(60.2) $(102.1) $(94.8)
Unrecognized net actuarial loss ............................ 57.8 56.5 54.7
Unrecognized prior service cost ............................ -- -- --
------ ------- ------
Net amount recognized ...................................... $ (2.4) $ (45.6) $(40.1)
====== ======= ======
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost ....................................... $ 45.2 $ -- $ --
Accrued benefit liability .................................. (48.9) (79.2) (75.0)
Intangible asset ........................................... -- -- --
Accumulated other comprehensive income ..................... 1.3 33.6 34.9
------ ------- ------
Net amount recognized ...................................... $ (2.4) $ (45.6) $(40.1)
====== ======= ======
Weighted-average Assumptions Used to Determine Benefit
Obligations at Period End
Discount rate .............................................. 5.96% 6.45% 6.68%
Rate of compensation increase .............................. 4.26% 4.24% 4.22%
Weighted-average Assumptions Used to Determine
Net Periodic Pension Cost for Periods
Discount rate .............................................. 6.45% 6.68% 7.40%
Rate of compensation increase .............................. 4.24% 4.22% 4.70%
Expected long-term return on plan assets ................... 7.92% 7.90% 9.93%
Components of Net Periodic Benefit Cost
Service cost ............................................... $ 15.6 $ 4.0 $ 12.6
Interest cost .............................................. 14.4 3.5 13.0
Expected return on plan assets ............................. (9.4) (2.3) (11.9)
Amortization of net loss ................................... 3.5 0.8 0.3
Amortization of prior service cost ......................... -- -- --
------ ------- ------
Total net periodic expense ................................. $ 24.1 $ 6.0 $ 14.0
====== ======= ======
76
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected long-term rate of return assumptions for pension assets are based
on projected asset allocation and historical and expected future returns for
each asset class. Independent analysis of historical and projected asset class
returns, inflation and interest rates are provided by our investment consultants
and reviewed as part of the process to develop our assumptions.
The accumulated benefit obligation for all defined benefit pension plans
was $232.4 million, $193.0 million, and $184.6 million at December 31, 2003,
December 31, 2002, and September 30, 2002, respectively.
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Information for Pension Plans with an Accumulated
Benefit Obligation in Excess of Plan Assets
Projected benefit obligation ........................................ $ 61.2 $225.2 $214.4
Accumulated benefit obligation ...................................... 47.4 193.0 184.6
Fair value of plan assets ........................................... 7.1 123.1 119.6
Additional Information
(Decrease) increase in Minimum Liability Included in
Other Comprehensive Income ....................................... $(32.3) $ (1.3) $ 34.9
Pension Plan Weighted-average Asset Allocations
Equity securities ................................................... 67.6% 61.1% 58.2%
Debt securities ..................................................... 32.1% 38.6% 41.7%
Real estate ......................................................... -- -- --
Other ............................................................... 0.3% 0.3% 0.1%
------ ------ ------
Total pension assets ................................................ 100.0% 100.0% 100.0%
====== ====== ======
CIT maintains a "Statement of Investment Policies and Objectives" that
specifies investment guidelines pertaining to the investment, supervision and
monitoring of pension assets to ensure consistency with the long-term objective
of ensuring sufficient funds to finance future retirement benefits. The policy
asset allocation guidelines allows for assets to be allocated between 50% to 70%
in Equities and 30% to 50% in Fixed-Income investments. CIT expects the actual
Equity and Fixed Income allocation to approximate the "neutral" or mid-point of
the policy ranges over the long-term. The guidelines provide specific guidance
related to asset class objectives, fund manager guidelines and identification of
both prohibited and restricted transactions, and are reviewed on a periodic
basis by the Employee Benefit Plans Committee of CIT to ensure the long-term
investment objectives are achieved. Members of the Committee are appointed by
the Chief Executive Officer of CIT and include the Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, General Counsel, and other
senior executives.
There was no CIT common stock included in the pension plan assets at
December 31, 2003, December 31, 2002, or September 30, 2002.
CIT expects to contribute $3.8 million to its pension plans and $3.6
million to its other postretirement benefit plans in 2004.
77
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period ........................... $ 48.1 $ 46.7 $ 39.5
Service cost ........................................................ 1.5 0.3 1.2
Interest cost ....................................................... 3.0 0.8 2.9
Actuarial loss ...................................................... 9.6 0.8 5.3
Net benefits paid ................................................... (4.2) (0.5) (2.2)
Plan amendments ..................................................... -- -- --
------ ------ ------
Benefit obligation at end of period ................................. $ 58.0 $ 48.1 $ 46.7
====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period .................... $ -- $ -- $ --
Net benefits paid ................................................... (4.2) (0.5) (2.2)
Employer contributions .............................................. 4.2 0.5 2.2
------ ------ ------
Fair value of plan assets at end of period .......................... $ -- $ -- $ --
====== ====== ======
Reconciliation of Funded Status
Funded status ....................................................... $(58.0) $(48.1) $(46.7)
Unrecognized net actuarial loss ..................................... 15.5 6.0 5.2
------ ------ ------
Accrued cost ........................................................ $(42.5) $(42.1) $(41.5)
------ ------ ------
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost ................................................ $ -- $ -- $ --
Accrued benefit liability ........................................... (42.5) (42.1) (41.5)
Intangible asset .................................................... -- -- --
Accumulated other comprehensive income .............................. -- -- --
------ ------ ------
Net amount recognized ............................................... $(42.5) $(42.1) $(41.5)
====== ====== ======
Weighted-average Assumptions Used to Determine
Benefit Obligations at Period End
Discount rate ....................................................... 6.00% 6.50% 6.75%
Rate of compensation increase ....................................... 4.25% 4.25% 4.25%
Weighted-average Assumptions Used to Determine Net
Periodic Benefit Cost for periods
Discount rate ....................................................... 6.50% 6.75% 7.50%
Rate of compensation increase ....................................... 4.25% 4.25% 4.50%
Components of Net Periodic Benefit Cost
Service cost ........................................................ $ 1.5 $ 0.3 $ 1.2
Interest cost ....................................................... 3.0 0.8 2.9
Amortization of prior service cost .................................. -- -- --
Amortization of net loss ............................................ 0.1 -- 0.1
------ ------ ------
Total net periodic expense .......................................... $ 4.6 $ 1.1 $ 4.2
====== ====== ======
For the period ended December 31, 2003, the assumed health care cost trend
rates decline for all retirees to an ultimate level of 5.00% in 2018; for the
period ended December 31 2002, 5.00% in 2008; and for the period ended September
30, 2002, 5.00% in 2008.
78
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Assumed Health Care Trend Rates at Period End
Health care cost trend rate assumed for next year ............... 12.00% 10.00% 11.00%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) ............................ 5.00% 5.00% 5.00%
Year that the rate reaches the ultimate trend rate .............. 2018 2008 2008
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following estimated effects
($ in millions).
Postretirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------------------------------------
Effect of One-percentage Point Increase on:
Period end postretirement benefit obligation ..................... $ 2.7 $ 2.3 $ 2.2
Total of service and interest
cost components ............................................... $ 0.1 $ -- $ 0.1
Effect of One-percentage Point Decrease on:
Period end postretirement benefit obligation ..................... $(2.6) $(2.2) $(2.1)
Total of service and interest cost components .................... $(0.1) $ -- $(0.1)
On December 8, 2003, the President of the United States signed into law
the Medicare Prescription Drug Improvement and Modernization Act of 2003. The
Act introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003", any measures of the accumulated postretirement
benefit obligation or net periodic postretirement benefit cost in the financial
statements or accompanying notes do not reflect the effects of the act. Specific
authoritative guidance on the accounting for the federal subsidy is pending and
that guidance, when issued, could require CIT to change previously reported
information.
Savings Incentive Plan
CIT also has a number of defined contribution retirement plans covering
certain of its U.S. and non-U.S. employees, designed in accordance with
conditions and practices in the countries concerned. Employee contributions to
the plans are subject to regulatory limitations and the specific plan
provisions. The largest plan is the CIT Group Inc. Savings Incentive Plan, which
qualifies under section 401(k) of the Internal Revenue Code and accounts for 80%
of CIT's total Savings Incentive Plan expense for the year ended December 31,
2003. CIT's expense is based on specific percentages of employee contributions
and plan administrative costs and aggregated $16.9 million, $4.0 million, and
$14.5 million for the year ended December 31, 2003, the three months ended
December 31, 2002, and the year ended September 30, 2002, respectively.
Corporate Annual Bonus Plan
The CIT Group Inc. Annual Bonus Plan and Discretionary Bonus Plan together
make-up CIT's annual bonus plan. The amount of awards depends on a variety of
factors, including corporate performance and individual performance during the
fiscal period for which awards are made and is subject to approval by the
Compensation Committee of the Board of Directors. Bonus payments of $59.0
million for the year ended December 31, 2003, were paid in February 2004. A
bonus of $20.1 million for the six months performance period from July 1, 2002
79
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through December 31, 2002 was paid in February 2003. For the fiscal year ended
September 30, 2002, $25.1 million of bonuses were paid relative to the
nine-month performance period ended June 30, 2002. Certain senior executive
officers received a portion of their corporate bonuses in the form of restricted
stock based on the closing price of CIT shares on the date of approval.
Long-Term Equity Compensation Plan
CIT sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP
allows CIT to issue to employees up to 36,000,000 shares of common stock through
grants of annual incentive awards, incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares and performance
units. Of the 36,000,000 shares, no more than 5,000,000 shares may be issued in
connection with awards of restricted stock, performance shares and performance
units. Common stock issued under the ECP may be either authorized but unissued
shares, treasury shares or any combination thereof. All options granted to
employees in 2003 have a vesting schedule of one third per year for three years,
have a 10-year term from the date of grant and are issued with strike prices
equal to the fair market value of the common stock on the date of grant.
Restricted stock granted in 2003 has a three-year cliff vesting.
Data for the stock option plans is summarized as follows.
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
---------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Option Price Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share
------ ------------ ------ ------------ ------- ------------
Outstanding at beginning of period ... 15,335,255 $33.13 15,494,009 $33.15 -- --
January Grant ........................ 4,240,644 $21.05 -- -- -- --
July Grant ........................... 648,485 $27.74 -- -- -- --
Converted Tyco options ............... -- -- -- -- 4,808,585 $56.20
Granted -- IPO ....................... -- -- -- -- 10,823,631 $23.00
Granted -- other ..................... 485,625 $27.27 27,500 $20.14 52,258 $22.20
Exercised ............................ (870,357) $23.02 -- -- -- --
Forfeited ............................ (1,072,828) $34.25 (186,254) $32.16 (190,465) $35.50
---------- ------ ---------- ------ ---------- ------
Outstanding at end of period ......... 18,766,824 $30.48 15,335,255 $33.13 15,494,009 $33.15
========== ====== ========== ====== ========== ======
Options exercisable at end of period.. 6,730,863 $43.18 3,960,926 $59.19 4,020,790 $59.06
========== ====== ========== ====== ========== ======
In 2003, 4,889,129 options were granted to employees as part of the
long-term incentive process. In addition, 485,625 CIT options were granted to
new hires and employees returning from a leave of absence.
The weighted average fair value of new options granted in 2003 is $5.30
and $4.74 for the three month period ended December 31, 2002. The fair value of
new options granted was determined at the date of grant using the Black-Scholes
option-pricing model, based on the following assumptions. Due to limited Company
history as a public company, no forfeiture rate was used.
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2003
January, 2003 ......................... 3-5 years 2.28% 31.6% - 33.4% 2.11% - 3.00%
January, 2003 -- Director Grant ....... 10 Years 2.28% 28.2% 4.01%
March 2003 -- Other ................... 3-5 Years 2.65% 29.5% - 33.2% 2.12% - 2.97%
May, 2003 -- Director Grant ........... 10 Years 2.11% 28.2% 3.44%
July, 2003 ............................ 3-5 years 1.70% 29.3% - 31.0% 2.06% - 3.10%
July, 2003 -- Director Grant .......... 10 Years 1.70% 28.1% 4.20%
September, 2003 -- Other .............. 3-5 Years 1.70% 29.3% - 31.0% 2.62% - 3.61%
80
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2002
July, 2002 (Tyco replacement) ......... 3.6-5.6 years 2.09% 32.3% - 33.2% 3.43% - 4.11%
July, 2002 (IPO) ...................... 3-6 years 2.09% 32.3% - 33.2% 3.24% - 4.22%
July, 2002 (other) .................... 10 years 2.09% 27.8% 5.21%
August, 2002 (other) .................. 3-5 years 2.09% 32.5% - 33.2% 2.47% - 3.19%
August, 2002 (other) .................. 10 years 2.16% 27.8% 4.57%
November, 2002 (other) ................ 3-5 years 2.40% 32.4% - 33.4% 2.26% - 3.95%
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 2003 and 2002.
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ----------- -------------- ----------- --------------
2003
$18.14 - $27.21 ......... 13,343,619 8.7 $ 22.38 2,850,463 $ 22.98
$27.22 - $40.83 ......... 2,598,485 8.3 $ 32.93 1,055,680 $ 35.38
$40.84 - $61.26 ......... 899,290 5.9 $ 51.27 899,290 $ 51.27
$61.27 - $91.91 ......... 1,779,982 4.4 $ 68.90 1,779,982 $ 68.90
$91.92 - $137.87 ........ 143,858 4.1 $130.82 143,858 $130.82
$137.88 - $206.82 ........ 1,590 4.4 $160.99 1,590 $160.99
---------- ---------
Totals .............. 18,766,824 6,730,863
========== =========
2002
$19.25 - $33.30 ......... 10,654,783 9.5 $ 25.66 4,019 $ 23.00
$33.31 - $49.96 ......... 1,691,276 8.3 $ 37.02 967,711 $ 34.89
$49.97 - $74.95 ......... 2,763,934 5.8 $ 62.86 2,763,934 $ 62.86
$74.96 - $112.44 ........ 61,152 6.2 $ 88.37 61,152 $ 88.37
$112.45 - $168.67 ........ 164,110 5.1 $130.64 164,110 $130.64
---------- ---------
Totals .............. 15,335,255 3,960,926
========== =========
Employee Stock Purchase Plan
In October 2002, CIT adopted an Employee Stock Purchase Plan (the "ESPP")
for all employees customarily employed at least 20 hours per week. The ESPP is
available to employees in the United States and to certain international
employees. Under the ESPP, CIT is authorized to issue up to 1,000,000 shares of
common stock to eligible employees. Employees can choose to have between 1% and
10% of their base salary withheld to purchase shares quarterly, at a purchase
price equal to 85% of the fair market value of CIT common stock on either the
first business day or the last business day of the quarterly offering period,
whichever is lower. The amount of common stock that may be purchased by a
participant through the plan is generally limited to $25,000 per year. A total
of 88,323 shares were purchased under the plan in 2003.
Restricted Stock
In 2003, CIT issued 1,229,450 restricted shares to employees under the
Long-Term Equity Compensation Plan. These shares were issued at the fair market
value on the date of the grant and have a three-year cliff-vest period. In
addition, 6,488 shares were granted to outside members of the Board of
Directors, who elected to receive shares in lieu of cash compensation for their
retainer. These restricted shares vest on the first anniversary of the grant.
For the year ended December 31, 2003, three months ended December 31, 2002 and
year ended September 30, 2002, $8.8 million, $1.2 million and $5.2 million,
respectively, of expenses are included in salaries and general operating
expenses on the consolidated statements of income.
81
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including standby letters of
credit, which obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. In the event that the customer is unable to pay
according to the contractual terms, then the receivables would be purchased. As
of December 31, 2003, there were no outstanding liabilities relating to these
credit-related commitments or guarantees, as amounts are generally billed and
collected on a monthly basis.
The accompanying table summarizes the contractual amounts of
credit-related commitments. The reduction in guarantees outstanding from
December 31, 2002 reflects the transition to on-balance sheet with respect to
certain factoring products, which are included in credit balances of factoring
clients in the CIT consolidated balance sheet ($ in millions).
At At
December 31, September 30,
December 31,2003 2002 2002
------------------------------- ------------ -------------
Due to Expire
-------------------
Within After Total Total Total
One Year One Year Outstanding Outstanding Outstanding
-------- --------- ----------- ----------- -----------
Financing and leasing assets .................... $1,611.5 $4,322.8 $5,934.3 $3,618.9 $3,075.8
Letters of credit and acceptances:
Standby letters of credit ....................... 506.1 2.6 508.7 519.8 469.0
Other letters of credit ......................... 621.2 72.8 694.0 583.3 641.8
Acceptances ..................................... 9.3 -- 9.3 5.6 8.4
Guarantees ...................................... 120.7 12.5 133.2 745.8 724.5
Venture capital fund commitments ................ -- 124.2 124.2 164.9 176.6
Venture capital direct investment commitments ... -- -- -- 4.4 4.4
As of December 31, 2003, commitments to purchase commercial aircraft from
both Airbus Industrie and The Boeing Company are detailed below ($ in millions).
Calendar Year: Amount Number
- -------------- ------ ------
2004 .............................................. $ 634.0 15
2005 .............................................. 952.0 20
2006 .............................................. 1,088.0 21
2007 .............................................. 260.0 5
-------- --
Total ............................................. $2,934.0 61
======== ==
The order amounts exclude CIT's options to purchase additional aircraft.
Lease commitments are in place for twelve of the fifteen units to be delivered
in 2004.
Outstanding commitments to purchase equipment, other than the aircraft
detailed above, totaled $197.2 million at December 31, 2003. CIT is party to a
railcar sale-leaseback transaction under which it is obligated to pay a
remaining total of $486.4 million, approximately $28 million per year through
2010 and declining thereafter
82
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through 2024, which is more than offset by CIT's re-lease of the assets,
contingent on its ability to maintain railcar usage. In conjunction with this
sale-leaseback transaction, CIT has guaranteed all obligations of the related
consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
27 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies. In addition, CIT has guaranteed, on behalf of certain
non-consolidated subsidiaries, $11.9 million of third party debt, which is not
reflected in the consolidated balance sheet at December 31, 2003.
Note 18 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at December 31, 2003 ($ in
millions).
Years Ended December 31, Amount
- ------------------------ ------
2004 .................................................. $ 53.2
2005 .................................................. 38.3
2006 .................................................. 28.6
2007 .................................................. 20.7
2008 .................................................. 9.0
Thereafter ............................................ 14.9
------
Total ............................................... $164.7
======
In addition to fixed lease rentals, leases generally require payment of
maintenance expenses and real estate taxes, both of which are subject to rent
escalation provisions. Minimum payments have not been reduced by minimum
sublease rentals of $32.8 million due in the future under noncancellable
subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------
(successor) (successor) (successor) (successor) (predecessor)
Premises .................... $ 34.0 $ 9.2 $38.4 $14.8 $19.0
Equipment ................... 9.3 2.1 8.4 3.0 3.7
Less sublease income ........ (9.4) (1.8) (9.0) (2.7) (3.4)
------ ----- ----- ----- -----
Total ..................... $ 33.9 $ 9.5 $37.8 $15.1 $19.3
====== ===== ===== ===== =====
Note 19 -- Fair Values of Financial Instruments
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the estimated fair value of CIT's financial instruments,
excluding leasing transactions accounted for under SFAS 13. The fair value
estimates are made at a discrete point in time based on relevant market
information and information about the financial instrument, assuming adequate
market liquidity. Because no established trading market exists for a significant
portion of CIT's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involving uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations, management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.
83
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Actual fair values in the marketplace are affected by other significant
factors, such as supply and demand, investment trends and the motivations of
buyers and sellers, which are not considered in the methodology used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing financial instruments without attempting to estimate the
value of future business transactions and the value of assets and liabilities
that are part of CIT's overall value but are not considered financial
instruments. Significant assets and liabilities that are not considered
financial instruments include customer base, operating lease equipment, premises
and equipment, assets received in satisfaction of loans, and deferred tax
balances. In addition, tax effects relating to the unrealized gains and losses
(differences in estimated fair values and carrying values) have not been
considered in these estimates and can have a significant effect on fair value
estimates. The carrying amounts for cash and cash equivalents approximate fair
value because they have short maturities and do not present significant credit
risks. Credit-related commitments, as disclosed in Note 17 -- "Commitments and
Contingencies", are primarily short-term floating-rate contracts whose terms and
conditions are individually negotiated, taking into account the creditworthiness
of the customer and the nature, accessibility and quality of the collateral and
guarantees. Therefore, the fair value of credit-related commitments, if
exercised, would approximate their contractual amounts.
84
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments are set forth below ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
Asset/(Liability) Asset/(Liability) Asset/(Liability)
------------------------ ------------------------ ------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
----------- ----------- ----------- ----------- ----------- -----------
Finance receivables-loans(1) .... $24,620.1 $24,711.3 $ 20,450.9 $ 20,608.0 $ 21,065.3 $ 21,218.0
Finance receivables
held for sale ................ 918.3 918.3 1,213.4 1,213.4 1,019.5 1,019.5
Retained interests in
securitizations(2) ........... 1,380.8 1,380.8 1,451.4 1,451.4 1,410.4 1,410.4
Other assets(3) ................. 1,287.8 1,287.8 1,322.4 1,322.4 1,337.4 1,337.4
Commercial paper(4) ............. (4,173.9) (4,173.9) (4,974.6) (4,974.6) (4,654.2) (4,654.2)
Fixed-rate senior notes and
subordinated fixed-rate
notes(5) ..................... (20,123.7) (20,291.6) (19,952.5) (20,621.3) (18,718.8) (18,844.7)
Variable-rate bank credit
facilities(5) ................ -- -- (2,118.0) (2,118.0) (4,040.0) (4,040.0)
Variable-rate senior notes(5) ... (9,428.9) (9,440.5) (4,917.6) (4,893.1) (5,392.4) (5,361.5)
Credit balances of factoring
clients and other
liabilities(5)(6) ............ (6,318.7) (6,318.7) (4,586.9) (4,586.9) (4,682.1) (4,682.1)
Preferred capital securities(7).. (263.0) (286.4) (257.2) (273.4) (257.7) (262.7)
Derivative financial
instruments:(8)
Interest rate swaps, net ........ (36.1) (36.1) (60.5) (60.5) (16.3) (16.3)
Cross-currency swaps, net ....... 254.3 254.3 145.8 145.8 142.2 142.2
Foreign exchange
forwards, net ................ (216.0) (216.0) (95.4) (95.4) (43.3) (43.3)
- --------------------------------------------------------------------------------
(1) The fair value of performing fixed-rate loans was estimated based upon a
present value discounted cash flow analysis, using interest rates that were
being offered at the end of the year for loans with similar terms to
borrowers of similar credit quality. Discount rates used in the present
value calculation range from 4.63% to 7.36% for December 31, 2003, 4.78% to
7.75% for December 31, 2002 and 4.91% to 7.52% for September 30, 2002. The
maturities used represent the average contractual maturities adjusted for
prepayments. For floating-rate loans that reprice frequently and have no
significant change in credit quality, fair value approximates carrying
value. The net carrying value of lease finance receivables not subject to
fair value disclosure totaled $6.0 billion at December 31, 2003, $6.4
billion at December 31, 2002 and $6.6 billion at September 30, 2002.
(2) Fair values of retained interests in securitizations are calculated
utilizing current and anticipated credit losses, prepayment speeds and
discount rates. Other investment securities actively traded in a secondary
market were valued using quoted available market prices.
(3) Other assets subject to fair value disclosure include accrued interest
receivable, certain investment securities and miscellaneous other assets.
The carrying amount of accrued interest receivable approximates fair value.
The carrying value of other assets not subject to fair value disclosure
totaled $2,022.5 at December 31, 2003, $1,959.1 million at December 31,
2002 and $2,035.8 million at September 30, 2002.
(4) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(5) The carrying value of fixed-rate senior notes and subordinated fixed-rate
notes includes $292.9 million, $270.6 million and $333.4 million of
accrued interest at December 31, 2003, December 31, 2002 and September 30,
2002, respectively. The carrying value of variable-rate bank credit
facilities includes $2.6 million of accrued interest at September 30,
2002. Accrued interest was negligible at December 31, 2002. The
variable-rate senior notes include $20.5 million, $10.7 million and $13.4
million of accrued interest at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively. These amounts are excluded from the
other liabilities balances in this table. Fixed-rate notes were valued
using a present value discounted cash flow analysis with a discount rate
approximating current market rates for issuances by CIT of similar term
debt at the end of the year. Discount rates used in the present value
calculation ranged from 1.54% to 6.32% at December 31, 2003, 1.65% to
6.02% at December 31, 2002; and 2.23% to 7.61% at September 30, 2002.
(6) The estimated fair value of credit balances of factoring clients
approximates carrying value due to their short settlement terms. Other
liabilities include accrued liabilities and deferred federal income taxes.
Accrued liabilities and payables with no stated maturities have an
estimated fair value that approximates carrying value. The carrying value
of other liabilities not subject to fair value disclosure totaled $601.4
million, $255.0 million and $207.5 million at December 31, 2003, December
31, 2002 and September 30, 2002, respectively.
(7) Preferred capital securities were valued using a present value discounted
cash flow analysis with a discount rate approximating current market rates
of similar issuances at the end of the year, and includes $7.5 million of
accrued interest at December 31, 2003.
(8) CIT enters into derivative financial instruments for hedging purposes only.
The estimated fair values are calculated internally using market data and
represent the net amount receivable or payable to terminate the agreement,
taking into account current market rates. See Note 9 -- "Derivative
Financial Instruments" for notional principal amounts associated with the
instruments.
85
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20 -- Certain Relationships and Related Transactions
CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P.
("DFS"), a joint venture that offers financing to Dell customers. The joint
venture provides Dell with financing and leasing capabilities that are
complementary to its product offerings and provides CIT with a steady source of
new financings. CIT acquired this relationship through an acquisition during
November 1999, and the current agreement extends until October 2005. CIT
regularly purchases finance receivables from DFS at a premium, portions of which
are typically securitized within 90 days of purchase from DFS. CIT has limited
recourse to DFS on defaulted contracts. In accordance with the joint venture
agreement, net income generated by DFS as determined under U.S. GAAP is
allocated 70% to Dell and 30% to CIT, after CIT has recovered any cumulative
losses. The DFS board of directors voting representation is equally weighted
between designees of CIT and Dell with one independent director. Any losses
generated by DFS as determined under U.S. GAAP are allocated to CIT. DFS is not
consolidated in CIT's December 31, 2003 financial statements and is accounted
for under the equity method. At December 31, 2003, financing and leasing assets
originated by DFS and purchased by CIT (included in the CIT Consolidated Balance
Sheet) were $1.4 billion and securitized assets included in managed assets were
$2.5 billion. In addition to the owned and securitized assets acquired from DFS,
CIT's maximum exposure to loss with respect to activities of the joint venture
is approximately $205 million pretax at December 31, 2003, which is comprised of
the investment in and loans to the joint venture.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. CIT
acquired this relationship through an acquisition during November 1999. The
agreement with Snap-on extends until January 2007. CIT and Snap-on have 50%
ownership interests, 50% board of directors representation and share income and
losses equally. The Snap-on joint venture is accounted for under the equity
method and is not consolidated in CIT's financial statements. As of December 31,
2003, the related financing and leasing assets and securitized assets were $1.1
billion and $0.1 billion, respectively. In addition to the owned and securitized
assets purchased from the Snap-on joint venture, CIT's maximum exposure to loss
with respect to activities of the joint venture is approximately $17 million
pretax at December 31, 2003, which is comprised of the investment in and loans
to the joint venture.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based
lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint
venture and share income and losses equally. This entity is not consolidated in
CIT's financial statements and is accounted for under the equity method. As of
December 31, 2003, CIT's maximum exposure to loss with respect to activities of
the joint venture is $119 million pretax, which is comprised of the investment
in and loans to the joint venture.
CIT invests in various trusts, partnerships, and limited liability
corporations established in conjunction with structured financing transactions
of equipment, power and infrastructure projects. CIT's interests in certain of
these entities were acquired by CIT in November 1999, and others were
subsequently entered into in the normal course of business. At December 31,
2003, other assets included $21 million of investments in non-consolidated
entities relating to such transactions that are accounted for under the equity
or cost methods. This investment is CIT's maximum exposure to loss with respect
to these interests as of December 31, 2003.
As of December 31, 2003, CIT bought receivables totaling $350.0 million
from certain subsidiaries of Tyco in a factoring transaction on an arms-length
basis. CIT and Tyco engaged in similar factoring transactions, the highest
amount of which was $384.4 million, at various times during Tyco's ownership of
CIT.
Certain shareholders of CIT provide investment management services in
conjunction with employee benefit plans. These services are provided in the
normal course of business.
86
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21 -- Business Segment Information
Management's Policy in Identifying Reportable Segments
CIT's reportable segments are comprised of strategic business units
aggregated into segments based upon the core competencies relating to product
origination, distribution methods, operations and servicing, and the nature of
their regulatory environment. This segment reporting is consistent with the
presentation to management.
Types of Products and Services
CIT has five reportable segments: Specialty Finance, Commercial Finance,
Equipment Finance, Capital Finance and Structured Finance. These segments, other
than Commercial Finance, offer secured lending and leasing products to midsize
and larger companies across a variety of industries, including aerospace,
construction, rail, machine tool, business aircraft, technology, manufacturing
and transportation. The Commercial Finance segment offers secured lending and
receivables collection as well as other financial products to small and midsize
companies. These include secured revolving lines of credit and term loans,
credit protection, accounts receivable collection, import and export financing
and factoring, debtor-in-possession and turnaround financing. The Specialty
Finance segment also offers home equity products to consumers primarily through
a network of brokers and correspondents.
Segment Profit and Assets
Because CIT generates a majority of its revenue from interest, fees and
asset sales, management relies primarily on operating revenues to assess the
performance of a segment. CIT also evaluates segment performance based on profit
after income taxes, as well as asset growth, credit risk management and other
factors.
Segment reporting was modified, beginning in the quarter ended March 31,
2003, to reflect Equipment Finance and Capital Finance as separate segments.
Prior periods have been restated to conform to this current presentation.
Previously, these two strategic business units were combined as the Equipment
Financing and Leasing segment. This new presentation is consistent with
reporting to management. The business segments' operating margins and net income
for the year ended December 31, 2003 include the allocation (from Corporate and
Other) of additional borrowing costs stemming from the 2002 disruption to the
Company's funding base and increased liquidity levels. These additional
borrowing and liquidity costs had a greater impact in 2003 than in 2002 and were
included in Corporate and Other in 2002. Also, for the year ended December 31,
2003, Corporate and Other included an after-tax charge of $38.4 million related
to the write-down of equity investments, an after-tax benefit of $30.8 million
from a gain on a call of debt as well as unallocated expenses. During 2003, in
order to better align competencies, we transferred certain small business loans
and leases, including the small business lending unit, totaling $1,078.6 million
from Equipment Finance to Specialty Finance. Prior periods have not been
restated to conform to this current presentation.
The Corporate and Other segment included the following items in the year
ended September 30, 2002: (1) goodwill impairment of $6,511.7 million, (2)
provision for telecommunications of $200.0 million ($124.0 million after tax),
(3) Argentine provision of $135.0 million ($83.7 million after tax), (4) funding
costs of $85.9 million ($53.2 million after tax), and (5) unallocated corporate
operating items totaling $7.2 million pre-tax (income) or $3.9 million after
tax. For the 2001 periods shown in the table, the corporate segment included
funding costs and unallocated corporate operating expenses. Corporate segment
funding costs increased significantly in 2002 from 2001, reflecting management's
decision to not allocate to the business units the incremental costs of
borrowing and liquidity relating to the disruption to our funding base and
credit downgrades. Such 2002 additional costs included higher debt quality
spreads, use of bank line versus commercial paper borrowings, incremental cost
of liquidity facilities, and excess cash held to enhance liquidity. Although
management chose to not allocate these incremental costs because they were
viewed as relating to temporary conditions, costs have been allocated since
January 1, 2003. For all periods shown, Corporate and Other includes the results
of the venture capital business.
87
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated managed assets total at or for the year ended
December 31, 2003, the three months ended December 31, 2002, the twelve months
ended September 30, 2002, and the combined nine months ending September 30,
2001. The selected financial information by business segment presented below is
based upon a fixed leverage ratio across business units and the allocation of
most corporate expenses. ($ in millions)
Corporate
Specialty Commercial Equipment Capital Structured Total and
Finance Finance Finance Finance Finance Segments Other Consolidated
------- ------- ------- ------- ------- -------- ----- ------------
At and for the year ended
December 31, 2003
Operating margin .......... $ 842.5 $ 529.4 $ 148.0 $ 132.2 $ 131.6 $ 1,783.7 $ 45.5 $ 1,829.2
Income taxes .............. 166.8 141.6 24.6 23.0 38.6 394.6 (29.6) 365.0
Operating earnings (loss).. 260.9 221.3 38.5 36.0 60.3 617.0 (50.1) 566.9
Total financing and
leasing assets .......... 12,318.4 10,261.9 6,957.7 7,201.2 3,344.7 40,083.9 -- 40,083.9
Total managed assets ...... 18,743.9 10,261.9 10,183.9 7,201.2 3,344.7 49,735.6 -- 49,735.6
At and for the three months
ended December 31, 2002
Operating margin .......... $ 216.8 $ 148.0 $ 64.7 $ 52.2 $ 29.8 $ 511.5 $ (33.4) $ 478.1
Income taxes .............. 47.1 40.5 8.7 14.5 8.9 119.7 (27.7) 92.0
Operating earnings (loss).. 73.7 63.4 13.4 22.8 13.9 187.2 (45.9) 141.3
Total financing and
leasing assets .......... 10,316.8 8,041.6 8,145.2 6,055.7 3,315.4 35,874.7 -- 35,874.7
Total managed assets ...... 16,863.0 8,041.6 12,081.4 6,055.7 3,315.4 46,357.1 -- 46,357.1
At or for the year ended
September 30, 2002
Operating margin .......... $ 932.1 $ 474.9 $ 378.7 $ 184.9 $ 132.8 $ 2,103.4 $ (296.9) $ 1,806.5
Income taxes .............. 214.4 121.9 74.3 49.6 40.0 500.2 (126.2) 374.0
Operating earnings (loss).. 349. 8 198.9 121.1 80.9 65.2 815.9 (7,514.6) (6,698.7)
Total financing and
leasing assets .......... 10,119.4 8,910.2 8,398.8 5,868.4 3,090.8 36,387.6 -- 36,387.6
Total managed assets ...... 16,970.0 8,910.2 12,782.9 5,868.4 3,090.8 47,622.3 -- 47,622.3
At or for the combined
nine months ended
September 30, 2001
Operating margin .......... $ 649.4 $ 343.2 $ 398.6 $ 153.7 $ 36.0 $ 1,580.9 $ (22.0) $ 1,558.9
Income taxes .............. 119.7 86.3 81.7 29.4 26.0 343.1 (100.9) 242.2
Operating earnings (loss).. 196.7 134.8 130.6 84.5 45.8 592.4 (329.1) 263.3
Total financing and
leasing assets .......... 12,791.1 8,657.1 11,063.7 5,045.4 3,171.9 40,729.2 -- 40,729.2
Total managed assets ...... 18,474.2 8,657.1 15,528.5 5,045.4 3,171.9 50,877.1 -- 50,877.1
Finance income and other revenues derived from United States based
financing and leasing assets were $3,695.2 million, $977.1 million, $4,284.8
million, and $3,718.7 million for the year ended December 31, 2003, the three
months ended December 31, 2002, the year ended September 30, 2002, and the nine
months ending September 30, 2001, respectively. Finance income and other
revenues derived from foreign based financing and leasing assets, were $944.0
million, $251.7 million, $990.3 million and $829.2 million for the year ended
December 31, 2003, the three months ended December 31, 2002, the year ended
September 30, 2002 and the nine months ended September 31, 2001, respectively.
Note 22 -- Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contained allegations that the
registration statement and prospectus prepared and filed in connection with
CIT's 2002 IPO were materially false and misleading, principally with respect to
the adequacy of CIT's telecommunications-related loan loss reserves at the time.
The lawsuit purported to have been brought on behalf of all those who purchased
CIT common stock in or traceable to the IPO, and sought, among other relief,
unspecified damages or rescission for those alleged class members who still hold
CIT stock and unspecified damages for other alleged class members. On June 25,
2003, by order of the United States District
88
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Court, the lawsuit was consolidated with five other substantially similar suits,
all of which had been filed after April 10, 2003 and one of which named as
defendants some of the underwriters in the IPO and certain former directors of
CIT. Glickenhaus & Co., a privately held investment firm, was named lead
plaintiff in the consolidated action.
On September 16, 2003, an amended and consolidated complaint was filed.
That complaint contains substantially the same allegations as the original
complaints. In addition to the foregoing, two similar suits were brought by
certain shareholders on behalf of CIT against CIT and some of its present and
former directors under Delaware corporate law.
CIT believes that the allegations in each of these actions are without
merit and that its disclosures were proper, complete and accurate. CIT intends
to vigorously defend itself in these actions.
In addition, there are various legal proceedings pending against CIT,
which have arisen in the ordinary course of business. Management believes that
the aggregate liabilities, if any, arising from such actions, including the
class action suit above, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Note 23 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $487.7 million, $400.9 million,
$402.0 million and $6,569.5 million at December 31, 2003, December 31, 2002,
September 30, 2002 and September 30, 2001, respectively. The Company
periodically reviews and evaluates its goodwill and other intangible assets for
potential impairment. Effective October 1, 2001, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill
is no longer amortized but instead is assessed for impairment at least annually.
As part of the adoption, the Company allocated its existing goodwill to each of
its reporting units as of October 1, 2001. Under the transition provisions of
SFAS 142, there was no goodwill impairment as of October 1, 2001.
During the quarter ended March 31, 2002, CIT's former parent, Tyco,
experienced disruptions to its business surrounding its announced break-up plan,
downgrades in its credit ratings, and a significant decline in its market
capitalization, which caused a disruption in the Company's ability to access
capital markets. As a result, management performed impairment analyses during
the quarters ended March 31, 2002 and June 30, 2002. These analyses resulted in
goodwill impairment charges of $4.513 billion and $1.999 billion for the
quarters ended March 31, 2002 and June 30, 2002, respectively. Management
performed a goodwill impairment analysis as of October 1, 2003, which indicated
that the fair value of goodwill was in excess of the carrying value. Therefore,
additional impairment charges were not necessary.
There were no changes in the carrying values of goodwill during the
transition period ended December 31, 2002. The changes in the carrying amount of
goodwill for the year ended December 31, 2003 were as follows ($ in millions):
Specialty Commercial
Finance Finance Total
--------- ----------- --------
Balance as of December 31, 2002 ......... $14.0 $370.4 $384.4
Severance reduction ..................... (1.3) -- (1.3)
----- ------ ------
Balance as of December 31, 2003 ......... $12.7 $370.4 $383.1
===== ====== ======
The downward revision to severance liabilities during the year ended
December 31, 2003 was related to Specialty Finance restructuring activities and
was recorded as a reduction to goodwill, as the severance liability was
established in conjunction with Tyco acquisition purchase accounting
adjustments.
Other intangible assets, comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
totaled $104.6 million, $16.5 million, $17.6 million and $22.0 million at
December 31, 2003 and 2002 and September 30, 2002 and 2001, respectively, and
are included in Goodwill and Intangible Assets on the Consolidated Balance
Sheets. The increase in other intangible assets during the year ended December
31, 2003 was due to customer relationships acquired in the purchase of two
factoring businesses. Other intangible assets are being amortized over periods
ranging from five to twenty years on a straight-line basis. Amortization expense
totaled $4.9 million for the year ended December 31, 2003, $1.1 million for the
three months
89
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 2002, $4.4 million for the year ended September 30, 2002 and
$0 million for the combined nine month period ended September 30, 2001. The
projected amortization for the years ended December 31, 2004 through December
31, 2008 are: $9.1 million for 2004 and 2005; $8.0 million for 2006; and $4.7
million for 2007 and 2008.
Following is a reconciliation of previously reported net income to net
income excluding goodwill amortization ($ in millions, except per share
amounts):
Three Year June 2 January 1
Year Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------ ----------
(successor) (successor) (successor) (successor) (predecessor)
Net income (loss) as reported ............... $566.9 $141.3 $(6,698.7) $182.8 $ 80.5
Goodwill amortization, net of tax ........... -- -- -- 59.8 32.7
------ ------ --------- ------ ------
Net income (loss) as adjusted ............... $566.9 $141.3 $(6,698.7) $242.6 $113.2
====== ====== ========= ====== ======
Net income (loss) as adjusted per
share -- basis ......................... $ 2.68 $ 0.67 $ (31.66) $ 1.15 $ 0.53
Net income (loss) as adjusted per
share -- diluted ....................... $ 2.66 $ 0.67 $ (31.66) $ 1.15 $ 0.53
Note 24 -- Consolidating Financial Statements -- Tyco Capital Holdings Inc.
(TCH)
TCH's activity was in connection with its capacity as the holding company
for the acquisition of CIT by Tyco, which included an outstanding loan from and
related interest expense payable to an affiliate of Tyco. Immediately prior to
the IPO of CIT on July 8, 2002, TCH was merged with CIT and the activity of TCH
(accumulated net deficit) was relieved via a capital contribution from Tyco. As
a result, TCH had no subsequent impact on the CIT consolidated financial
statements.
($ in millions) Year Ended Nine Months Ended
September 30, 2002 September 30, 2001
-------------------------------------- -----------------------------------
CIT TCH Consolidated CIT TCH Consolidated
--- --- ------------ --- --- ------------
(successor) (combined)
Finance Income ...................... $ 4,342.8 $ -- $ 4,342.8 $3,975.3 $ -- $3,975.3
Interest expense .................... 1,439.3 -- 1,439.3 1,619.8 -- 1,619.8
--------- ------- --------- -------- ------- --------
Net finance income .................. 2,903.5 -- 2,903.5 2,355.5 -- 2,355.5
Depreciation on operating lease
equipment ........................ 1,241.0 -- 1,241.0 1,036.7 -- 1,036.7
--------- ------- --------- -------- ------- --------
Net finance margin .................. 1,662.5 -- 1,662.5 1,318.8 -- 1,318.8
Provision for credit losses ......... 788.3 -- 788.3 332.5 -- 332.5
--------- ------- --------- -------- ------- --------
Net finance margin after provision
for credit losses ................ 874.2 -- 874.2 986.3 -- 986.3
Other revenue ....................... 932.3 -- 932.3 572.6 -- 572.6
--------- ------- --------- -------- ------- --------
Operating margin .................... 1,806.5 -- 1,806.5 1,558.9 -- 1,558.9
--------- ------- --------- -------- ------- --------
Salaries and general operating
expenses ......................... 923.4 23.0 946.4 784.9 9.6 794.5
Interest expense -- TCH ............. -- 662.6 662.6 -- 98.8 98.8
Goodwill impairment ................. 6,511.7 -- 6,511.7 -- -- --
Goodwill amortization ............... -- -- -- 97.6 -- 97.6
Acquisition related costs ........... -- -- -- 54.0 -- 54.0
--------- ------- --------- -------- ------- --------
Operating expenses .................. 7,435.1 685.6 8,120.7 936.5 108.4 1,044.9
--------- ------- --------- -------- ------- --------
(Loss) income before provision for
income taxes ..................... (5,628.6) (685.6) (6,314.2) 622.4 (108.4) 514.0
(Provision) benefit for income taxes (336.1) (37.9) (374.0) (280.1) 37.9 (242.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax ............... (10.5) -- (10.5) (8.5) -- (8.5)
--------- ------- --------- -------- ------- --------
Net (loss) income ................... $(5,975.2) $(723.5) $(6,698.7) $ 333.8 $ (70.5) $ 263.3
========= ======= ========= ======== ======= ========
90
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25 -- Initial Public Offering and Acquisition by Tyco International Ltd.
On July 8, 2002, the former parent of CIT, Tyco International Ltd.
("Tyco") completed a sale of 100% of CIT's outstanding common stock in an
initial public offering ("IPO"). All proceeds from the IPO were collected by
Tyco. Immediately prior to the offering, a restructuring was effectuated whereby
the predecessor, CIT Group Inc., a Nevada corporation, was merged with and into
its parent Tyco Capital Holding, Inc. ("TCH") and that combined entity was
further merged with and into CIT Group Inc. (Del), a Delaware corporation. In
connection with the reorganization, CIT Group Inc. (Del) was renamed CIT Group
Inc. As a result of the reorganization, CIT is the successor to CIT Group Inc.
(Nevada)'s business, operations, and obligations. On July 12, 2002, the
underwriters of the IPO exercised a portion of their over-allotment option to
purchase an additional 11.6 million shares of the Company's Common Stock from
CIT at the IPO price of $23.00 per share, before underwriting discounts and
commissions. CIT received the funds from this sale.
The purchase price paid by Tyco for CIT was valued at approximately $9.5
billion. The $9.5 billion value consisted of the following: the issuance of
approximately 133.0 million Tyco common shares valued at $6,650.5 million on
June 1, 2001 in exchange for approximately 73% of the outstanding CIT common
stock (including exchangeable shares of CIT Exchangeco, Inc.); the payment of
$2,486.4 million in cash to Dai-Ichi Kangyo Bank, Limited ("DKB") on June 1,
2001 for approximately 27% of the outstanding CIT common stock; options for Tyco
common shares valued at $318.6 million issued in exchange for CIT stock options;
and $29.2 million in acquisition-related costs incurred by Tyco. In addition,
$22.3 million in acquisition-related costs incurred by Tyco were paid and were
reflected in CIT's equity as an additional capital contribution. The purchase of
the CIT common stock held by DKB, which was contingent upon the satisfaction of
the conditions of the merger, took place immediately prior to the closing of the
merger on June 1, 2001. Additionally, Tyco made capital contributions totaling
$898.3 million for the period June 2, 2001 through September 30, 2001, including
a note receivable of $200.0 million that was subsequently paid by Tyco during
the first fiscal quarter of 2002. Except for the capital contribution used to
unwind the activity of TCH, there were no further capital contributions from
Tyco subsequent to September 30, 2001.
In connection with the acquisition by Tyco, CIT recorded acquired assets
and liabilities at their estimated June 2, 2001 fair values. During the first
six months of fiscal 2002, CIT recorded additions to goodwill of $348.6 million.
The goodwill adjustments were related to fair value adjustments to purchased
assets and liabilities, and accruals related to severance, facilities or other
expenses incurred as a result of the purchase transaction. The accruals recorded
during the six months ended March 31, 2002 related to finalizing integration and
consolidation plans for the elimination of additional corporate administrative
and other personnel located primarily in North America and Europe. These
accruals resulted in additional purchase accounting liabilities, which also
increased goodwill and deferred tax assets. The severance reserve established at
the acquisition date was primarily related to corporate administrative personnel
in North America. The Other Reserve established consisted primarily of
acquisition-related costs incurred by Tyco.
The following table summarizes purchase accounting liabilities (pre-tax)
related to severance of employees and closing facilities that were recorded in
connection with the acquisition by Tyco, as well as utilization during the
respective periods ($ in millions).
91
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Severance Facilities
------------------- ---------------------
Number of Number of Other Total
Employees Reserves Facilities Reserves Reserves Reserves
--------- -------- ---------- -------- -------- --------
Reserves established in fiscal 2001 ...... 671 $ 45.8 -- $ -- $ 55.9 $101.7
Fiscal 2001 utilization .................. (408) (20.2) -- -- (51.5) (71.7)
---- ----- ---- ----- ----- ------
Ending balance at September 30, 2001 ..... 263 25.6 -- -- 4.4 30.0
Fiscal 2002 acquisition reserves ......... 826 58.4 29 20.7 -- 79.1
Fiscal 2002 utilization .................. (808) (60.8) (5) (6.5) (4.4) (71.7)
---- ----- ---- ----- ----- ------
Balance September 30, 2002 ............... 281 23.2 24 14.2 -- 37.4
October 1 -- December 31, 2002
utilization ........................... (41) (6.0) (2) (1.8) -- (7.8)
---- ----- ---- ----- ----- ------
Balance December 31, 2002 ................ 240 17.2 22 12.4 -- 29.6
2003 Utilization ......................... (97) (13.1) (10) (5.2) -- (18.3)
2003 Reduction ........................... (100) (1.8) -- -- -- (1.8)
---- ----- ---- ----- ----- ------
Balance December 31, 2003 ................ 43 $ 2.3 12 $ 7.2 $ -- $ 9.5
==== ===== ==== ===== ===== ======
The downward revision to the severance reserves during the year ended
December 31, 2003 related to Specialty Finance restructuring activities and was
recorded as a reduction to goodwill. The reserves remaining at December 31, 2003
primarily relate to the restructuring of European operations. The facility
reserves relate primarily to shortfalls in sublease transactions and will be
utilized over the remaining lease terms, generally within 6 years. Severance
reserves also include amounts payable within the next year to individuals who
chose to receive payments on a periodic basis.
On September 30, 2001, CIT sold at net book value certain international
subsidiaries to a non-U.S. subsidiary of Tyco. As a result of this sale, there
were receivables from affiliates totaling $1,440.9 million, representing the
debt investment in these subsidiaries. CIT charged arm's length, market-based
interest rates on these receivables, and recorded $19.0 million of interest
income, as an offset to interest expense, related to those notes for the quarter
ended December 31, 2001. A note receivable issued at the time of this
transaction of approximately $295 million was collected. Following Tyco's
announcement on January 22, 2002 that it planned to separate into four
independent, publicly traded companies, CIT repurchased at net book value the
international subsidiaries on February 11, 2002. In conjunction with this
repurchase, the receivables from affiliates of $1,588.1 million at December 31,
2001 were satisfied. The reacquisition of these subsidiaries has been accounted
for as a merger of entities under common control. Accordingly, the balances
contained within the financial statements and footnotes include the results of
operations, financial position and cash flows of the international subsidiaries
repurchased from Tyco for all periods presented.
Note 26 -- Acquisition-Related Costs
For the combined nine months ended September 30, 2001, acquisition-related
costs of $54.0 million, consisting primarily of investment banking and other
professional fees, were incurred by CIT prior to and in connection with the
acquisition of CIT by Tyco.
Note 27 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented financial statements or other
information for these subsidiaries on a stand-alone basis. ($ in millions).
92
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------------------- --- ------------ ------------ -----
(successor)
December 31, 2003
ASSETS
Net finance receivables ............ $ 1,581.3 $3,755.4 $1,208.8 $24,111.0 $ -- $30,656.5
Operating lease equipment, net ..... -- 580.3 146.4 6,888.8 -- 7,615.5
Finance receivables held for sale .. -- 80.0 163.8 674.5 -- 918.3
Cash and cash equivalents .......... 1,479.9 410.6 227.5 (144.3) -- 1,973.7
Other assets ....................... 8,308.2 198.1 174.1 1,892.6 (5,394.2) 5,178.8
----------- -------- -------- --------- ---------- ---------
Total Assets ..................... $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $ (5,394.2) $46,342.8
=========== ======== ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 30,656.7 $1,003.5 $1,407.7 $ 600.7 $ -- $33,668.6
Credit balances of
factoring clients ................ -- -- -- 3,894.6 -- 3,894.6
Accrued liabilities and
payables ......................... (24,681.5) 3,412.0 (701.2) 25,317.1 -- 3,346.4
----------- -------- -------- --------- ---------- ---------
Total Liabilities ................ 5,975.2 4,415.5 706.5 29,812.4 -- 40,909.6
Minority interest .................. -- -- -- 39.0 -- 39.0
Total Stockholders' Equity ......... 5,394.2 608.9 1,214.1 3,571.2 (5,394.2) 5,394.2
----------- -------- -------- --------- ---------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $ (5,394.2) $46,342.8
=========== ======== ======== ========= ========== =========
December 31, 2002
ASSETS
Net finance receivables ............ $ 633.5 $3,541.4 $ 935.7 $21,749.9 $ -- $26,860.5
Operating lease equipment, net ..... -- 734.6 157.1 5,812.9 -- 6,704.6
Finance receivables held for sale .. -- 159.1 62.8 991.5 -- 1,213.4
Cash and cash equivalents .......... 1,310.9 231.1 293.7 200.9 -- 2,036.6
Other assets ....................... 6,940.5 283.3 391.6 2,372.6 (4,870.7) 5,117.3
----------- -------- -------- --------- ---------- ---------
Total Assets ..................... $ 8,884.9 $4,949.5 $1,840.9 $31,127.8 $ (4,870.7) $41,932.4
=========== ======== ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 28,194.8 $1,815.7 $2,116.8 $ (446.0) $ -- $31,681.3
Credit balances of
factoring clients ................ -- -- -- 2,270.0 -- 2,270.0
Accrued liabilities and
payables ......................... (24,180.6) 2,574.1 (1,400.3) 25,860.0 -- 2,853.2
----------- -------- -------- --------- ---------- ---------
Total Liabilities ................ 4,014.2 4,389.8 716.5 27,684.0 -- 36,804.5
Preferred capital securities ....... -- -- -- 257.2 -- 257.2
Total Stockholders' Equity ......... 4,870.7 559.7 1,124.4 3,186.6 (4,870.7) 4,870.7
----------- -------- -------- --------- ---------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 8,884.9 $4,949.5 $1,840.9 $31,127.8 $ (4,870.7) $41,932.4
=========== ======== ======== ========= ========== =========
93
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------------------- --- ------------ ------------ -----
(successor)
September 30, 2002
ASSETS
Net finance receivables ............ $ 864.3 $2,504.8 $ 893.5 $23,418.6 $ -- $27,681.2
Operating lease equipment, net ..... -- 797.2 185.3 5,584.9 -- 6,567.4
Finance receivables held
for sale ......................... -- 156.7 47.7 815.1 -- 1,019.5
Cash and cash equivalents .......... 1,737.8 225.8 330.3 (19.5) -- 2,274.4
Other assets ....................... 4,855.0 444.4 452.5 4,173.9 (4,757.8) 5,168.0
---------- -------- -------- --------- --------- ---------
Total Assets ..................... $ 7,457.1 $4,128.9 $1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 28,860.8 $1,858.0 $2,147.6 $ (410.4) $ -- $32,456.0
Credit balances of factoring clients -- -- -- 2,513.8 -- 2,513.8
Accrued liabilities and
payables ......................... (26,161.5) 1,799.5 (1,348.1) 28,435.3 -- 2,725.2
---------- -------- -------- --------- --------- ---------
Total Liabilities ................ 2,699.3 3,657.5 799.5 30,538.7 -- 37,695.0
Preferred capital securities ....... -- -- -- 257.7 -- 257.7
Total Stockholders' Equity ......... 4,757.8 471.4 1,109.8 3,176.6 (4,757.8) 4,757.8
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 7,457.1 $4,128.9 $1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ======== ========= ========= =========
94
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- -------- ------------ ------------ -----
(successor)
Year Ended December 31, 2003
Finance income ......................... $ 89.0 $ 785.3 $195.0 $2,660.2 $ -- $3,729.5
Interest expense ....................... (52.7) 303.8 6.6 1,061.6 -- 1,319.3
------- ------- ------ -------- ------- --------
Net finance income ..................... 141.7 481.5 188.4 1,598.6 -- 2,410.2
Depreciation on operating lease
equipment ............................ -- 371.6 68.5 612.9 -- 1,053.0
------- ------- ------ -------- ------- --------
Net finance margin ..................... 141.7 109.9 119.9 985.7 -- 1,357.2
Provision for credit losses ............ 36.7 53.1 14.6 282.9 -- 387.3
------- ------- ------ -------- ------- --------
Net finance margin, after provision for
credit losses ........................ 105.0 56.8 105.3 702.8 -- 969.9
Equity in net income of subsidiaries ... 481.3 -- -- -- (481.3) --
Other revenue .......................... 60.4 124.8 95.7 666.7 -- 947.6
Loss on venture capital investments .... -- -- -- (88.3) -- (88.3)
------- ------- ------ -------- ------- --------
Operating margin ....................... 646.7 181.6 201.0 1,281.2 (481.3) 1,829.2
Operating expenses ..................... 57.4 168.9 90.3 625.7 -- 942.3
Gain on redemption of debt ............. -- -- -- 50.4 -- 50.4
------- ------- ------ -------- ------- --------
Income (loss) before provision for
income taxes ......................... 589.3 12.7 110.7 705.9 (481.3) 937.3
Provision for income taxes ............. 22.4 5.0 43.2 294.4 -- 365.0
Dividends on preferred capital securities,
after tax ............................ -- -- -- (5.4) -- (5.4)
------- ------- ------ -------- ------- --------
Net income ............................. $ 566.9 $ 7.7 $ 67.5 $ 406.1 $(481.3) $ 566.9
======= ======= ====== ======== ======= ========
CIT
CIT Capita Holdings Other
(successor) Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Finance income ......................... $ 32.9 $ 224.5 $ 50.6 $ 663.7 $ -- $ 971.7
Interest expense ....................... 23.9 73.9 (1.1) 243.3 -- 340.0
------- ------- ------ -------- ------- --------
Net finance income ..................... 9.0 150.6 51.7 420.4 -- 631.7
Depreciation on operating lease equipment -- 105.0 21.6 150.7 -- 277.3
------- ------- ------ -------- ------- --------
Net finance margin ..................... 9.0 45.6 30.1 269.7 -- 354.4
Provision for credit losses ............ 18.8 8.9 2.4 103.3 -- 133.4
------- ------- ------ -------- ------- --------
Net finance margin, after provision for
credit losses ........................ (9.8) 36.7 27.7 166.4 -- 221.0
Equity in net income of subsidiaries ... 144.1 -- -- -- (144.1) --
Other revenue .......................... 4.1 46.1 23.5 189.8 -- 263.5
Loss on venture capital investments .... -- -- -- (6.4) -- (6.4)
------- ------- ------ -------- ------- --------
Operating margin ....................... 138.4 82.8 51.2 349.8 (144.1) 478.1
Operating expenses ..................... 16.4 35.1 24.7 165.9 -- 242.1
------- ------- ------ -------- ------- --------
Income before provision for income taxes 122.0 47.7 26.5 183.9 (144.1) 236.0
Provision (benefit) for income taxes ... (19.3) 18.6 14.2 78.5 -- 92.0
Dividends on preferred capital
securities, after tax ................ -- -- -- (2.7) -- (2.7)
------- ------- ------ -------- ------- --------
Net income ............................. $ 141.3 $ 29.1 $ 12.3 $ 102.7 $(144.1) $ 141.3
======= ======= ====== ======== ======= ========
95
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------------- ---------- ----------- -------- ------------ ------------ ------
(successor)
Year Ended September 30, 2002
Finance income ........................ $ 200.4 $1,050.1 $233.2 $2,859.1 $ -- $ 4,342.8
Interest expense ...................... (80.3) 401.3 4.8 1,113.5 -- 1,439.3
--------- -------- ------ -------- ------- ---------
Net finance income .................... 280.7 648.8 228.4 1,745.6 -- 2,903.5
Depreciation on operating lease
equipment ........................... -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ -------- ------- ---------
Net finance margin .................... 280.7 145.8 122.9 1,113.1 -- 1,662.5
Provision for credit losses ........... 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ -------- ------- ---------
Net finance margin, after provision for
credit losses ....................... (27.6) (52.1) 98.0 855.9 -- 874.2
Equity in net income of subsidiaries .. 130.9 -- -- -- (130.9) --
Other revenue ......................... 20.7 124.0 93.0 734.9 -- 972.6
Loss on venture capital investments ... -- -- -- (40.3) -- (40.3)
--------- -------- ------ -------- ------- ---------
Operating margin ...................... 124.0 71.9 191.0 1,550.5 (130.9) 1,806.5
Operating expenses .................... 6,588.0 188.7 65.9 1,278.1 -- 8,120.7
--------- -------- ------ -------- ------- ---------
(Loss) income before provision for
income taxes ........................ (6,464.0) (116.8) 125.1 272.4 (130.9) (6,314.2)
Provision (benefit) for income taxes .. 234.7 (45.6) 48.8 136.1 -- 374.0
Dividends on preferred capital
securities, after tax ............... -- -- -- (10.5) -- (10.5)
--------- -------- ------ -------- ------- ---------
Net (loss) income ..................... $(6,698.7) $ (71.2) $ 76.3 $ 125.8 $(130.9) $(6,698.7)
========= ======== ====== ======== ======= =========
(combined)
Nine Months Ended September 30, 2001
Finance income ........................ $226.4 $998.0 $219.1 $2,531.8 $ -- $3,975.3
Interest expense ...................... 141.3 305.4 23.1 1,150.0 -- 1,619.8
------ ------ ------ -------- ------- --------
Net finance income .................... 85.1 692.6 196.0 1,381.8 -- 2,355.5
Depreciation on operating lease
equipment ........................... -- 460.5 103.4 472.8 -- 1,036.7
------ ------ ------ -------- ------- --------
Net finance margin .................... 85.1 232.1 92.6 909.0 -- 1,318.8
Provision for credit losses ........... 54.7 88.9 15.1 173.8 -- 332.5
------ ------ ------ -------- ------- --------
Net finance margin, after provision for
credit losses ....................... 30.4 143.2 77.5 735.2 -- 986.3
Equity in net income of subsidiaries .. 461.5 -- -- -- (461.5) --
Other revenue ......................... (80.6) 67.6 68.1 511.5 -- 566.6
Gain on venture capital investments ... -- -- -- 6.0 -- 6.0
------ ------ ------ -------- ------- --------
Operating margin ...................... 411.3 210.8 145.6 1,252.7 (461.5) 1,558.9
Operating expenses .................... 216.9 160.0 78.4 589.6 -- 1,044.9
------ ------ ------ -------- ------- --------
Income before provision for
income taxes ........................ 194.4 50.8 67.2 663.1 (461.5) 514.0
Provision (benefit) for income taxes .. (68.9) 19.3 25.5 266.3 -- 242.2
Dividends on preferred capital
securities, after tax ............... -- -- -- (8.5) -- (8.5)
------ ------ ------ -------- ------- --------
Net income ............................ $263.3 $ 31.5 $ 41.7 $ 388.3 $(461.5) $ 263.3
====== ====== ====== ======== ======= ========
96
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- --- ------------------------- -----
(successor)
Year Ended December 31, 2003
Cash Flows From Operating Activities:
Net cash flows provided by
operations ........................ $ 224.4 $ 629.7 $ 386.6 $ 946.4 $ -- $ 2,187.1
---------- -------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease in financing and
leasing assets .................... (982.4) (338.2) (416.4) (2,172.7) -- (3,909.7)
Decrease in inter-company loans
and investments ................... (1,534.9) -- -- -- 1,534.9 --
Other ............................... -- -- -- (77.8) -- (77.8)
---------- -------- ---------- ---------- ---------- ----------
Net cash flows (used for)
investing activities .............. (2,517.3) (338.2) (416.4) (2,250.5) 1,534.9 (3,987.5)
---------- -------- ---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ..... 2,461.9 (812.2) (709.1) 902.3 -- 1,842.9
Inter-company financing ............. -- 700.2 672.7 162.0 (1,534.9) --
Cash dividends paid ................. -- -- -- (101.8) -- (101.8)
Other ............................... -- -- -- (3.6) -- (3.6)
---------- -------- ---------- ---------- ---------- ----------
Net cash flows provided by
(used for) financing activities ... 2,461.9 (112.0) (36.4) 958.9 (1,534.9) 1,737.5
---------- -------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents ................ 169.0 179.5 (66.2) (345.2) -- (62.9)
Cash and cash equivalents,
beginning of period ............... 1,310.9 231.1 293.7 200.9 -- 2,036.6
---------- -------- ---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period ..................... $ 1,479.9 $ 410.6 $ 227.5 $ (144.3) $ -- $ 1,973.7
========== ======== ========== ========== ========== ==========
97
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
------------------------------ ---------- ----------- -------- ------------ ------------ ----------
(successor)
Three Months Ended December 31, 2002
Cash Flows From Operating Activities:
Net cash flows (used for)
provided by operations ............... $ (2,191.1) $ 115.1 $ 51.5 $ 2,636.9 $ -- $ 612.4
---------- ---------- -------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net increase (decrease) in financing
and leasing assets ................... 212.8 (1,062.8) (43.6) 882.8 -- (10.8)
Increase in intercompany loans
and investments ...................... 2,217.4 -- -- -- (2,217.4) --
Other .................................. -- -- -- (4.3) -- (4.3)
---------- ---------- -------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................. 2,430.2 (1,062.8) (43.6) 878.5 (2,217.4) (15.1)
---------- ---------- -------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net decrease in debt ................... (666.0) (42.3) (30.8) (70.6) -- (809.7)
Intercompany financing ................. -- 995.3 (13.7) (3,199.0) 2,217.4 --
Cash dividends paid .................... -- -- -- (25.4) -- (25.4)
---------- ---------- -------- ---------- ---------- ----------
Net cash flows (used for) provided by
financing activities ................. (666.0) 953.0 (44.5) (3,295.0) 2,217.4 (835.1)
---------- ---------- -------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ..................... (426.9) 5.3 (36.6) 220.4 -- (237.8)
Cash and cash equivalents,
beginning of period .................. 1,737.8 225.8 330.3 (19.5) -- 2,274.4
---------- ---------- -------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,310.9 $ 231.1 $ 293.7 $ 200.9 $ -- $ 2,036.6
========== ========== ======== ========== ========== ==========
98
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------------------- --- ------------ ------------ -----
(successor)
Year Ended September 30, 2002
Cash Flows From Operating Activities:
Net cash flows provided by
(used for) operations ............... $ 334.7 $ (298.1) $ (688.2) $ 2,047.5 $ -- $ 1,395.9
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Investing Activities:
Net increase in financing
and leasing assets .................. 662.0 211.9 721.3 779.0 -- 2,374.2
Increase in intercompany loans and
investments ......................... 1,008.3 -- -- -- (1,008.3) --
Other .................................. -- -- -- (52.5) -- (52.5)
---------- ---------- -------- ---------- -------- ----------
Net cash flows provided by
investing activities ................ 1,670.3 211.9 721.3 726.5 (1,008.3) 2,321.7
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ (1,885.3) (1,021.2) 175.3 (698.1) -- (3,429.3)
Intercompany financing ................. -- 1,226.2 117.7 (2,352.2) 1,008.3 --
Capital contributions from
former parent ....................... 923.5 -- -- -- -- 923.5
Cash dividends paid .................... -- -- -- -- -- --
Proceeds from issuance of
common stock ........................ 254.6 -- -- -- -- 254.6
---------- ---------- -------- ---------- -------- ----------
Net cash flows (used for) provided by
financing activities ................ (707.2) 205.0 293.0 (3,050.3) 1,008.3 (2,251.2)
---------- ---------- -------- ---------- -------- ----------
Net increase (decrease) in cash and
cash equivalents .................... 1,297.8 118.8 326.1 (276.3) -- 1,466.4
Cash and cash equivalents,
beginning of period ................. 440.0 107.0 4.2 256.8 -- 808.0
---------- ---------- -------- ---------- -------- ----------
Cash and cash equivalents, end of period $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
========== ========== ======== ========== ======== ==========
99
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------------------- --- ------------ ------------ -----
(combined)
Nine Months Ended September 30, 2001
Cash Flows From Operating Activities:
Net cash flows provided by (used for)
operations .......................... $ 17.4 $ 275.1 $ 128.4 $ 608.4 $ -- $ 1,029.3
---------- ---------- -------- -------- ---------- ----------
Cash Flows From Investing Activities:
Net increase (decrease) in financing and
leasing assets ...................... 335.0 440.4 (36.7) 275.5 -- 1,014.2
Decrease in intercompany loans and
investments ......................... (2,822.6) -- -- -- 2,822.6 --
Other .................................. -- -- -- (21.2) -- (21.2)
---------- ---------- -------- -------- ---------- ----------
Net cash flows provided by (used for)
investing activities ................ (2,487.6) 440.4 (36.7) 254.3 2,822.6 993.0
---------- ---------- -------- -------- ---------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ 1,114.7 (2,872.5) (247.4) (741.4) -- (2,746.6)
Intercompany financing ................. -- 2,134.7 240.6 447.3 (2,822.6) --
Capital contributions from
former parent ....................... 675.0 -- -- 70.5 -- 745.5
Cash dividends paid .................... -- -- -- (52.9) -- (52.9)
Other .................................. -- -- -- 27.6 -- 27.6
---------- ---------- -------- -------- ---------- ----------
Net cash flows (used for) provided by
financing activities ................ 1,789.7 (737.8) (6.8) (248.9) (2,822.6) (2,026.4)
---------- ---------- -------- -------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents .................... (680.5) (22.3) 84.9 613.8 -- (4.1)
Cash and cash equivalents, beginning
of period ........................... 1,120.5 129.3 (80.7) (357.0) -- 812.1
---------- ---------- -------- -------- ---------- ----------
Cash and cash equivalents, end of period $ 440.0 $ 107.0 $ 4.2 $ 256.8 $ -- $ 808.0
========== ========== ======== ======== ========== ==========
100
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 28 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below ($ in millions, except
per share data).
Year Ended December 31, 2003
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ------------ ------------ ---------
Net finance margin ......................... $313.7 $339.2 $342.3 $362.0
Provision for credit losses ................ 103.0 100.6 82.9 100.8
Other revenue .............................. 239.9 229.7 232.0 246.0
Loss on venture capital investments ........ (4.4) (12.1) (11.3) (60.5)
Salaries and general operating expenses .... 233.6 227.2 237.5 244.0
Gain on debt call .......................... -- -- -- 50.4
Provision for income taxes ................. 82.9 89.3 94.6 98.2
Dividends on preferred capital
securities, after tax .................... 2.7 2.7 -- --
Minority interest after tax ................ -- 0.1 0.2 (0.3)
Net income (loss) .......................... $127.0 $136.9 $147.8 $155.2
Net income (loss) per diluted share (1) .... $ 0.60 $ 0.65 $0.69 $ 0.72
Year Ended September 30, 2002
------------------------------------------
Three Months
Ended
December 31, First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
------------ ------- ------- ------- --------
Net finance margin ................................ $354.4 $487.5 $ 448.2 $ 356.0 $370.8
Provision for credit losses ....................... 133.4 112.9 195.0 357.7 122.7
Other revenue ..................................... 263.5 242.5 237.4 247.5 245.2
(Loss) gain on venture capital investments ........ (6.4) 2.6 (5.3) (1.4) (36.2)
Salaries and general operating expenses ........... 242.1 238.7 234.2 237.9 235.6
Interest expense -- TCH ........................... -- 76.3 305.0 281.3 --
Goodwill impairment ............................... -- -- 4,512.7 1,999.0 --
Provision for income taxes ........................ 92.0 118.2 50.4 121.3 84.1
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax .... 2.7 2.4 2.7 2.7 2.7
Net income (loss) ................................. $141.3 $184.1 $(4,619.7) $(2,397.8) $134.7
Net income (loss) per diluted share (1) ........... $ 0.67 $ 0.87 $ (21.84) $ (11.33) $ 0.64
101
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine Months Ended September 30, 2001
----------------------------------------
First Second Third
Quarter Quarter(2) Quarter
------- ---------- -------
(predecessor) (combined) (successor)
Net finance margin ............................................ $404.7 $429.4 $484.7
Provision for credit losses ................................... 68.3 166.7 97.5
Other revenue ................................................. 206.7 120.0 239.9
Gain (loss) on venture capital investments .................... 4.9 1.8 (0.7)
Salaries and general operating expenses ....................... 263.5 267.9 263.1
Goodwill amortization ......................................... 22.5 29.7 45.4
Interest expense -- TCH ....................................... -- 25.0 73.8
Acquisition-related costs ..................................... -- 54.0 --
Provision for income taxes .................................... 99.0 30.5 112.7
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ....................... 2.9 2.8 2.8
Net income (loss) ............................................. $160.1 $(25.4) $128.6
Net income (loss) per diluted share(1) ........................ $ 0.75 $(0.12) $ 0.61
- --------------------------------------------------------------------------------
(1) Per share calculations assume that common shares outstanding as a result of
the July 2002 IPO (211.7 million) were outstanding for all periods
preceding the quarter ended September 30, 2002.
(2) The second quarter of 2001 includes predecessor operations through June 1,
2001 and successor operations for June 2 through June 30, 2001.
102
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Prior to Tyco's acquisition of CIT, the independent auditor for CIT Group
Inc. (formerly The CIT Group, Inc.) was KPMG LLP. The independent accountants
for Tyco were PricewaterhouseCoopers LLP ("PwC"). On June 1, 2001, in connection
with the acquisition, Tyco and CIT jointly determined that CIT would terminate
its audit engagement with KPMG LLP and enter into an audit engagement with PwC,
in order to facilitate the auditing of Tyco's Consolidated Financial Statements.
CIT's Board of Directors approved the appointment of PwC as the independent
accountants for CIT.
In connection with the interim period through January 1, 2001 through June
1, 2001, there were no disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
Item 9A. Controls and Procedures.
As of December 31, 2003 the Company evaluated the effectiveness of the
design and operation of its disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to ensure that the information
that the Company must disclose in its reports filed under the Securities
Exchange Act is communicated and processed in a timely manner. Albert R. Gamper
Jr. Chairman and Chief Executive Officer, and Joseph M. Leone, Vice Chairman and
Chief Financial Officer, participated in this evaluation.
Based on this evaluation, Messrs. Gamper and Leone concluded that, as of
the date of their evaluation, the Company's disclosure controls and procedures
were effective, except as noted in the next paragraph. Since the date of the
evaluation described above, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO, we classified our tax reporting as a "reportable condition", as
defined by standards established by the American Institute of Certified Public
Accountants. We have made substantial progress in rebuilding our tax reporting
and compliance functions, including hiring and training personnel, rebuilding
tax reporting systems, preparing amendments to prior period U.S. Federal income
tax returns, and implementing processes and controls with respect to income tax
reporting and compliance. We have built processes to prepare a tax basis balance
sheet to complete the analysis of deferred tax assets and liabilities as of
December 31, 2003. Further work continues in the areas of quality control, proof
and reconciliation and we anticipate completing this initiative during the
second or third quarter of 2004. Future income tax return filings and the
completion of the aforementioned analysis of deferred tax assets and liabilities
could result in reclassifications to deferred tax assets and liabilities.
103
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors" and "Election of
Directors -- Executive Officers" in our Proxy Statement for our 2004 annual
meeting of stockholders.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Compensation of Directors and Executive
Officers" in our Proxy Statement for our 2004 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Principal Shareholders" in our Proxy
Statement for our 2004 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement for our 2004 annual meeting of
stockholders.
Item 14. Principal Accountant Fees and Services.
The information called for by Item 14 is incorporated by reference from
the information under the caption "Appointment of Independent Accountants" in
our Proxy Statement for our 2004 annual meeting of stockholders.
104
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report (see Item 8):
1. The following financial statements of CIT and Subsidiaries:
Reports of Independent Accountants
Consolidated Balance Sheets-December 31, 2003, December 31,
2002, and September 30, 2001.
Consolidated Statements of Income for the year ended December
31, 2003, for the three months ended December 31, 2002, for
the fiscal year ended September 30, 2002, for the period from
June 2 through September 30, 2001, and for the period January
1 through June 1, 2001.
Consolidated Statements of Shareholders' Equity for the year
ended December 31, 2003, for the three months ended December
31, 2002, for the fiscal year ended September 30, 2002, for
the period from June 2 through September 30, 2001, and for the
period January 1 through June 1, 2001.
Consolidated Statements of Cash Flows for the year ended
December 31, 2003, for the three months ended December 31,
2002, for the fiscal year ended September 30, 2002, for the
period from June 2 through September 30, 2001, and for the
period January 1 through June 1, 2001.
Notes to Consolidated Financial Statements
2. All schedules are omitted because they are not applicable or
because the required information appears in the Consolidated
Financial Statements or the notes thereto.
(b) Current Report on Form 8-K, dated October 22, 2003, reporting (i)
that CIT's Board of Directors declared a dividend of $.12 per share,
(ii) that CIT currently anticipated calling certain debt securities
for redemption in December 2003 and January 2004 pursuant to their
terms, and (iii) CIT's financial results as of and for the quarter
and nine month periods ended September 30, 2003.
Current Report on Form 8-K, dated October 23, 2003, attaching as an
exhibit certain historical quarterly financial information.
Current Report on Form 8-K, dated December 22, 2003, reporting that
CIT and the applicable trustee intended to execute certain
documentation to correct the interest payment schedule on CIT's
Floating Rate Senior Notes maturing September 22, 2006, which were
issued on September 23, 2003, CUSIP Number 125581AF5, in the
aggregate principal amount of $200,000,000.
(c) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Form 10-Q filed by CIT on August
12, 2003).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Form 10-Q filed by CIT on August 12, 2003).
4.1 Form of Certificate of Common Stock of CIT (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 26, 2002).
4.2 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and The Bank of New York, as trustee, for the issuance
of unsecured and unsubordinated debt securities (Incorporated
by reference to an Exhibit to Form S-3 filed by CIT on
September 24, 1998).
4.3 First Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and The Bank of New York, as
trustee, for the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to Exhibit 4.2g to
Amendment No. 1 to Form S-3 filed by CIT on August 8, 2001).
105
4.4 Second Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of June 1, 2001,
by and between CIT Group Inc. (formerly know as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and successor
to The CIT Group, Inc.) and The Bank of New York, as trustee,
for the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to Exhibit 4.1 to Form
8-K filed by CIT on February 22, 2002).
4.5 Third Supplemental Indenture dated July 2, 2002 between CIT
Group Inc. and The Bank of New York, as Trustee (Incorporated
by reference to Exhibit 4.1 to Form 8-K filed by CIT on July
10, 2002).
4.6 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and Bank One Trust Company, N.A., as trustee, for the
issuance of unsecured and unsubordinated debt securities
(Incorporated by reference to an Exhibit to Form S-3 filed by
CIT on September 24, 1998).
4.7 First Supplemental Indenture dated as of May 9, 2001 among CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), Bank One Trust Company, N.A., as trustee, and Bank One
NA, London Branch, as London Paying Agent and London
Calculation Agent (Incorporated by reference to Exhibit 4.2d
to Post-Effective Amendment No. 1 to Form S-3 filed by CIT on
May 11, 2001).
4.8 Second Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and Bank One Trust Company,
N.A., as trustee (Incorporated by reference to Exhibit 4.2e to
Form S-3 filed by CIT on June 7, 2001).
4.9 Third Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of May 9, 2001
and the Second Supplemental Indenture dated as of June 1,
2001, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and Bank One Trust Company,
N.A., as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.2 to Form 8-K filed by CIT on February 22, 2002).
4.10 Fourth Supplemental Indenture dated as of July 2, 2002 to an
Indenture dated as of September 24, 1998, as supplemented by
the First Supplemental Indenture dated as of May 9, 2001 and
the Second Supplemental Indenture dated as of June 1, 2001 and
the Third Supplemental Indenture dated as of February 14,
2002, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and Bank One Trust Company,
N.A., as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.1 to Form 8-K filed by CIT on July 10, 2002).
4.11 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and The Bank of New York, as trustee, for the issuance
of unsecured and senior subordinated debt securities
(Incorporated by reference to an Exhibit to Form S-3 filed by
CIT September 24, 1998).
4.12 First Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and The Bank of New York, as
trustee, for the issuance of unsecured and senior subordinated
debt securities (Incorporated by reference to Exhibit 4.2f to
Form S-3 filed by CIT on June 7, 2001).
4.13 Second Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of June 1, 2001,
by and between CIT Group Inc. (formerly known as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and successor
to The CIT Group, Inc.) and The Bank
106
of New York, as trustee, for the issuance of unsecured senior
subordinated debt securities (Incorporated by reference to
Exhibit 4.3 to Form 8-K filed by CIT on February 22, 2002).
4.14 Third Supplemental Indenture dated as of July 2, 2002 to an
Indenture dated as of September 24, 1998, as supplemented by
the First Supplemental Indenture dated as of June 1, 2001 and
the Second Supplemental Indenture dated as of February 14,
2002, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and The Bank of New York, as
trustee, for the issuance of unsecured senior subordinated
debt securities (Incorporated by reference to Exhibit 4.2 to
Form 8-K filed by CIT on July 10, 2002).
4.15 Indenture dated as of September 24, 1998 by and between CIT
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.) and BNY Midwestern Trust Company (as successor trustee
to Harris Trust and Savings Bank) as trustee, for the issuance
of unsecured and unsubordinated debt securities (Incorporated
by reference to an Exhibit to Form S-3 filed by CIT on
September 24, 1998).
4.16 First Supplemental Indenture dated as of June 1, 2001 among
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), CIT Holdings (NV) Inc. and BNY Midwestern Trust Company
(as successor trustee to Harris Trust and Savings Bank) as
trustee (Incorporated by reference to Exhibit 4.2e to Form S-3
filed by CIT on June 7, 2001).
4.17 Second Supplemental Indenture dated as of February 14, 2002 to
an Indenture dated as of September 24, 1998, as supplemented
by the First Supplemental Indenture dated as of May 9, 2001
and the Second Supplemental Indenture dated as of June 1,
2001, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and BNY Midwestern Trust
Company (as successor trustee to Harris Trust and Savings
Bank) as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.2 to Form 8-K filed by CIT on February 22, 2002).
4.18 Third Supplemental Indenture dated as of July 2, 2002 to an
Indenture dated as of September 24, 1998, as supplemented by
the First Supplemental Indenture dated as of May 9, 2001 and
the Second Supplemental Indenture dated as of June 1, 2001 and
the Third Supplemental Indenture dated as of February 14,
2002, by and between CIT Group Inc. (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and BNY Midwestern Trust
Company (as successor trustee to Harris Trust and Savings
Bank) as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.1 to Form 8-K filed by CIT on July 10, 2002).
4.19 Indenture dated as of August 26, 2002 by and among CIT Group
Inc., J.P. Morgan Trust Company, National Association (as
successor to Bank One Trust Company, N.A.), as Trustee and
Bank One NA, London Branch, as London Paying Agent and London
Calculation Agent, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by reference to
Exhibit 4.18 to Form 10-K filed by CIT on February 26, 2003).
4.20 Certain instruments defining the rights of holders of CIT's
long-term debt, none of which authorize a total amount of
indebtedness in excess of 10% of the total amounts outstanding
of CIT and its subsidiaries on a consolidated basis have not
been filed as exhibits. CIT agrees to furnish a copy of these
agreements to the Commission upon request.
4.21 5-Year Credit Agreement, dated as of March 28, 2000, among CIT
Group Inc. (formerly known as Tyco Capital Corporation and The
CIT Group, Inc.), the banks party thereto, J.P. Morgan
Securities Inc. (formerly known as Chase Securities Inc.), as
Arranger, Barclays Bank PLC, Bank of America, N.A., Citibank,
N.A. and The Dai-Ichi Kangyo Bank, Limited, as Syndication
Agents, and JP Morgan Chase Bank (formerly known as The Chase
Manhattan Bank), as Administrative Agent ("5 Year Credit
Agreement") (Incorporated by reference to Exhibit 10.6 to Form
10-Q filed by CIT on February 14, 2002).
107
4.22 First Amendment to 5 Year Credit Agreement, dated as of
October 7, 2002 (Incorporated by reference to Exhibit 99.3 to
Form 8-K filed by CIT on October 24, 2002).
4.23 Assumption Agreement, dated as of June 1, 2001, to 5 Year
Credit Agreement (Incorporated by reference to Exhibit 10.7 to
Form 10-Q filed by CIT on February 14, 2002).
4.24 Additional Bank Agreement, dated as of August 1, 2000, to 5
Year Credit Agreement (Incorporated by reference to Exhibit
10.8 to Form 10-Q filed by CIT on February 14, 2002).
4.25 Assumption Agreement dated as of July 2, 2002 made by CIT
Group Inc. (Incorporated by reference to Exhibit 4.1 to Form
8-K filed by CIT on July 10, 2002).
4.26 364-Day Credit Agreement, dated as of October 15, 2002, among
CIT Group Inc., the banks and other financial institutions
from time to time parties thereto, J.P. Morgan Securities,
Inc., as sole lead arranger and bookrunner, JP Morgan Chase
Bank, as administrative agent, and Barclays Bank PLC, Bank of
America, N.A. and Citibank, as syndication agents
(Incorporated by reference to Form 10-Q filed by CIT on
November 7, 2002).
4.27 5-Year Credit Agreement, dated as of October 10, 2003 among
J.P. Morgan Securities Inc., a joint lead arranger and
bookrunner, Citigroup Global Markets Inc., as joint lead
arranger and bookrunner, JP Morgan Chase Bank as
administrative agent, Bank of America, N.A. as syndication
agent, and Barclays Bank PLC, as documentation agent
(Incorporated by reference to Exhibit 4.2 to Form 10-Q filed
by CIT on November 7, 2003).
10.1 Agreement dated as of June 1, 2001 between CIT Holdings (NV)
Inc., a wholly-owned subsidiary of Tyco International Ltd.,
and CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), a Nevada corporation, regarding transactions between
CIT Holdings and CIT (incorporated by reference to Exhibit
10.1 to Amendment No. 3 to the Registration Statement on Form
S-3 filed June 7, 2002).
10.2 Form of Separation Agreement by and between Tyco International
Ltd. and CIT (incorporated by reference to Exhibit 10.2 to
Amendment No. 3 to the Registration Statement on Form S-3
filed June 26, 2002).
10.3 Form of Financial Services Cooperation Agreement by and
between Tyco International Ltd. and CIT (incorporated by
reference to Exhibit [10.3] to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 12, 2002).
10.4 Employment Agreement for Albert R. Gamper, Jr., dated as of
January 1, 2003 (incorporated by reference to Form 10-K filed
by CIT on February 26, 2003). 10.5 Employment Agreement for
Joseph M. Leone dated as of January 1, 2003 (incorporated by
reference to Form 10-K filed by CIT on February 26, 2003).
10.6 Employment Agreement for Thomas B. Hallman dated as of January
1, 2003 (incorporated by reference to Form 10-K filed by CIT
on February 26, 2003).
10.7 Employment Agreement for Lawrence A. Marsiello dated as of
January 1, 2003 (incorporated by reference to Form 10-K filed
by CIT on February 26, 2003).
10.8 Employment Agreement for Nikita Zdanow dated as of January 1,
2003 (incorporated by reference to Form 10-K filed by CIT on
February 26, 2003).
10.9 Employment Agreement for Jeffrey M. Peek dated as of July 22,
2003 (incorporated by reference to Form 10-Q filed by CIT on
November 7, 2003).
10.10 Executive Severance Plan (incorporated by reference to Exhibit
[10.24] to Amendment No. 3 to the Registration Statement on
Form S-3 filed June 26, 2002).
10.11 Long-Term Equity Compensation Plan (incorporated by reference
to Form DEF-14A filed April 23, 2003).
10.12 Form of Indemnification Agreement (incorporated by reference
to Exhibit [10.26] to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
108
10.13 Form of Tax Agreement by and between Tyco International Ltd.
and CIT (incorporated by reference to Exhibit [10.27] to
Amendment No. 3 to the Registration Statement on Form S-3
filed June 26, 2002).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
21.1 Subsidiaries of CIT.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney.
31.1 Certification of Albert R. Gamper, Jr. pursuant to Rules
13a-15(e) and 15d-15(f) of the Securities Exchange Commission,
as promulgated pursuant to Section 13(a) of the Securities
Exchange Act and Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Joseph M. Leone pursuant to Rules 13a-15(e)
and 15d-15(f) of the Securities Exchange Commission, as
promulgated pursuant to Section 13(a) of the Securities
Exchange Act and Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Albert R. Gamper, Jr. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Joseph M. Leone pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ ROBERT J. INGATO
-----------------------------------------
Robert J. Ingato
Executive Vice President, General Counsel
and Secretary
March 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 9, 2004 in the
capacities indicated below.
Name Date
------ ----
/s/ ALBERT R. GAMPER, JR.
- ----------------------------------------------------
Albert R. Gamper Jr.
Chairman and Chief Executive Officer
and Director
(principal executive officer)
- ----------------------------------------------------
Gary C. Butler
Director
WILLIAM A. FARLINGER*
- ----------------------------------------------------
William A. Farlinger
Director
WILLIAM FREEMAN*
- ----------------------------------------------------
William Freeman
Director
THOMAS H. KEAN*
- ----------------------------------------------------
Thomas H. Kean
Director
EDWARD J. KELLY, III*
- ----------------------------------------------------
Edward J. Kelly, III
Director
MARIANNE MILLER PARRS*
- ----------------------------------------------------
Marianne Miller Parrs
Director
JEFFREY M. PEEK
- ----------------------------------------------------
Jeffrey M. Peek
Director
JOHN RYAN*
- ----------------------------------------------------
John Ryan
Director
PETER J. TOBIN*
- ----------------------------------------------------
Peter J. Tobin
Director
LOIS M. VAN DEUSEN*
- ----------------------------------------------------
Lois M. Van Deusen
Director
/S/ JOSEPH M. LEONE
- ----------------------------------------------------
Joseph M. Leone
Vice Chairman and
Chief Financial Officer
(principal accounting officer)
*By: /s/ WILLIAM J. TAYLOR
- ----------------------------------------------------
William J. Taylor
Executive Vice President and Controller
(principal accounting officer)
*By: /S/ ROBERT J. INGATO
- ----------------------------------------------------
Robert J. Ingato
Executive Vice President and General Counsel
Original powers of attorney authorizing Robert Ingato, and James P.
Shanahan and each of them to sign on behalf of the above-mentioned directors are
held by the Corporation and available for examination by the Securities and
Exchange Commission pursuant to Item 302(b) of Regulation S-T.
110
Where You Can Find More Information
A copy of the Annual Report on Form 10-K, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington D.C. 20549. Information on the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested parties can electronically access the Annual Report on Form 10-K,
including the exhibits and schedules thereto.
The Annual Report on Form 10-K, including the exhibits and schedules
thereto, and other SEC filings, are available free of charge on the Company's
Internet site at http://www.cit.com as soon as reasonably practicable after such
material is electronically filed with the SEC. Copies of our Corporate
Governance Guidelines, the Charters of the Audit Committee, the Compensation
Committee, and the Nominating and Governance Committee, and our Code of Business
Conduct are available, free of charge, on our internet site at
http://www.cit.com, and printed copies are available by contacting Investor
Relations, 1 CIT Drive, Livingston, NJ 07439 or by telephone at (973) 740-5000.
111