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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-31369
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CIT Group Inc.
(Exact name of Registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 CIT Drive, Livingston, New Jersey, 07039
(Address of Registrant's principal executive offices)
(973) 740-5000
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
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 _____
As of July 30, 2004, there were 210,814,589 shares of the Registrant's
common stock outstanding.
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CIT GROUP INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Part I--Financial Information:
Item 1. Consolidated Financial Statements ............................. 1
Consolidated Balance Sheets (Unaudited) ....................... 1
Consolidated Statements of Income (Unaudited) ................. 2
Consolidated Statements of Stockholders' Equity (Unaudited) ... 3
Consolidated Statements of Cash Flows (Unaudited) ............. 4
Notes to Consolidated Financial Statements .................... 5-18
Item 2. Management's Discussion and Analysis of Financial Condition
and and Results of Operations and Quantitative and Qualitative
Item 3. Disclosure about Market Risk ................................ 19-48
Item 4. Controls and Procedures ....................................... 48
Part II--Other Information:
Item 1. Legal Proceedings ............................................. 49
Item 2. Issuer Purchases of Equity Securities ......................... 49
Item 4. Submission of Matters to a Vote of Security Holders ........... 50
Item 6. Exhibits and Reports on Form 8-K .............................. 51
Signatures .................................................... 52
i
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
($ in millions -- except share data)
June 30, December 31,
2004 2003
----------- -----------
ASSETS
Financing and leasing assets:
Finance receivables ................................................. $ 31,828.6 $ 31,300.2
Reserve for credit losses ........................................... (621.0) (643.7)
----------- -----------
Net finance receivables ............................................. 31,207.6 30,656.5
Operating lease equipment, net ...................................... 7,838.8 7,615.5
Finance receivables held for sale ................................... 1,595.2 918.3
Cash and cash equivalents .............................................. 1,777.7 1,973.7
Retained interests in securitizations and other investments ............ 1,242.2 1,380.8
Goodwill and intangible assets ......................................... 516.4 487.7
Other assets ........................................................... 2,504.6 3,310.3
----------- -----------
Total Assets ........................................................... $ 46,682.5 $ 46,342.8
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper .................................................... $ 4,170.4 $ 4,173.9
Variable-rate senior notes .......................................... 10,931.6 9,408.4
Fixed-rate senior notes ............................................. 19,330.3 19,830.8
Preferred capital securities ........................................ 254.6 255.5
----------- -----------
Total debt ............................................................. 34,686.9 33,668.6
Credit balances of factoring clients ................................... 3,292.1 3,894.6
Accrued liabilities and payables ....................................... 2,973.6 3,346.4
----------- -----------
Total Liabilities ................................................... 40,952.6 40,909.6
----------- -----------
Commitments and Contingencies (Note 10)
Minority interest ...................................................... 38.1 39.0
Stockholders' Equity:
Preferred stock: $0.01 par value, 100,000,000 authorized, none issued -- --
Common stock: $0.01 par value, 600,000,000 authorized,
212,092,592 issued, 211,195,862 outstanding ....................... 2.1 2.1
Paid-in capital, net of deferred compensation of $47.8 and $30.6 .... 10,672.2 10,677.0
Accumulated deficit ................................................. (4,831.8) (5,141.8)
Accumulated other comprehensive loss ................................ (118.1) (141.6)
Less: Treasury stock, 896,730 and 43,529 shares, at cost ............ (32.6) (1.5)
----------- -----------
Total Stockholders' Equity .......................................... 5,691.8 5,394.2
----------- -----------
Total Liabilities and Stockholders' Equity .......................... $ 46,682.5 $ 46,342.8
=========== ===========
See Notes to Consolidated Financial Statements.
1
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in millions -- except per share data)
Quarters Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Finance income ...................................... $915.2 $943.2 $1,818.1 $1,882.4
Interest expense .................................... 300.0 337.8 598.0 692.5
------- ------- ------- -------
Net finance income .................................. 615.2 605.4 1,220.1 1,189.9
Depreciation on operating lease equipment ........... 236.3 272.9 470.8 551.7
------- ------- ------- -------
Net finance margin .................................. 378.9 332.5 749.3 638.2
Provision for credit losses ......................... 65.7 100.6 151.3 203.6
------- ------- ------- -------
Net finance margin after provision for
credit losses .................................... 313.2 231.9 598.0 434.6
Other revenue ....................................... 233.5 229.7 463.9 469.6
Gains (losses) on venture capital investments ....... 3.0 (12.1) 3.7 (16.5)
------- ------- ------- -------
Operating margin .................................... 549.7 449.5 1,065.6 887.7
Salaries and general operating expenses ............. 260.3 220.7 507.6 446.3
Gain on redemption of debt .......................... -- -- 41.8 --
------- ------- ------- -------
Income before provision for income taxes ............ 289.4 228.8 599.8 441.4
Provision for income taxes .......................... (112.8) (89.2) (233.9) (172.1)
Dividends on preferred capital securities,
after tax ........................................ -- (2.7) -- (5.4)
------- ------- ------- -------
Net income .......................................... $176.6 $136.9 $ 365.9 $ 263.9
======= ======= ======= =======
Earnings per share
Basic earnings per share ............................ $ 0.83 $ 0.65 $ 1.73 $ 1.25
======= ======= ======= =======
Diluted earnings per share .......................... $ 0.82 $ 0.65 $ 1.70 $ 1.24
======= ======= ======= =======
Number of shares - basic (thousands) ................ 211,532 211,588 211,685 211,581
======= ======= ======= =======
Number of shares - diluted (thousands) .............. 215,359 212,066 215,584 211,975
======= ======= ======= =======
Dividends per common share .......................... $ 0.13 $ 0.12 $ 0.26 $ 0.24
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
($ in millions)
Accumulated
Other Total
Common Paid-in Treasury Accumulated Comprehensive Stockholders'
Stock Capital Stock (Deficit) (Loss) Equity
----- ------- ----- --------- ------ ------
Balance December 31, 2003 .......... $ 2.1 $10,677.0 $ (1.5) $(5,141.8) $(141.6) $5,394.2
Net income ......................... -- -- -- 365.9 -- 365.9
Foreign currency translation
adjustments ...................... -- -- -- -- (7.9) (7.9)
Change in fair values of
derivatives qualifying as
cash flow hedges ................. -- -- -- -- 33.2 33.2
Unrealized losses on equity
and securitization
investments, net ................. -- -- -- -- (1.8) (1.8)
--------
Total comprehensive income ......... -- -- -- -- -- 389.4
--------
Cash dividends ..................... -- -- -- (55.9) -- (55.9)
Amortization of restricted
common stock grants .............. -- 11.9 -- -- -- 11.9
Treasury stock purchased,
at cost .......................... -- -- (73.2) -- -- (73.2)
Exercise of stock option awards .... -- (16.7) 42.1 -- -- 25.4
----- --------- ------ --------- ------- --------
Balance June 30, 2004 .............. $ 2.1 $10,672.2 $(32.6) $(4,831.8) $(118.1) $5,691.8
===== ========= ====== ========= ======= ========
See Notes to Consolidated Financial Statements.
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
Six Months Ended
June 30,
------------------------
2004 2003
----------- -----------
Cash Flows From Operations
Net income .................................................................. $ 365.9 $ 263.9
Adjustments to reconcile net income (loss) to net cash flows from operations:
Depreciation and amortization ............................................ 490.7 569.7
Provision for credit losses .............................................. 151.3 203.6
Provision for deferred federal income taxes .............................. 175.2 150.3
Gains on equipment, receivable and investment sales ...................... (115.7) (119.3)
Gain on debt redemption .................................................. (41.8) --
Decrease (increase) in other assets ...................................... 228.3 (201.8)
(Decrease) increase in accrued liabilities and payables .................. (223.4) 9.5
Other .................................................................... (57.8) 27.1
----------- -----------
Net cash flows provided by operations ....................................... 972.7 903.0
----------- -----------
Cash Flows From Investing Activities
Loans extended .............................................................. (27,428.5) (25,040.9)
Collections on loans ........................................................ 23,238.0 21,180.1
Proceeds from asset and receivable sales .................................... 3,739.4 3,859.9
Purchases of assets to be leased ............................................ (1,373.5) (1,355.0)
Purchase of finance receivable portfolios ................................... (361.5) (534.4)
Net decrease in short-term factoring receivables ............................ (88.9) (205.9)
Other ....................................................................... 51.1 (47.8)
----------- -----------
Net cash flows (used for) investing activities .............................. (2,223.9) (2,144.0)
----------- -----------
Cash Flows From Financing Activities
Proceeds from the issuance of variable and fixed-rate notes ................. 6,628.1 6,192.8
Repayments of variable and fixed-rate notes ................................. (5,374.3) (5,045.4)
Net decrease in commercial paper ............................................ (3.5) (397.9)
Net repayments of non-recourse leveraged lease debt ......................... (103.3) (71.0)
Cash dividends paid ......................................................... (55.9) (50.8)
Other ....................................................................... (35.9) --
----------- -----------
Net cash flows provided by financing activities ............................. 1,055.2 627.7
----------- -----------
Net (decrease) in cash and cash equivalents ................................. (196.0) (613.3)
Cash and cash equivalents, beginning of period .............................. 1,973.7 2,036.6
----------- -----------
Cash and cash equivalents, end of period .................................... $ 1,777.7 $ 1,423.3
=========== ===========
Supplementary Cash Flow Disclosure
Interest paid ............................................................... $ 721.9 $ 811.5
Federal, foreign, state and local income taxes paid, net .................... $ 45.1 $ 40.6
See Notes to Consolidated Financial Statements.
4
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 -- Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a global commercial and consumer finance company that was founded in 1908. CIT
provides financing and leasing capital for companies in a wide variety of
industries, 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.
These financial statements, which have been prepared in accordance with
the instructions to Form 10-Q, do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States ("GAAP") and should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Financial statements
in this Form 10-Q have not been examined by independent accountants in
accordance with generally accepted auditing standards, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of CIT's financial position and
results of operations. Certain prior period amounts have been reclassified to
conform to the current presentation.
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 CIT has the controlling financial interest.
Entities that do not meet the consolidation criteria in either FIN 46 or ARB 51
but that 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 that CIT does
not have significant influence over 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.
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):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
Net income (loss) as reported .............................. $176.6 $136.9 $365.9 $263.9
Stock-based compensation expense-- fair value method,
after tax ................................................ 5.4 5.1 10.5 11.7
------ ------ ------ ------
Pro forma net income (loss) ................................ $171.2 $131.8 $355.4 $252.2
====== ====== ====== ======
Basic earnings per share as reported ....................... $ 0.83 $ 0.65 $ 1.73 $ 1.25
====== ====== ====== ======
Basic earnings per share pro forma ......................... $ 0.81 $ 0.62 $ 1.68 $ 1.19
====== ====== ====== ======
Diluted earnings per share as reported ..................... $ 0.82 $ 0.65 $ 1.70 $ 1.24
====== ====== ====== ======
Diluted earnings per share pro forma ....................... $ 0.79 $ 0.62 $ 1.65 $ 1.19
====== ====== ====== ======
5
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the quarters ended June 30, 2004 and 2003, net income includes $3.4
million and $0.7 million of after-tax compensation cost related to restricted
stock awards. These costs for the six months ended June 30, 2004 and 2003
totaled $7.4 million and $1.2 million after tax.
Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin 105, "Application
of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 requires that
certain mortgage loan commitments issued after March 31, 2004 be accounted for
as derivatives until the loan is made or they expire unexercised. The adoption
of SAB 105 did not have a material financial statement impact on the Company.
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. The adoption is not expected to have a material
financial statement impact on the Company.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revision requires
interim disclosures regarding certain components of net periodic pension costs
and the employer's contribution paid, or expected to be paid during the current
fiscal year, if significantly different from amounts previously disclosed for
interim periods beginning after December 15, 2003. The additional required
disclosures are included in Note 9 -- Post Retirement and Other Benefit Plans.
In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue
Recognition" ("SAB 104"), which revises or rescinds portions of related
interpretive guidance in order to be consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The adoption of
SAB 104 as of January 1, 2004 did not have a material financial statement impact
on the Company.
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
material financial statement impact on the Company.
Note 2 -- Earnings Per Share
Basic earnings per share ("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 do
not have a dilutive effect (because the exercise price is above the market
price) are not included in the denominator and averaged approximately 16.7
million shares and 19.0 million shares for the quarters ended June 30, 2004 and
2003, and 16.4 million shares and 18.2 million shares for the six months ended
June 30, 2004 and 2003, respectively.
6
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented ($ in millions, except per share amounts, which are
in whole dollars; weighted-average share balances in thousands):
Quarter Ended June 30, 2004 Quarter Ended June 30, 2003
----------------------------------- ------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Income available to common
stockholders ..................... $176.6 211,532 $0.83 $136.9 211,588 $0.65
Effect of Dilutive Securities:
Restricted shares ................. -- 758 -- 456
Stock options ..................... -- 3,069 -- 22
------ ------- ------ -------
Diluted EPS .......................... $176.6 215,359 $0.82 $136.9 212,066 $0.65
====== ======= ====== =======
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
----------------------------------- ------------------------------------
Basic EPS:
Income available to common
stockholders .................... $365.9 211,685 $1.73 $263.9 211,581 $1.25
Effect of Dilutive Securities:
Restricted shares ................. -- 649 -- 383
Stock options ..................... -- 3,250 -- 11
------ ------- ------ -------
Diluted EPS .......................... $365.9 215,584 $1.70 $263.9 211,975 $1.24
====== ======= ====== =======
Note 3 -- Business Segment Information
The selected financial information by business segment presented below is
based upon a fixed leverage ratio across business units and the allocation of
most corporate expenses. Corporate and Other includes operating losses on
venture capital investments along with those assets, which are now managed by
Capital Finance ($ in millions).
Total
Specialty Commercial Equipment Capital Business Corporate
Finance Finance Finance Finance Segments and Other Consolidated
------- ------- ------- ------- -------- --------- ------------
Quarter Ended June 30, 2004
Operating margin ..................... $ 230.3 $ 164.5 $ 52.7 $ 80.1 $ 527.6 $ 22.1 $ 549.7
Income taxes ......................... 42.9 43.4 11.7 18.2 116.2 (3.4) 112.8
Net income (loss) .................... 81.7 71.2 18.3 31.2 202.4 (25.8) 176.6
Quarter Ended June 30, 2003
Operating margin ..................... $ 204.4 $ 146.1 $ 35.8 $ 49.0 $ 435.3 $ 14.2 $ 449.5
Income taxes ......................... 40.2 40.3 5.1 10.2 95.8 (6.6) 89.2
Net income (loss) .................... 63.0 63.0 7.9 16.4 150.3 (13.4) 136.9
At and for the Six Months
Ended June 30, 2004
Operating margin ..................... $ 458.4 $ 321.5 $ 100.0 $ 140.2 $ 1,020.1 $ 45.5 $ 1,065.6
Income taxes ......................... 87.6 84.8 21.5 30.9 224.8 9.1 233.9
Net income (loss) .................... 159.9 139.3 33.5 52.8 385.5 (19.6) 365.9
Total financing and leasing assets ... 14,078.7 11,217.7 6,847.5 9,309.6 41,453.5 -- 41,453.5
Total managed assets ................. 19,574.8 11,217.7 9,752.4 9,309.6 49,854.5 -- 49,854.5
At and for the Six Months
Ended June 30, 2003
Operating margin ..................... $ 394.9 $ 287.1 $ 76.0 $ 95.1 $ 853.1 $ 34.6 $ 887.7
Income taxes ......................... 73.6 78.3 11.9 19.5 183.3 (11.2) 172.1
Net income (loss) .................... 115.2 122.5 18.6 30.9 287.2 (23.3) 263.9
Total financing and leasing assets ... 11,600.8 10,220.4 6,711.0 8,976.8 37,509.0 -- 37,509.0
Total managed assets ................. 18,137.4 10,220.4 10,530.9 8,976.8 47,865.5 -- 47,865.5
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
During the June 2004 quarter, the former Structured Finance segment was
combined into the Capital Finance segment to better align with the marketplace
and to improve efficiency. As part of this re-alignment, approximately $1.3
billion of communications and media assets were transferred to Commercial
Finance. Prior period balances have been conformed to present period
presentation.
Note 4 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets ($ in millions):
June 30, 2004 December 31, 2003
--------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
North America:
West ...................... $ 8,083.1 19.5% $ 7,485.5 18.7%
Northeast ................. 8,042.5 19.4% 8,319.8 20.8%
Midwest ................... 6,257.0 15.1% 5,996.2 14.9%
Southeast ................. 6,007.9 14.5% 5,558.6 13.9%
Southwest ................. 4,630.2 11.2% 4,423.1 11.0%
Canada .................... 1,989.6 4.8% 2,055.5 5.1%
--------- ----- --------- -----
Total North America .......... 35,010.3 84.5% 33,838.7 84.4%
Other foreign ................ 6,443.2 15.5% 6,245.2 15.6%
--------- ----- --------- -----
Total ..................... $41,453.5 100.0% $40,083.9 100.0%
========= ===== ========= =====
June 30, 2004 December 31, 2003
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
Industry
Manufacturing(1) ................................. $ 7,027.5 17.0% $ 7,340.6 18.3%
Retail(2) ........................................ 5,322.5 12.8% 5,630.9 14.0%
Commercial aerospace (including regional airlines) 5,256.8 12.7% 5,039.3 12.6%
Consumer based lending-- home mortgage ........... 3,537.2 8.5% 2,679.6 6.7%
Transportation(3) ................................ 2,839.4 6.8% 2,934.9 7.3%
Service industries ............................... 2,762.1 6.7% 2,608.3 6.5%
Consumer based lending-- non-real estate(4) ...... 2,173.9 5.2% 1,862.1 4.7%
Wholesaling ...................................... 1,618.6 3.9% 1,374.7 3.4%
Construction equipment ........................... 1,475.2 3.6% 1,571.2 3.9%
Communications(5) ................................ 1,378.6 3.3% 1,386.5 3.5%
Automotive Services .............................. 1,187.9 2.9% 1,152.3 2.9%
Other (no industry greater than 3.0%)(6) ......... 6,873.8 16.6% 6,503.5 16.2%
--------- ----- --------- -----
Total ......................................... $41,453.5 100.0% $40,083.9 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of apparel (3.2%), followed by food and kindred
products, textiles, transportation equipment, chemical and allied
products, rubber and plastics, industrial machinery and equipment, and
other industries.
(2) Includes retailers of apparel (5.5%) and general merchandise (3.8%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers for computers and related equipment,
as well as for products in various industries such as manufactured
housing, recreational vehicles and marine.
(5) Includes $404.0 million and $556.3 million of equipment financed for the
telecommunications industry at June 30, 2004 and December 31, 2003,
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 $993.0 million, or 2.4% of
total financing and leasing assets at June 30, 2004. This amount includes
approximately $652.5 million in project financing and $256.3 million in
rail cars on lease to customers other than railroads.
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 5 -- Retained Interests in Securitizations and Other Investments
The following table details the components of retained interests in
securitizations and other investments ($ in millions):
June 30, December 31,
2004 2003
-------- ------------
Retained interests in commercial loans:
Retained subordinated securities .............. $ 395.5 $ 536.6
Interest-only strips .......................... 332.9 366.8
Cash reserve accounts ......................... 317.7 226.3
-------- --------
Total retained interest in commercial loans ... 1,046.1 1,129.7
-------- --------
Retained interests in consumer loans:
Retained subordinated securities .............. 76.0 86.7
Interest-only strips .......................... 39.3 58.9
Cash reserve accounts ......................... 17.2 34.0
-------- --------
Total retained interest in consumer loans ..... 132.5 179.6
-------- --------
Total retained interest in securitizations .... 1,178.6 1,309.3
Aerospace equipment trust certificates ........... 63.6 71.5
-------- --------
Total ......................................... $1,242.2 $1,380.8
======== ========
Note 6 -- Accumulated Other Comprehensive Loss
The following table details the components of accumulated other
comprehensive loss, net of tax ($ in millions):
June 30, December 31,
2004 2003
-------- ------------
Foreign currency translation adjustments ............... $(113.7) $(105.8)
Changes in fair values of derivatives qualifying
as cashflow hedges ................................... (8.1) (41.3)
Unrealized gain on equity and securitization
investments .......................................... 4.5 6.3
Minimum pension liability adjustments .................. (0.8) (0.8)
------- -------
Total accumulated other comprehensive loss .......... $(118.1) $(141.6)
======= =======
Note 7 -- Derivative Financial Instruments
As part of managing exposure to interest rate, foreign currency, and, in
limited instances, credit risk, CIT, as an end-user, enters into various
derivative transactions, all of which are transacted in over-the-counter markets
with other financial institutions acting as principal counterparties.
Derivatives are utilized for hedging purposes only, and policy prohibits
entering into derivative financial instruments for trading or speculative
purposes. To ensure both appropriate use as a hedge and to achieve hedge
accounting treatment, whenever possible, substantially all derivatives entered
into are designated according to a hedge objective against a specific or
forecasted liability or, in limited instances, assets. The notional amounts,
rates, indices, and maturities of our derivatives closely match the related
terms of the underlying hedged items.
CIT utilizes interest rate swaps to exchange variable-rate interest
underlying forecasted issuances of commercial paper, specific variable-rate debt
instruments, and, in limited instances, variable-rate assets for fixed-rate
amounts. These interest rate swaps are designated as cash flow hedges and
changes in fair value of these swaps, to the extent they are effective as a
hedge, are recorded in other comprehensive income. Ineffective amounts are
recorded in interest expense. Interest rate swaps are also utilized to convert
fixed-rate interest on specific debt instruments to variable-rate amounts. These
interest rate swaps are designated as fair value hedges and changes in fair
value of these swaps are recorded as basis adjustments to the underlying hedged
item.
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedge designation ($ in millions):
Notional Amount
----------------------------------
June 30, 2004 December 31, 2003
------------- -----------------'
Effectively converts the interest
rate on an equivalent amount of
commercial paper, variable-rate
Floating to fixed-rate swaps-- notes and selected assets to a
cash flow hedges ............... $ 4,787.1 $2,615.0 fixed rate.
Effectively converts the interest
rate on an equivalent amount of
Fixed to floating-rate swaps-- fixed-rate notes and selected assets
fair value hedges .............. 7,126.2 6,758.2 to a variable rate.
--------- --------
Total interest rate swaps ........ $11,913.3 $9,373.2
========= ========
In addition to the swaps in the table above, in conjunction with
securitizations, CIT has $2.4 billion in notional amount of interest rate swaps
outstanding with the related trusts to protect the trusts against interest rate
risk. CIT is insulated from this risk by entering into offsetting swap
transactions with third parties totaling $2.4 billion in notional amount at June
30, 2004.
CIT utilizes foreign currency exchange forward contracts to hedge currency
risk underlying foreign currency loans to subsidiaries and the net investments
in foreign operations. These contracts are designated as foreign currency cash
flow hedges or net investment hedges and changes in fair value of these
contracts are recorded in other comprehensive income along with the translation
gains and losses on the underlying hedged items. CIT also utilizes cross
currency interest rate swaps to hedge currency risk underlying foreign currency
debt and selected foreign currency assets. These swaps are designated as foreign
currency cash flow hedges or foreign currency fair value hedges and changes in
fair value of these contracts are recorded in other comprehensive income (for
cash flow hedges), or as a basis adjustment to the hedged item (for fair value
hedges) along with the translation gains and losses on the underlying hedged
items.
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as cash flow hedges are presented in the following
table ($ in millions):
Fair Value Total
Adjustments Income Tax Unrealized
of Derivatives Effects Loss
-------------- ------- ----
Balance at December 31, 2003-- unrealized loss ................... $64.6 $(23.3) $41.3
Changes in values of derivatives qualifying as cash flow hedges .. (54.4) 21.2 (33.2)
----- ------ -----
Balance at June 30, 2004-- unrealized loss ....................... $10.2 $ (2.1) $ 8.1
===== ====== =====
The unrealized loss as of June 30, 2004, 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 quarter and
six months ended June 30, 2004, the ineffective portion of changes in the fair
value of cash flow hedges amounted to $0.4 million and $0.7 million and has been
recorded as a decrease to interest expense. Assuming no change in interest
rates, approximately $3.2 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.
During 2004, CIT entered into credit default swaps, with a combined
notional value of $98.0 million and terms of 5 years, to economically hedge
certain CIT credit exposures. These swaps do not meet the requirements
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
for hedge accounting treatment and therefore are recorded at fair value, with
both realized and unrealized gains or losses recorded in other revenue in the
consolidated statement of income. The fair value adjustment as of June 30, 2004
amounted to a $2.5 million pretax loss.
Note 8 -- 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. The current contract with Dell runs through October 2005. We
expect to announce by the end of the third quarter of 2004 a contract continuing
and modifying the current terms of the relationship.
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 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 GAAP are allocated to CIT. DFS is not
consolidated in CIT's financial statements and is accounted for under the equity
method. At June 30, 2004 and December 31, 2003, financing and leasing assets
related to the DFS program (included in the CIT Consolidated Balance Sheet) were
$2.0 billion and $1.4 billion, and securitized assets included in managed assets
were $2.2 billion and $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 $206 million and $205 million
pretax at June 30, 2004 and December 31, 2003. These amounts are 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. 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 both June
30, 2004 and 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 $16 million and $17 million pretax at June 30, 2004 and
December 31, 2003, which is comprised of the investment in and loans to the
joint venture. Both the Snap-on and the Dell joint venture arrangements were
acquired in a 1999 acquisition.
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
June 30, 2004 and December 31, 2003, CIT's maximum exposure to loss with respect
to activities of the joint venture is $147 million and $119 million pretax.
These amounts are 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 June 30, 2004 and
December 31, 2003, other assets included $20 million and $21 million of
investments in non-consolidated entities relating to such transactions that are
accounted for under the equity or cost methods. This investment is CIT's maximum
exposure to loss with respect to these interests as of each date.
Certain shareholders of CIT provide investment management services in the
normal course of business in conjunction with CIT's employee benefit plans.
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 9 -- Post retirement and Other Benefit Plans
The following table discloses various components of pension expense ($ in
millions):
For the Quarter For the Six Months
Ended June 30, Ended June 30,
---------------- ------------------
Retirement Plans 2004 2003 2004 2003
----- ----- ----- -----
Service cost ...................... $ 4.4 $ 3.9 $ 8.9 $ 7.8
Interest cost ..................... 3.9 3.6 7.8 7.2
Expected return on plan assets .... (4.0) (2.3) (8.1) (4.6)
Amortization of net loss .......... 0.7 0.8 1.4 1.7
----- ----- ----- -----
Net periodic benefit cost ......... $ 5.0 $ 6.0 $10.0 $12.1
===== ===== ===== =====
Postretirement Plans
Service cost ...................... $ 0.4 $ 0.4 $ 0.9 $ 0.8
Interest cost ..................... 0.9 0.8 1.7 1.5
Amortization of net loss .......... 0.2 -- 0.5 0.1
----- ----- ----- -----
Net periodic benefit cost ......... $ 1.5 $ 1.2 $ 3.1 $ 2.4
===== ===== ===== =====
Note 10 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including commitments to provide
financing and leasing capital, standby letters of credit and guarantees. Standby
letters of credit 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 June 30, 2004, 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 ($ in millions):
December 31,
June 30, 2004 2003
------------------------------- ------------
Due to Expire
------------------
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
Financing and leasing assets ....... $1,177.6 $5,713.7 $6,891.3 $5,934.3
Letters of credit and acceptances:
Standby letters of credit ........ 424.1 138.3 562.4 508.7
Other letters of credit .......... 760.0 0.4 760.4 694.0
Acceptances ...................... 18.4 -- 18.4 9.3
Guarantees ......................... 118.6 12.4 131.0 133.2
Venture capital fund commitments ... 3.4 100.7 104.1 124.2
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Commitments to purchase commercial aircraft from both Airbus Industrie and
The Boeing Company are detailed below ($ in millions):
June 30, 2004 December 31, 2003
---------------- -----------------
Calendar Year Amount Units Amount Units
- ------------- ------ ----- ------ -----
2004 (Remaining) ................... $ 399.0 10 $ 634.0 15
2005 ............................... 906.0 18 952.0 20
2006 ............................... 996.0 20 1,088.0 21
2007 ............................... 260.0 5 260.0 5
-------- -- -------- --
Total .............................. $2,561.0 53 $2,934.0 61
======== == ======== ==
The order amounts exclude CIT's unexercised options to purchase additional
aircraft.
Outstanding commitments to purchase equipment, other than the aircraft
detailed above, totaled $226.4 million at June 30, 2004 and $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 $465.8 million, approximately
$28 million per year through 2010 and declining thereafter 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
14 -- 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 June 30, 2004.
Note 11 -- 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 former 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, has been 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 is
vigorously defending 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.
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 12 -- Severance and Facility Restructuring Reserves
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 of CIT by Tyco, as well as restructuring
activities during the current quarter ($ in millions):
Severance Facilities
-------------------- ---------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance December 31, 2003 ........... 43 $ 2.3 12 $ 7.2 $ 9.5
Additions ........................... 64 4.3 -- -- 4.3
Utilization ......................... (52) (3.2) (2) (4.4) (7.6)
--- ----- --- ----- -----
Balance at June 30, 2004 ............ 55 $ 3.4 10 $ 2.8 $ 6.2
=== ===== === ===== =====
The beginning reserves relate largely to the restructuring of the European
operations and include amounts payable within the next year to individuals who
chose to receive payments on a periodic basis. The facility reserves relate
primarily to shortfalls in sublease transactions and will be utilized over the
remaining lease terms, generally within 6 years. The additions to severance
reserves in 2004 relate primarily to the combination of the former Structured
Finance with Capital Finance and the transfer of the communications and media
portfolio to Commercial Finance. These additional reserves are expected to be
utilized within a year.
Note 13 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $516.4 million and $487.7 million
at June 30, 2004 and December 31, 2003, respectively. The Company periodically
reviews and evaluates its goodwill and other intangible assets for potential
impairment. Effective October 1, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill is no
longer amortized but instead is assessed for impairment at least annually. As
part of the adoption, the Company allocated its existing goodwill to each of its
reporting units as of October 1, 2001. Under the transition provisions of SFAS
142, there was no goodwill impairment as of October 1, 2001.
The most recent goodwill impairment analysis was performed during the
fourth quarter of 2003, which indicated that the fair value of goodwill was in
excess of the carrying value. There were no changes in the carrying values of
goodwill during the quarter ended June 30, 2004. The following table summarizes
the remaining goodwill balance by segment ($ in millions):
Specialty Commercial
Finance Finance Total
------- ------- -----
Balance as of June 30, 2004 ............. $12.7 $370.4 $383.1
Other intangible assets, net, comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
totaled $133.3 million and $104.6 million, at June 30, 2004 and December 31,
2003, and are included in Goodwill and Intangible Assets in the Consolidated
Balance Sheets. The increase in 2004 was primarily related to the acquisition of
a technology business with approximately $520 million in assets. Other
intangible assets are being amortized over their corresponding respective lives
ranging from five to twenty years in relation to the related revenue streams,
where applicable. Amortization expense totaled $2.3 million and $4.5 million for
the quarter and six months ended June 30, 2004 versus $1.1 million and $2.2
million for the respective prior year periods. Accumulated amortization totalled
$14.9 million and $10.4 million at June 30, 2004 and December 31, 2003. The
projected amortization for the years ended December 31, 2004 through December
31, 2008 are: $11.1 million for 2004; $13.2 million for 2005; $12.1 million for
2006; and $8.8 million for 2007 and 2008.
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 14 -- Summarized Financial Information of Subsidiaries
The following presents condensed consolidating financial information for
CIT Holdings LLC and Capita Corporation (formerly AT&T Capital Corporation). CIT
has guaranteed on a full and unconditional basis the existing debt securities
that were registered under the Securities Act of 1933 and certain other
indebtedness of these subsidiaries. CIT has not presented related financial
statements or other information for these subsidiaries on a stand-alone basis.
($ in millions)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------- ----------- --- ------------ ------------ -----
June 30, 2004
ASSETS
Net finance receivables ............ $ 1,158.1 $3,364.3 $1,428.4 $25,256.8 $ -- $31,207.6
Operating lease equipment, net ..... -- 498.5 133.5 7,206.8 -- 7,838.8
Finance receivables held for sale .. -- 78.6 66.8 1,449.8 -- 1,595.2
Cash and cash equivalents .......... 1,031.7 546.3 325.4 (125.7) -- 1,777.7
Other assets ....................... 7,652.2 (47.5) 160.9 2,189.4 (5,691.8) 4,263.2
---------- -------- -------- --------- --------- ---------
Total Assets .................... $ 9,842.0 $4,440.2 $2,115.0 $35,977.1 $(5,691.8) $46,682.5
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 32,131.8 $ 437.4 $1,414.5 $ 703.2 $ -- $34,686.9
Credit balances of
factoring clients ............... -- -- -- 3,292.1 -- 3,292.1
Accrued liabilities and payables ... (27,981.6) 3,464.3 (537.0) 28,027.9 -- 2,973.6
---------- -------- -------- --------- --------- ---------
Total Liabilities ............... 4,150.2 3,901.7 877.5 32,023.2 -- 40,952.6
Minority interest .................. -- -- -- 38.1 -- 38.1
Total Stockholders' Equity ......... 5,691.8 538.5 1,237.5 3,915.8 (5,691.8) 5,691.8
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............ $ 9,842.0 $4,440.2 $2,115.0 $35,977.1 $(5,691.8) $46,682.5
========== ======== ======== ========= ========= =========
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
========== ======== ======== ========= ========= =========
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- --- ------------ ------------ -----
Six Months Ended June 30, 2004
Finance income .................... $ 15.5 $359.6 $ 93.7 $1,349.3 $ -- $1,818.1
Interest expense .................. (43.5) 105.6 7.5 528.4 -- 598.0
------ ------ ------ -------- ------- --------
Net finance income ................ 59.0 254.0 86.2 820.9 -- 1,220.1
Depreciation on operating
lease equipment ................ -- 161.4 21.4 288.0 -- 470.8
------ ------ ------ -------- ------- --------
Net finance margin ................ 59.0 92.6 64.8 532.9 -- 749.3
Provision for credit losses ....... 7.7 25.5 5.2 112.9 -- 151.3
------ ------ ------ -------- ------- --------
Net finance margin, after provision
for credit losses .............. 51.3 67.1 59.6 420.0 -- 598.0
Equity in net income of
subsidiaries ................... 341.2 -- -- -- (341.2) --
Other revenue ..................... (2.2) 77.0 50.6 338.5 -- 463.9
Gains on venture capital
investments .................... -- -- -- 3.7 -- 3.7
------ ------ ------ -------- ------- --------
Operating margin .................. 390.3 144.1 110.2 762.2 (341.2) 1,065.6
Operating expenses ................ 56.7 71.7 50.9 328.3 -- 507.6
Gain on redemption of debt ........ 41.8 -- -- -- -- 41.8
------ ------ ------ -------- ------- --------
Income (loss) before provision
for income taxes ............... 375.4 72.4 59.3 433.9 (341.2) 599.8
Provision for income taxes ........ 9.5 28.2 23.1 173.1 -- 233.9
------ ------ ------ -------- ------- --------
Net income ........................ $365.9 $ 44.2 $ 36.2 $ 260.8 $(341.2) $ 365.9
====== ====== ====== ======== ======= ========
Six Months Ended June 30, 2003
Finance income .................... $ 53.9 $399.9 $ 95.4 $1,333.2 $ -- $1,882.4
Interest expense .................. (1.9) 166.6 (7.3) 535.1 -- 692.5
------ ------ ------ -------- ------- --------
Net finance income ................ 55.8 233.3 102.7 798.1 -- 1,189.9
Depreciation on operating
lease equipment ............... -- 194.6 38.8 318.3 -- 551.7
------ ------ ------ -------- ------- --------
Net finance margin ................ 55.8 38.7 63.9 479.8 -- 638.2
Provision for credit losses ....... 19.6 25.7 9.6 148.7 -- 203.6
------ ------ ------ -------- ------- --------
Net finance margin, after provision
for credit losses .............. 36.2 13.0 54.3 331.1 -- 434.6
Equity in net income
of subsidiaries ................ 243.8 -- -- -- (243.8) --
Other revenue ..................... 4.0 55.2 50.4 360.0 -- 469.6
Losses on venture capital
investments .................... -- -- -- (16.5) -- (16.5)
------ ------ ------ -------- ------- --------
Operating margin .................. 284.0 68.2 104.7 674.6 (243.8) 887.7
Operating expenses ................ 24.7 68.2 59.2 294.2 -- 446.3
------ ------ ------ -------- ------- --------
Income (loss) before provision for
income taxes ................... 259.3 -- 45.5 380.4 (243.8) 441.4
Provision for income taxes ........ (4.6) -- 17.7 159.0 -- 172.1
Dividends on preferred capital
securities, after tax .......... -- -- -- (5.4) -- (5.4)
------ ------ ------ -------- ------- --------
Net income ........................ $263.9 $ -- $ 27.8 $ 216.0 $(243.8) $ 263.9
====== ====== ====== ======== ======= ========
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING STATEMENT CIT Capita Holdings Other
OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- --- ------------ ------------ -----
Six Months Ended June 30, 2004
Cash Flows From
Operating Activities:
Net cash flows provided
by operations ..................... $ 128.8 $ 514.0 $ 166.4 $ 163.5 $ -- $ 972.7
--------- ------- ------- -------- --------- ---------
Cash Flows From
Investing Activities:
Net (increase) decrease in financing
and leasing assets ................ 457.5 322.3 (122.7) (2,932.1) -- (2,275.0)
Decrease in inter-company loans
and investments ................... (2,453.7) -- -- -- 2,453.7 --
Other ................................ -- -- -- 51.1 -- 51.1
--------- ------- ------- -------- --------- ---------
Net cash flows (used for)
investing activities .............. (1,996.2) 322.3 (122.7) (2,881.0) 2,453.7 (2,223.9)
--------- ------- ------- -------- --------- ---------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt ...... 1,475.1 (566.1) 6.8 231.2 -- 1,147.0
Inter-company financing .............. -- (134.5) 47.4 2,540.8 (2,453.7) --
Cash dividends paid .................. (55.9) -- -- -- -- (55.9)
Other ................................ -- -- -- (35.9) -- (35.9)
--------- ------- ------- -------- --------- ---------
Net cash flows provided by
(used for) financing activities ... 1,419.2 (700.6) 54.2 2,736.1 (2,453.7) 1,055.2
--------- ------- ------- -------- --------- ---------
Net increase (decrease) in cash and
cash equivalents .................. (448.2) 135.7 97.9 18.6 -- (196.0)
Cash and cash equivalents,
beginning of period ............... 1,479.9 410.6 227.5 (144.3) -- 1,973.7
--------- ------- ------- -------- --------- ---------
Cash and cash equivalents,
end of period ..................... $ 1,031.7 $ 546.3 $ 325.4 $ (125.7) $ -- $ 1,777.7
========= ======= ======= ======== ========= =========
17
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING STATEMENT CIT Capita Holdings Other
OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- -------- ------------ ------------ -----
Six Months Ended June 30, 2003
Cash Flows From
Operating Activities:
Net cash flows provided
by (used for) operations ........... $ (983.4) $ 623.1 $(125.7) $1,389.0 $ -- $ 903.0
--------- -------- ------- -------- ------- ---------
Cash Flows From
Investing Activities:
Net decrease in financing and
leasing assets ..................... (914.8) (164.4) (203.0) (814.0) -- (2,096.2)
Increase in inter-company loans
and investments .................... 521.6 -- -- -- (521.6) --
Other ................................. -- -- -- (47.8) -- (47.8)
--------- -------- ------- -------- ------- ---------
Net cash flows (used for)
investing activities ............... (393.2) (164.4) (203.0) (861.8) (521.6) (2,144.0)
--------- -------- ------- -------- ------- ---------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt ....... 891.5 7.3 (309.3) 89.0 -- 678.5
Inter-company financing ............... -- (362.7) 403.2 (562.1) 521.6 --
Cash dividends paid ................... (50.8) -- -- -- -- (50.8)
--------- -------- ------- -------- ------- ---------
Net cash flows provided by
(used for) financing activities .... 840.7 (355.4) 93.9 (473.1) 521.6 627.7
--------- -------- ------- -------- ------- ---------
Net increase (decrease) in cash and
cash equivalents ................... (535.9) 103.3 (234.8) 54.1 -- (613.3)
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 ...................... $ 775.0 $ 334.4 $ 58.9 $ 255.0 $ -- $ 1,423.3
========= ======== ======= ======== ======= =========
Note 15 -- Subsequent Events
On and effective July 21, 2004, the CIT Board of Directors elected Jeffrey
M. Peek as the Company's President and Chief Executive Officer. Mr. Peek, who
had previously served as CIT's President and Chief Operating Officer, replaced
Albert R. Gamper Jr., who had served as Chairman and Chief Executive Officer
since 1987. Mr. Gamper will remain as Chairman until his retirement on December
31, 2004.
On July 28, 2004, CIT announced that it has agreed to acquire the vendor
finance leasing business in Western Europe of CitiCapital, a business unit of
Citigroup (NYSE: C). The transaction is subject to customary regulatory
approvals and is expected to close in the fourth quarter of this year. The
business to be acquired, based in Watford, England, will be integrated into
CIT's Specialty Finance Group. The approximately $950 million of acquired assets
are principally comprised of leases and loans secured by technology, healthcare,
and construction and industrial equipment. A significant majority of the
portfolio is located in the U.K. and France, with the remainder in Germany,
Spain and Italy.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Quantitative and Qualitative Disclosure about Market
Risk
The following discussion uses financial terms that we believe to be
relevant to our business. A glossary of other key terms used in our business can
be found following the "Introduction" section.
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 and
other collateralized asset ownership belong 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, including the
right to take depreciation and the risk of damage or obsolescence. 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).
We believe that 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 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 depends on maintaining high quality assets, strong
capital ratios and high credit ratings. This profitability key is also a
function of interest rate and currency rate risk management, where the goal is
to substantially insulate our interest margins and profits from movements in
market interest rates and foreign currency exchange 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 interest sensitivity and liquidity measurements that are
discussed in 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.
19
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
securitized finance receivables 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.
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. 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 and more recently
to hedge credit risk. Derivative contracts used
by CIT include interest rate swaps, cross
currency swaps, foreign exchange forward
contracts and credit default swaps.
20
Term Description
- ----- ----------
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.
Finance Income ............... Finance income includes both interest income on
finance receivables and rental income on
operating leases.
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 or as lessor, depending on the
transaction.
Leases -- tax-optimized
leveraged .................. Leveraged leases where we are the lessor and
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, recognizes
depreciation on the asset, and assumes the risks
of ownership, including obsolescence.
Managed Assets ............... Managed assets are comprised of finance
receivables, operating lease equipment, finance
receivables held for sale, certain investments
and receivables securitized and still managed by
us. The change in managed assets during a
reporting period is one of our measurements of
asset growth.
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.
Non-spread Revenue ........... Non-spread revenues include syndication fees,
gains from dispositions of equipment, factoring
commissions, loan servicing and other fees and
are reported in Other Revenue.
Quality Spreads .............. The difference between interest cost on our
borrowings and the interest costs on comparable
term U.S. Treasury securities 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.
21
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 in order to isolate the risks and
rewards of owning its assets and incurring its
liabilities. 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.
Yield-related Fees ........... In certain transactions, in addition to interest
income, yield-related fees are collected for the
assumption of underwriting risk. Yield-related
fees are reported in Finance Income and are
recognized over the life of the lending
transaction.
Profitability and Key Business Trends
Net income for the six months ended June 30, 2004 included a $25.5 million
after-tax gain recognized in the first quarter on the early redemption of debt.
Our improved profitability reflected higher asset levels, lower charge-offs and
lower borrowing costs, which were partially offset by higher operating expenses.
Our profitability measurements for the respective periods are presented in
the table below:
Quarters Ended June 30,
-----------------------
2004 2003
----- -----
Net income per diluted share ...................... $0.82 $0.65
Net income as a percentage of AEA ................. 1.86% 1.53%
Return on average tangible equity ................. 13.7% 11.6%
Six Months Ended June 30,
------------------------
2004 2003
----- -----
Net income per diluted share(1) ................... $1.70 $1.24
Net income as a percentage of AEA(1) .............. 1.95% 1.50%
Return on average tangible equity(1) .............. 14.4% 11.3%
- --------------------------------------------------------------------------------
(1) For the six months ended June 30, 2004, net income per diluted share, net
income as a percentage of AEA and return on average tangible equity
excluding gain on redemption of debt were $1.58, 1.82% and 13.4%,
respectively.
Total financing and leasing portfolio assets grew to $41.5 billion at June
30, 2004 from $40.1 billion and $37.5 billion at December 31, 2003 and June 30,
2003. Managed assets were $49.9 billion at June 30, 2004, versus $49.7 billion
and $47.9 billion at December 31, 2003 and June 30, 2003. New business volumes
increased 8% and 12% from 2003 for the quarter and the six months, with strength
across all business lines. We also acquired a technology finance business with
$520 million in assets during the quarter.
22
Offsetting the impact on asset levels of the strong volume and acquisition
were unusually high prepayment activities due to strong liquidity in the credit
markets, capital allocation initiatives and seasonal declines in factoring asset
levels. Prepayments included a $350 million factoring account and a $50 million
international financing. Capital allocation initiatives reduced asset levels by
approximately $400 million, including the following:
o The syndication of a $150 million project finance exposure in
Capital Finance executed primarily for risk management purposes;
o The sale of a test equipment rental business with $100 million in
assets;
o The sale of $70 million of direct venture capital investments;
o Continued runoff in liquidating portfolios of $60 million. In
addition, following management's decision to accelerate the
liquidation of these assets, approximately $110 million in
recreational vehicle and marine portfolios were transferred to
assets held for sale at June 30, 2004; and
o The sale of $20 million in residual Argentine assets.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosure about Market
Risk" contain certain non-GAAP financial measures. See "Non-GAAP Financial
Measurements" for additional information. The sections that follow analyze our
results by financial statement caption and are referenced back to the
profitability keys that are discussed in "Introduction."
Net Finance Margin
An analysis of net finance margin is set forth below ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Finance income ................................ $ 915.2 $ 943.2 $ 1,818.1 $ 1,882.4
Interest expense .............................. 300.0 337.8 598.0 692.5
--------- --------- --------- ---------
Net finance income .......................... 615.2 605.4 1,220.1 1,189.9
Depreciation on operating lease equipment ..... 236.3 272.9 470.8 551.7
--------- --------- --------- ---------
Net finance margin .......................... $ 378.9 $ 332.5 $ 749.3 $ 638.2
========= ========= ========= =========
Average Earnings Asset ("AEA") ................ $37,992.8 $35,700.0 $37,499.1 $35,194.8
========= ========= ========= =========
As a % of AEA:
Finance income ................................ 9.64% 10.57% 9.70% 10.70%
Interest expense .............................. 3.16% 3.78% 3.19% 3.93%
---- ---- ---- ----
Net finance income .......................... 6.48% 6.79% 6.51% 6.77%
Depreciation on operating lease equipment ..... 2.49% 3.06% 2.51% 3.14%
---- ---- ---- ----
Net finance margin .......................... 3.99% 3.73% 4.00% 3.63%
==== ==== ==== ====
For the quarter ended June 30, 2004, net finance margin improved by $46.4
million or 26 basis points (as a percentage of AEA) from 2003, while the
improvement for the six months ended June 30, 2004 totaled $111.1 million or 37
basis points over the prior year period due primarily to reduced borrowing
costs. Year over year growth in financing and leasing assets was offset by lower
finance income, as the portfolio continued to reprice in the relatively low rate
environment. Lower operating lease rentals reduced finance income by $41.2
million or 43 basis points from the second quarter of 2003 and reduced six month
finance income by $74.9 million or 40 basis points from the prior year period.
See "Operating Leases" for additional information regarding operating lease
margin.
The trend in net finance margin as a percentage of AEA, excluding the
impact of operating lease rentals, reflects a greater decline in interest
expense than in finance income yield, primarily due to the narrowing
(improvement) of our credit spreads and the refinancing of higher-cost debt. The
increase in AEA reflects growth in the latter part of 2003 and in 2004.
23
Additional information regarding our borrowing costs is shown in the
following table ($ in millions):
Before Swaps After Swaps
---------------------- -----------------------
Quarter Ended June 30, 2004
Commercial paper, variable-rate senior
notes and bank credit facilities ................... $14,875.7 1.55% $18,250.0 2.33%
Fixed-rate senior and subordinated notes .............. 19,312.4 5.71% 15,938.1 5.19%
--------- ---------
Composite ............................................. $34,188.1 3.90% $34,188.1 3.67%
========= =========
Quarter Ended June 30, 2003
Commercial paper, variable-rate senior
notes and bank credit facilities ................... $12,030.2 1.90% $15,646.8 2.72%
Fixed-rate senior and subordinated notes .............. 20,284.9 6.13% 16,668.3 5.93%
--------- ---------
Composite ............................................. $32,315.1 4.56% $32,315.1 4.37%
========= =========
Six Months Ended June 30, 2004
Commercial paper, variable-rate senior
notes and bank credit facilities ................... $14,289.9 1.56% $18,036.9 2.30%
Fixed-rate senior and subordinated notes .............. 19,130.3 5.70% 15,383.3 5.26%
--------- ---------
Composite ............................................. $33,420.2 3.93% $33,420.2 3.66%
========= =========
Six Months Ended June 30, 2003
Commercial paper, variable-rate senior
notes and bank credit facilities ................... $12,367.3 1.92% $15,159.1 2.75%
Fixed-rate senior and subordinated notes .............. 19,990.3 6.23% 17,198.5 6.02%
--------- ---------
Composite ............................................. $32,357.6 4.58% $32,357.6 4.49%
========= =========
Operating Leases
The table below summarizes operating lease margin, both in amount and as a
percentage of average operating lease equipment ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
------------------------ -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Rental income ........................... $ 338.1 $ 379.3 $ 684.5 $ 759.4
Depreciation expense .................... 236.3 272.9 470.8 551.7
-------- -------- -------- --------
Operating lease margin .......... $ 101.8 $ 106.4 $ 213.7 $ 207.7
======== ======== ======== ========
Average operating lease equipment ....... $7,628.5 $7,304.2 $7,613.6 $7,033.7
======== ======== ======== ========
As a % of Average Operating
Lease Equipment:
Rental income ........................... 17.73% 20.77% 17.98% 21.60%
Depreciation expense .................... 12.39% 14.95% 12.37% 15.69%
---- ---- ---- ----
Operating lease margin ................ 5.34% 5.82% 5.61% 5.91%
==== ==== ==== ====
Depreciation expense for the quarter ended June 30, 2004 included an
additional $14.8 million impairment charge to reduce certain older, out of
production aircraft to estimated fair value. The additional depreciation expense
primarily relates to aircraft with a single lessee with upcoming lease
terminations and for which market rental rates have declined. Therefore, the
projected cash flows no longer supported the corresponding carrying value,
resulting in the additional depreciation charge.
The decline in operating lease margin and its components from 2003 also
reflects lower rentals on the Capital Finance aerospace portfolio due to the
commercial airline industry downturn and the change in equipment mix to a
greater proportion of aircraft and rail assets with an average depreciable life
of 25 and 40 years, respectively, compared to smaller-ticket assets with lives
generally of 3 years in the Specialty Finance and Equipment Finance portfolios.
Aerospace rentals trended downward following the terrorist attacks on September
11, 2001, but have recently shown some stability.
24
The following table summarizes the total operating lease portfolio by
segment ($ in millions):
June 30,
--------------------------
2004 2003
----- -----
Capital Finance -- Aerospace .................... $4,161.7 $3,801.1
Capital Finance -- Rail and Other ............... 2,212.5 2,083.7
Specialty Finance ............................... 1,084.0 1,171.2
Equipment Finance ............................... 380.6 504.0
-------- --------
Total ......................................... $7,838.8 $7,560.0
======== ========
o The increase in the Capital Finance aerospace portfolio reflects
deliveries of new commercial aircraft.
o The decline 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, rather than
operating leases, in these segments.
Maximizing equipment utilization levels is a prime component of operating
lease portfolio profitability. Equipment not subject to lease agreements totaled
$176.3 million and $265.9 million, at June 30, 2004 and December 31, 2003,
respectively. The reduction was due to fewer commercial aerospace and rail
assets off lease as well as the sale of a test equipment rental business in the
second quarter of 2004. Weakness in the commercial airline industry could
adversely impact prospective rental and utilization rates.
Net Finance Margin after Provision for Credit Losses (Risk-adjusted Margin)
The following table summarizes risk-adjusted margin, both in amount and as
a percentage of AEA ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- --------------------------
2004 2003 2004 2003
------ ------ ------ ------
Net finance margin .............. $378.9 $332.5 $749.3 $638.2
Provision for credit losses ..... 65.7 100.6 151.3 203.6
------ ------ ------ ------
Risk-adjusted margin .......... $313.2 $231.9 $598.0 $434.6
====== ====== ====== ======
As a Percentage of AEA:
Net finance margin .............. 3.99% 3.73% 4.00% 3.63%
Provision for credit losses ..... 0.69% 1.13% 0.81% 1.16%
---- ---- ---- ----
Risk-adjusted margin .......... 3.30% 2.60% 3.19% 2.47%
==== ==== ==== ====
The improvement for both periods of 2004 compared to 2003 primarily
reflects the previously discussed improvement in net finance margin, as well as
incremental benefit from a lower provision for charge-offs, which is discussed
further in "Credit Metrics".
In conjunction with the June 2001 acquisition of CIT by Tyco, fair value
adjustments to mark the liquidating portfolios (discounts), other finance
receivables and debt to market were recorded under new basis accounting. These
adjustments are being accreted into income as the portfolios and debt liquidate.
For the quarter and six months ended June 30, 2003, risk adjusted margin,
including charge-offs relating to the liquidating portfolios, was positively
impacted by 15 and 19 basis points for the accretion of these items. For the
2004 periods, the combined impact of these fair value adjustments was
negligible. See "Financing and Leasing Assets" for additional information
regarding the liquidating portfolios.
25
Other Revenue
The components of other revenue are set forth in the following table ($ in
millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
------ ------ ------ ------
Fees and other income ....................... $141.0 $134.6 $267.7 $279.3
Factoring commissions ....................... 53.5 44.8 108.5 91.7
Gains on sales of leasing equipment ......... 27.1 16.5 54.4 34.1
Gains on securitizations .................... 11.9 33.8 33.3 64.5
------ ------ ------ ------
Total other revenue ....................... $233.5 $229.7 $463.9 $469.6
====== ====== ====== ======
Other revenue as a percentage of AEA ........ 2.46% 2.57% 2.47% 2.67%
====== ====== ====== ======
The following table presents information regarding gains on
securitizations ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Total volume securitized .......................... $847.2 $1,652.5 $2,083.6 $2,889.9
Gains ............................................. $ 11.9 $ 33.8 $ 33.3 $ 64.5
Gains as a percentage of volume securitized ....... 1.40% 2.05% 1.60% 2.23%
Gains as a percentage of pre-tax income ........... 4.11% 14.8% 5.55% 14.6%
We continue to emphasize growth and diversification of other revenues to
improve our overall profitability.
o Fees and other income include servicing fees, syndication fees,
gains from asset sales and miscellaneous fees. Fees and other income
for the quarter included increased fees related to syndication
activity in Capital Finance principally for risk management
purposes. This was offset in part by a pretax charge of $11.9
million to reduce $120 million of recreational vehicle and marine
assets in Specialty Finance to estimated fair market value following
the decision this quarter to pursue a more rapid liquidation of
these portfolios. The sale of a $100 million test equipment business
resulted in a $13.1 million pre-tax gain. Reduced fees and other
income also reflect lower servicing fee revenue related to
securitizations consistent with the lower level of securitization
activity.
o Higher factoring commissions benefited from two large acquisitions
completed during the second half of 2003.
o Second quarter securitization volume was down considerably from
2003, due primarily to a decline in commercial (vendor finance)
securitization volume in Specialty Finance. Additionally, we
continue to fund home equity loan growth entirely on-balance sheet.
2003 volume included $0.5 billion of home equity loans for the six
months.
o Gains on sales of leasing equipment increased from 2003 due to
higher commercial aircraft equipment gains in the first quarter as
well as stronger end of lease equipment sales in Equipment Finance
and the International unit of Specialty Finance.
Venture Capital Investments
On January 15, 2004, we announced the signing of a purchase and sale
agreement for the disposition of the direct investment portfolio at an amount
approximating the carrying value at December 31, 2003. During the second
quarter, we closed the sale of approximately $70 million of this portfolio under
the existing sales contract. We are working toward satisfying the outstanding
closing conditions for the remaining $35 million.
26
Our remaining portfolio of direct and private fund venture capital equity
investments is summarized in the following table ($ in millions):
June 30, December 31, June 30,
2004 2003 2003
-------- ------------ --------
Total investment balance ............. $190.9 $249.9 $325.4
Direct investments ................... $ 35.8 $101.1 $169.1
Number of companies .................. 13 47 49
Private equity funds ................. $155.1 $148.8 $156.3
Number of funds ...................... 52 52 52
Remaining commitments ................ $104.1 $124.2 $144.3
The remaining commitments at June 30, 2004 relate to the private equity
funds.
Provision for Credit Losses
Our provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
-------- --------- ---------- ---------
Balance beginning of period ............................... $636.7 $757.0 $643.7 $760.8
------ ------ ------ ------
Provision for credit losses - Finance receivables ......... 78.2 100.6 163.8 203.6
- Argentine reserve ........... (12.5) -- (12.5) --
------ ------ ------ ------
Total provision for credit losses ......................... 65.7 100.6 151.3 203.6
Reserves relating to acquisitions, other .................. 2.2 5.7 8.9 13.2
------ ------ ------ ------
Additions to reserve for credit losses, net ............. 67.9 106.3 160.2 216.8
------ ------ ------ ------
Net credit losses:
Specialty Finance ....................................... 33.4 39.9 72.1 83.9
Commercial Finance ...................................... 28.2 29.9 54.6 55.0
Equipment Finance ....................................... 15.5 38.6 41.8 76.7
Capital Finance ......................................... 6.5 -- 14.4 7.1
------ ------ ------ ------
Total net credit losses ................................. 83.6 108.4 182.9 222.7
------ ------ ------ ------
Balance end of period ..................................... $621.0 $754.9 $621.0 $754.9
====== ====== ====== ======
Reserve for credit losses as a percentage of
finance receivables ..................................... 1.95% 2.66%
===== ====
Reserve for credit losses as a percentage of past due
receivables (60 days or more)(1) ........................ 108.9% 81.5%
===== ====
Reserve for credit losses as a percentage of
non-performing assets(2) ................................ 110.5% 80.2%
===== ====
- --------------------------------------------------------------------------------
(1) The reserve for credit losses as a percentage of past due receivables (60
days or more), excluding telecommunication and Argentine reserves and
corresponding delinquencies, was 96.3% at June 30, 2004 and 55.6% at June
30, 2003.
(2) The reserve for credit losses as a percentage of non-performing assets,
excluding telecommunication and Argentine reserves and corresponding
non-performing assets, was 105.9% at June 30, 2004 and 58.1% at June 30,
2003.
The decreased provision for 2004 in relation to 2003 reflects lower
charge-offs and improving credit metrics. During the quarter, we sold our
remaining assets in Argentina and transferred the remaining specific Argentine
reserve to other portfolio reserves. See "Credit Metrics" for further discussion
on net charge-offs and other related statistics.
27
Reserve for Credit Losses
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of corresponding finance receivables
($ in millions):
June 30, 2004 December 31, 2003 June 30, 2003
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ - ------ - ------ -
Finance receivables .......... $544.1 1.73% $524.6 1.71% $491.8 1.78%
Telecommunications(1) ........ 76.9 18.20% 106.6 19.16% 128.1 19.77%
Argentina(2) ................. -- -- 12.5 55.07% 135.0 80.36%
------ ------ ------
Total ........................ $621.0 1.95% $643.7 2.06% $754.9 2.66%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
The decline in the reserve for credit losses at June 30, 2004 from the
2003 periods, in both amount and percentage, was due to telecommunication
charge-offs taken against the previously established specific reserve and the
improving credit metrics. The decline in the specific Argentine reserve resulted
largely from the fourth quarter 2003 charge-off of $101.0 million, and the sale
of that business during the second quarter of 2004.
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.
The reserve includes specific reserves relating to impaired loans
(excluding telecommunication and Argentine) of $35.9 million at June 30, 2004,
compared to $66.4 million at December 31, 2003 and $51.7 million at June 30,
2003. The portion of the reserve related to the inherent estimated loss and
estimation risk reflect our evaluation of trends in our key credit metrics as
well as our assessment of risk in certain industry sectors, including commercial
aerospace.
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 values, 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
The telecommunications reserve was $76.9 million at June 30, 2004, as we
have recorded net charge-offs of $123.1 million against this specific reserve
since its establishment. We added $200.0 million to the reserve for credit
losses during the quarter ended June 30, 2002 in light of the continued
deterioration in the telecommunications sector at that time, particularly with
respect to our competitive local exchange carrier ("CLEC") portfolio.
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in Note 4 to the Consolidated Financial
Statements. This portfolio includes lending and leasing transactions to the
telecommunications sector. Lending and leasing of telecommunication equipment to
non-telecom companies is conducted in our Specialty Finance business and is
categorized according to the customer's ("obligor's") industry in the industry
composition table. Certain statistical data is presented in the following table
($ in millions):
28
June 30, December 31, June 30,
2004 2003 2003
------ ------ ------
CLEC accounts ................................................ $159.0 $197.8 $224.3
Other telecommunication accounts ............................. 263.6 381.2 423.6
------ ------ ------
Total telecommunication portfolio ............................ $422.6 $579.0 $647.9
====== ====== ======
Portfolio as a % of total financing and leasing assets ....... 1.0% 1.5% 1.7%
Number of accounts ........................................... 36 44 53
Top 10 accounts .............................................. $230.8 $253.4 $262.7
Largest account exposure ..................................... $ 30.7 $ 31.0 $ 33.4
Non-performing accounts ...................................... $ 48.5 $ 57.2 $ 94.2
Number of non-performing accounts ............................ 7 6 10
Non-performing accounts as a percentage of portfolio ......... 11.5% 9.9% 14.5%
Reserve for Credit Losses -- Argentina
During the quarter we completed the previously announced sale of our
Argentine portfolio to an Argentine bank at a modest gain. With the completion
of this transaction, we transferred the remaining specific reserve of $12.5
million to the Reserve for Credit Losses -- Finance Receivables.
In the first half of 2002, we established a $135.0 million specific
reserve for Argentine exposure 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 $21.5 million to the
Reserve for Credit Losses -- Finance Receivables.
Credit Metrics
Net Charge-offs
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown in the following tables ($ in millions):
Quarter Ended June 30, 2004
------------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
--------------- ------------------ ------------------
Specialty Finance -- commercial .................. $13.2 0.73% $13.6 0.75% $(0.4) --
Commercial Finance ............................... 28.2 0.97% 11.3 0.40% 16.9 14.96%
Equipment Finance ................................ 15.5 0.99% 13.9 0.90% 1.6 4.67%
Capital Finance .................................. 6.5 0.96% 6.5 0.96% -- --
----- ----- -----
Total Commercial Segments ..................... 63.4 0.91% 45.3 0.66% 18.1 12.16%
Specialty Finance -- consumer .................... 20.2 1.94% 10.1 1.15% 10.1 5.59%
----- ----- -----
Total ......................................... $83.6 1.04% $55.4 0.72% $28.2 8.53%
===== ===== =====
Quarter Ended June 30, 2003
------------------------------------------------------------
Specialty Finance -- commercial .................. $ 23.9 1.33% $23.9 1.33% $-- --
Commercial Finance ............................... 29.9 1.18% 18.6 0.78% 11.3 7.13%
Equipment Finance ................................ 38.6 2.51% 26.1 1.82% 12.5 12.00%
Capital Finance .................................. -- -- -- -- -- --
------ ----- -----
Total Commercial Segments ..................... 92.4 1.40% 68.6 1.09% 23.8 8.87%
Specialty Finance -- consumer .................... 16.0 2.62% 9.9 2.43% 6.1 3.01%
------ ----- -----
Total ......................................... $108.4 1.51% $78.5 1.17% $29.9 6.33%
====== ===== =====
29
Six Months Ended June 30, 2004
-----------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
----------------- ------------------ ------------------
Specialty Finance -- commercial ................. $ 35.2 0.98% $ 35.1 0.98% $ 0.1 9.00%
Commercial Finance .............................. 54.6 0.94% 24.0 0.43% 30.6 12.49%
Equipment Finance ............................... 41.8 1.33% 34.9 1.14% 6.9 8.87%
Capital Finance ................................. 14.4 1.06% 14.4 1.06% -- --
------ ------ -----
Total Commercial Segments .................... 146.0 1.05% 108.4 0.80% 37.6 11.60%
Specialty Finance -- consumer ................... 36.9 1.88% 20.3 1.28% 16.6 4.45%
------ ------ -----
Total ........................................ $182.9 1.15% $128.7 0.85% $54.2 7.78%
====== ====== =====
Six Months Ended June 30, 2003
------------------------------------------------------------
Specialty Finance -- commercial ................. $ 54.9 1.53% $ 54.5 1.52% $ 0.4 7.84%
Commercial Finance .............................. 55.0 1.12% 35.2 0.76% 19.8 6.15%
Equipment Finance ............................... 76.7 2.45% 55.8 1.92% 20.9 8.94%
Capital Finance ................................. 7.1 0.49% 1.8 0.10% 5.3 --
------ ------ -----
Total Commercial Segments .................... 193.7 1.48% 147.3 1.18% 46.4 8.08%
Specialty Finance -- consumer ................... 29.0 2.53% 16.5 2.23% 12.5 3.05%
------ ------ -----
Total ........................................ $222.7 1.56% $163.8 1.23% $58.9 5.99%
====== ====== =====
Total charge-offs continued to decline during 2004, reflecting
improvements across virtually all segments:
o Specialty Finance -- commercial improvements were primarily in the
vendor programs, small-ticket and international portfolios. Net
charge-offs for the current quarter also reflected a higher level of
recoveries.
o Commercial Finance charge-offs fell well below the prior year in
both the asset-based lending and factoring business. In conjunction
with combination of the former Structured Finance into Capital
Finance, the communications and media portfolio was transferred to
this segment. As a result, charge-offs against the specific
telecommunications reserve are reflected in this segment. See
"Results by Business Segment" for further discussion.
o Equipment Finance improvement was considerable in relation to prior
year due to broad-based reductions across all product lines in both
the U.S. and Canada.
o Specialty Finance-consumer charge-offs, while up in absolute
amounts, were down as a percentage of finance receivables from the
prior year reflecting the return to on balance sheet funding of the
home equity portion of this portfolio.
30
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets and the related percentages of
finance receivables ($ in millions):
June 30, 2004 December 31, 2003 June 30, 2003
---------------- ----------------- ----------------
Past Dues:
Specialty Finance -- commercial ........ $185.7 2.50% $226.4 3.17% $249.6 3.58%
Commercial Finance ..................... 107.4 0.96% 131.9 1.14% 187.5 1.83%
Equipment Finance ...................... 95.9 1.53% 137.9 2.18% 253.0 4.21%
Capital Finance ........................ 18.2 0.69% 30.5 1.11% 107.9 3.90%
------ ------ ------
Total Commercial Segments ........... 407.2 1.48% 526.7 1.90% 798.0 3.07%
Specialty Finance -- consumer .......... 163.3 3.86% 149.6 4.26% 128.1 5.26%
------ ------ ------
Total ............................... $570.5 1.79% $676.3 2.16% $926.1 3.26%
====== ====== ======
Non-performing assets:
Specialty Finance -- commercial ........ $ 93.4 1.26% $119.8 1.68% $140.0 2.01%
Commercial Finance ..................... 116.1 1.03% 132.5 1.15% 208.4 2.04%
Equipment Finance ...................... 173.6 2.76% 218.3 3.46% 337.8 5.62%
Capital Finance ........................ 13.2 0.50% 49.7 1.81% 116.0 4.19%
------ ------ ------
Total Commercial Segments ........... 396.3 1.44% 520.3 1.87% 802.2 3.09%
Specialty Finance -- consumer .......... 165.9 3.92% 156.2 4.45% 139.0 5.70%
------ ------ ------
Total ............................... $562.2 1.77% $676.5 2.16% $941.2 3.31%
====== ====== ======
Non accrual loans ...................... $468.9 $566.5 $804.6
Repossessed assets ..................... 93.3 110.0 136.6
------ ------ ------
Total non-performing assets ......... $562.2 $676.5 $941.2
====== ====== ======
The June 30, 2004 delinquency rate of 1.79% marked the seventh consecutive
quarter of improvement, with the most notable declines in Specialty Finance --
commercial and Equipment Finance.
o Specialty Finance -- commercial delinquency improvement from both
prior year periods was driven by declines in the Small Business
Lending portfolio, the international portfolios, most notably in our
European operations, where servicing was centralized during 2003,
and in the small / mid-ticket business.
o Commercial Finance past due levels were down considerably from 2003
due to improvements in the Commercial Services (factoring) and
Business Credit (asset-based lending) units as well as in the
telecommunications portfolio.
o Equipment Finance delinquency improved across virtually all product
lines in relation to both 2003 periods and was down 62% in absolute
amounts from June 2003.
o Capital Finance improvement from 2003 included lower delinquency in
the project finance portfolio.
o Specialty Finance -- consumer delinquency was up in dollar amount
but down as a percentage of finance receivables from 2003,
reflecting a return to on balance sheet funding of the home equity
portfolio. However, consumer delinquency on a managed basis has been
relatively stable in percentage terms over the periods presented.
Likewise, non-performing assets also declined for the seventh consecutive
quarter, reflecting the same trends discussed above. Non-performing
telecommunications accounts (in Commercial Finance) totaled $48.5 million, $57.2
million and $94.2 million at June 30, 2004, December 31, 2003, and June 30,
2003, respectively.
31
Managed past due loans in dollar amount and as a percentage of managed
financial assets are shown in the table below ($ in millions):
June 30, 2004 December 31, 2003 June 30, 2003
---------------- ----------------- ------------------
Past Dues:
Specialty Finance -- commercial ....... $266.1 2.22% $ 321.2 2.77% $ 318.5 2.88%
Commercial Finance .................... 107.4 0.96% 131.9 1.14% 187.5 1.83%
Equipment Finance ..................... 168.1 1.79% 243.6 2.49% 395.5 3.94%
Capital Finance ....................... 18.2 0.66% 30.5 1.11% 107.9 3.90%
------ -------- --------
Total Commercial Segments .......... 559.8 1.59% 727.2 2.04% 1,009.4 2.96%
Specialty Finance -- consumer ......... 309.0 4.74% 294.8 4.78% 268.4 4.55%
------ -------- --------
Total .............................. $868.8 2.08% $1,022.0 2.44% $1,277.8 3.20%
====== ======== ========
Managed past due loans decreased both in dollar amount and as a percentage
of managed financial assets, reflecting the same factors that are discussed in
the owned delinquency analysis.
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are summarized in the following table
($ in millions):
Quarters Ended June 30, Six Month Ended June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Efficiency ratio (1) ................................. 42.3% 40.1% 41.7% 40.9%
Salaries and general operating expenses as a
percentage of AMA(2) ............................... 2.23% 1.93% 2.19% 1.97%
Salaries and general operating expenses .............. $ 260.3 $ 220.7 $ 507.6 $ 446.3
Average Managed Assets ............................... $46,608.4 $45,764.8 $46,406.5 $45,385.8
- --------------------------------------------------------------------------------
(1) Efficiency ratio is the ratio of salaries and general operating margin,
excluding the provision for credit losses.
(2) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us.
Salaries and general operating expenses for the quarter and six months
ended June 30, 2004 increased from the prior year periods primarily due to
higher incentive-based compensation, including restricted stock awards, employee
separation costs of approximately $4.3 million related to the business
realignments in Capital Finance and Commercial Finance, acquisition activities
and higher corporate expenses reflecting increased advertising, governance and
compliance-related costs. Personnel decreased to approximately 5,705 at June 30,
2004, from 5,845 at June 30, 2003.
Beginning with the March 2004 quarter, we reclassified debt commissions
from general operating expense to interest expense to reflect all-in funding
costs in margin. This change was also made in the historical comparative data
and does not impact net income. As a result of this change, prior year salaries
and general operating expenses were decreased by approximately $6.7 million for
the quarter and $14.7 million for the six months ended June 30, 2003, which
reduced (improved) the historically reported ratios.
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 and the
restructuring and portfolio dispositions will reduce corresponding expenses in
the second half of the year.
Gain on Redemption of Debt
In January 2004 and December 2003, we called at par $1.25 billion of term
debt securities. These notes were listed on the New York Stock Exchange under
the ticker symbols CIC and CIP and are commonly known as PINEs
32
("Public Income Notes"). The securities carried coupon rates of 8.25% and
8.125%, but were marked down to a market interest rate yield of approximately
7.5% in our financial statements through purchase accounting. In light of the
high coupon rates, we called the securities for redemption pursuant to the terms
outlined in the prospectuses. The call of $512 million on January 15, 2004
resulted in a pretax gain of $41.8 million ($25.5 million after tax) in the
first quarter of 2004. The December call of $735 million resulted in a pretax
gain of $50.4 million ($30.8 million after tax) during the fourth quarter of
2003.
Income Taxes
The following table sets forth certain information concerning our income
taxes ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
-------- --------- --------- ---------
Provision for income taxes $112.8 $89.2 $233.9 $172.1
Effective tax rate 39.0% 39.0% 39.0% 39.0%
The effective tax rate exceeds the U.S. Federal tax rate of 35% primarily
due to state and local, and foreign income taxes.
At June 30, 2004, CIT had U.S. federal net operating losses of
approximately $2,328 million, which expire in various years beginning in 2011.
In addition, CIT has various state net operating losses that will expire in
various years beginning in 2004. Federal and state operating losses may be
subject to annual use limitations under section 382 of the Internal Revenue Code
of 1986, as amended, and other limitations under certain state laws. Management
believes that CIT will have sufficient taxable income in future years and can
avail itself of tax planning strategies in order to fully utilize these losses.
Accordingly, we do not believe a valuation allowance is required with respect to
these net operating losses.
CIT has open tax years in the U.S., Canada and other jurisdictions that
are currently under examination by the applicable tax authorities, and certain
later tax years that may in the future be subject to examination. CIT
periodically evaluates the adequacy of our related tax reserves, taking into
account our open tax return positions, tax law changes and third party
indemnifications. We believe that our tax reserves are appropriate. The final
determination of tax audits and any related litigation could affect our tax
reserves.
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, and
the allocation of most corporate expenses ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income (Loss)
Specialty Finance ........................ $ 81.7 $ 63.0 $159.9 $115.2
Commercial Finance ....................... 71.2 63.0 139.3 122.5
Equipment Finance ........................ 18.3 7.9 33.5 18.6
Capital Finance .......................... 31.2 16.4 52.8 30.9
------ ------ ------ ------
Total Segments ......................... 202.4 150.3 385.5 287.2
Corporate, including certain charges ..... (25.8) (13.4) (19.6) (23.3)
------ ------ ------ ------
Total .................................. $176.6 $136.9 $365.9 $263.9
====== ====== ====== ======
Return on AEA
Specialty Finance ........................ 2.43% 2.07% 2.44% 1.91%
Commercial Finance ....................... 3.47% 3.25% 3.43% 3.24%
Equipment Finance ........................ 1.06% 0.46% 0.97% 0.53%
Capital Finance .......................... 1.36% 0.77% 1.16% 0.75%
Total Segments ......................... 2.14% 1.70% 2.07% 1.65%
Corporate, including certain charges ..... (0.28)% (0.17)% (0.12)% (0.15)%
Total .................................. 1.86% 1.53% 1.95% 1.50%
33
During the June 2004 quarter, the former Structured Finance segment was
combined into the Capital Finance segment to better align with the marketplace
and to improve efficiency. As part of this re-alignment, approximately $1.3
billion of communications and media assets were transferred to Commercial
Finance. Prior period balances have been conformed to present period
presentation.
For all periods shown, Corporate includes the operating results of the
venture capital business including gains and losses on venture capital
investments (losses of $1.5 million and $13.2 million after tax for the quarters
ended June 30, 2004 and 2003 and losses of $5.3 million and $22.1 million after
tax for the six months ended June 30, 2004 and 2003) and unallocated corporate
operating expenses. For the six months ended June 30, 2004, Corporate also
includes the gain on the early redemption of debt ($25.5 million after tax).
Results by segment were as follows:
o Specialty Finance profitability improvement reflected strong
earnings in the small-ticket commercial lines and in the home equity
loans unit. The sale of a $100 million test equipment business
resulted in a $13.1 million pre-tax gain. Results also include a
charge of $11.9 million to reduce $120 million principal value of
recreational vehicle and marine assets (which were transferred to
assets held for sale) to estimated fair market value following the
decision this quarter to pursue a more rapid liquidation. These
portfolios were sold on July 30, 2004 at a price approximating the
June 30, 2004 carrying value.
o Commercial Finance earnings remained strong, benefiting from
continued high returns in both the factoring and asset-based lending
businesses. The current year results also benefited from last year's
factoring acquisitions. Profitability on the communications and
media portfolio (transferred from Capital Finance) included
syndication activity.
o Equipment Finance returns, while still below management's
expectations, increased from the prior year, reflecting lower
charge-offs, improved margins and higher equipment gains.
Profitability improvement was broad-based across business lines in
both the U.S. and Canada.
o Capital Finance earnings reflected improved rail rentals and
syndication gains in the project finance portfolio done largely for
risk management purposes. Aerospace lease margins and profitability
was dampened by a $14.8 million additional depreciation charge to
reduce certain older leased aircraft, which are no longer
manufactured, to estimated fair value.
34
Financing and Leasing Assets
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions):
Percentage Change
------------------------
June 30, December 31, June 30, June 04 vs. June 04 vs.
2004 2003 2003 Dec. 03 June 03
--------- ------------ --------- ----------- -----------
Specialty Finance
Commercial
Finance receivables ..................... $ 7,441.6 $ 7,150.0 $ 6,975.4 4.1 % 6.7 %
Operating lease equipment, net .......... 1,084.0 959.5 1,171.2 13.0 % (7.4)%
Finance receivables held for sale ....... 1,053.0 548.1 622.6 92.1 % 69.1 %
--------- --------- ---------
Owned assets .......................... 9,578.6 8,657.6 8,769.2 10.6 % 9.2 %
Finance receivables securitized and
managed by CIT ........................ 3,480.2 3,915.4 3,473.9 (11.1)% 0.2 %
--------- --------- ---------
Managed assets .......................... 13,058.8 12,573.0 12,243.1 3.9 % 6.7 %
--------- --------- ---------
Consumer
Finance receivables -- home equity ...... 3,377.2 2,513.1 1,502.1 34.4 % 124.8 %
Finance receivables -- other ............ 857.8 997.7 934.5 (14.0)% (8.2)%
Finance receivables held for sale ....... 265.1 150.0 395.0 76.7 % (32.9)%
--------- --------- ---------
Owned assets .......................... 4,500.1 3,660.8 2,831.6 22.9 % 58.9%
Home equity finance receivables
securitized and managed by CIT ........ 1,487.9 1,867.6 2,276.7 (20.3)% (34.6)%
Other finance receivables securitized
and managed by CIT .................... 528.0 642.5 786.0 (17.8)% (32.8)%
--------- --------- ---------
Managed assets .......................... 6,516.0 6,170.9 5,894.3 5.6 % 10.5 %
--------- --------- ---------
Commercial Finance Segment
Commercial Services
Finance receivables ..................... 5,808.6 6,325.8 4,766.3 (8.2)% 21.9 %
Business Credit
Finance receivables ..................... 5,409.1 5,247.1 5,454.1 3.1 % (0.8)%
--------- --------- ---------
Owned assets .......................... 11,217.7 11,572.9 10,220.4 (3.1)% 9.8 %
--------- --------- ---------
Equipment Finance Segment
Finance receivables ..................... 6,285.3 6,317.9 6,014.6 (0.5)% 4.5 %
Operating lease equipment, net .......... 380.6 419.6 504.0 (9.3)% (24.5)%
Finance receivables held for sale ....... 181.6 220.2 192.4 (17.5)% (5.6)%
--------- --------- ---------
Owned assets .......................... 6,847.5 6,957.7 6,711.0 (1.6)% 2.0 %
Finance receivables securitized and
managed by CIT ........................ 2,904.9 3,226.2 3,819.9 (10.0)% (24.0)%
--------- --------- ---------
Managed assets .......................... 9,752.4 10,183.9 10,530.9 (4.2)% (7.4)%
--------- --------- ---------
Capital Finance Segment
Finance receivables ..................... 2,649.0 2,748.6 2,766.6 (3.6)% (4.3)%
Operating lease equipment, net .......... 6,374.2 6,236.4 5,884.8 2.2 % 8.3 %
Finance receivables held for sale ....... 95.5 -- -- 100.0 % 100.0 %
--------- --------- ---------
Owned assets .......................... 9,118.7 8,985.0 8,651.4 1.5% 5.4 %
--------- --------- ---------
Other -- Equity Investments ................ 190.9 249.9 325.4 (23.6)% (41.3)%
--------- --------- ---------
Finance receivables ..................... $31,828.6 $31,300.2 $28,413.6 1.7 % 12.0 %
Operating lease equipment, net .......... 7,838.8 7,615.5 7,560.0 2.9 % 3.7 %
Finance receivables held for sale ....... 1,595.2 918.3 1,210.0 73.7 % 31.8 %
--------- --------- ---------
Financing and leasing assets
excluding equity investments .......... 41,262.6 39,834.0 37,183.6 3.6 % 11.0 %
Equity investments (included in
other assets) ......................... 190.9 249.9 325.4 (23.6)% (41.3)%
--------- --------- ---------
Owned assets .......................... 41,453.5 40,083.9 37,509.0 3.4 % 10.5 %
Finance receivables securitized and
managed by CIT ........................ 8,401.0 9,651.7 10,356.5 (13.0)% (18.9)%
--------- --------- ---------
Total Managed assets .................. $49,854.5 $49,735.6 $47,865.5 0.2 % 4.2 %
========= ========= =========
35
The increase in owned assets from June 2003 was driven by: the combination
of a strong mortgage refinancing market and bulk receivable purchases in the
Specialty Finance home equity portfolio; strategic acquisitions in Specialty
Finance commercial including a technology leasing business; two factoring
acquisitions in Commercial Services in late 2003; and deliveries of aerospace
assets in Capital Finance. The decline in receivables securitized reflects our
return to funding home equity growth on balance sheet and a lower level of
commercial equipment securitizations. The current period activity also reflects
the capital allocation initiatives discussed previously in "Profitability and
Key Business Trends."
The table below summarizes the targeted non-strategic business lines.
During the second quarter, we announced plans to sell the remaining recreational
marine and recreational vehicle receivables. During the quarter we recorded a
pretax charge of $11.9 million to reduce $120 million principal value of
recreational vehicle and marine assets in Specialty Finance to estimated fair
market value following the decision this quarter to pursue a more rapid
liquidation of these portfolios. In addition, during 2001 we ceased making new
venture capital investments beyond existing commitments, and during the first
quarter of 2004 we entered into an agreement to sell our direct investment
portfolio. See "Losses on Venture Capital Investments" for more information. ($
in millions)
June 30, December 31, June 30,
2004 2003 2003
-------- ------------ --------
Portfolio
Manufactured housing .................... $586 $584 $ 605
Recreational marine ..................... 63 86 104
Recreational vehicle .................... 43 58 46
Franchise finance ....................... 70 102 173
Owner-operator trucking ................. 52 91 155
Wholesale inventory finance ............. -- 2 2
---- ---- ------
Total on-balance sheet financing
and leasing assets ................ $814 $923 $1,085
==== ==== ======
The following table presents new business volume (excluding factoring) by
segment ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Specialty Finance ............. $3,278.3 $2,937.3 $ 6,854.2 $6,010.3
Commercial Finance ............ 778.4 968.6 1,445.6 1,385.8
Equipment Finance ............. 1,049.2 857.5 1,971.3 1,686.4
Capital Finance ............... 487.5 474.3 650.1 766.0
-------- -------- --------- --------
Total new business volume ... $5,593.4 $5,237.7 $10,921.2 $9,848.5
======== ======== ========= ========
New origination volume for the quarter and six months ended June 30, 2004
included stronger volume from our Specialty Finance vendor finance,
international and home equity units, as well as improved demand for financing in
Equipment Finance and working capital financings in the Business Credit unit of
Commercial Finance.
Concentrations
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.3% of our total financing and leasing assets at June 30, 2004 (the
largest account being less than 1.0%), 5.2% at December 31, 2003, and 5.1% at
June 30, 2003.
36
Leveraged Leases
As of June 30, 2004, net investments in leveraged leases totaled $1.2
billion, or 3.9% of finance receivables, with the major components being: (i)
$552.8 million in commercial aerospace transactions, including $219.9 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) $331.6 million of project finance transactions,
primarily in the power and utility sector; and (iii) $230.1 million in rail
transactions.
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. We expect to announce by the end of the third
quarter of 2004 a contract continuing and modifying the current terms of the
relationship.
At June 30, 2004, our financing and leasing assets included $1,987.4
million, $1,111.2 million and $780.6 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 $2,234.1 million, $68.7 million and $578.9 million
from the Dell, Snap-on and Avaya origination sources, respectively.
A significant reduction in origination volumes from any of these alliances
could have a material impact on our asset and net income levels. For additional
information regarding certain of our joint venture activities, see Note 8 --
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. For each period presented, our managed asset
geographic composition did not differ significantly from our owned asset
geographic composition.
June 30, December 31, June 30,
2004 2003 2003
-------- ------------ --------
State
California ......................... 10.6% 10.2% 10.3%
Texas .............................. 8.1% 7.7% 7.6%
New York ........................... 6.8% 7.4% 7.3%
Other states ....................... 54.2% 54.0% 53.6%
---- ---- ----
Total U.S. ............................ 79.7% 79.3% 78.8%
==== ==== ====
Country
Canada ............................. 4.8% 5.1% 5.1%
England ............................ 2.7% 2.8% 3.3%
Australia .......................... 1.3% 1.3% 1.2%
Mexico ............................. 1.3% 1.0% 0.9%
Germany ............................ 1.2% 1.0% 1.1%
France ............................. 1.0% 1.1% 0.9%
China .............................. 1.0% 0.9% 1.2%
Other countries .................... 7.0% 7.5% 7.5%
---- ---- ----
Total Outside U.S. .................... 20.3% 20.7% 21.2%
==== ==== ====
37
Industry Composition
The following discussions provide information with respect to selected
industry compositions.
Commercial Aerospace
Our commercial aerospace portfolio, which includes financing and leasing
transactions with commercial airlines and regional carriers, is managed in our
Capital Finance segment.
At June 30, 2004, our commercial airlines portfolio consists of financing
and leasing assets with an average age of approximately 7 years (based on a
dollar value weighted average). The portfolio was comprised of 85 accounts, with
the majority placed with major airlines around the world. The portfolio at
December 31, 2003 consisted of 84 customers, and aircraft with a weighted
average age of approximately 6 years. The commercial aircraft all comply with
stage III noise regulations.
The following table summarizes the composition of the commercial airline
portfolio ($ in millions):
June 30, 2004 December 31, 2003 June 30, 2003
--------------------- ---------------------- ---------------------
Net Number Net Number Net Number
Investment of Planes Investment of Planes Investment of Planes
---------- --------- ---------- --------- ---------- ---------
By Geography:
Europe $2,241.7 72 $1,991.0 65 $1,930.9 62
North America(1) 930.4 68 1,029.7 72 1,060.9 76
Asia Pacific 1,080.9 41 1,013.6 40 879.5 36
Latin America 624.3 25 612.7 28 536.2 25
Africa/Middle East 56.0 3 69.1 4 71.7 4
-------- --- -------- --- -------- ---
Total $4,933.3 209 $4,716.1 209 $4,479.2 203
======== === ======== === ======== ===
By Manufacturer:
Boeing $2,653.9 138 $2,581.7 140 $2,607.9 140
Airbus 2,250.0 61 2,114.6 57 1,847.5 48
Other 29.4 10 19.8 12 23.8 15
-------- --- -------- --- -------- ---
Total $4,933.3 209 $4,716.1 209 $4,479.2 203
======== === ======== === ======== ===
By Body Type(2):
Narrow $3,673.3 163 $3,415.7 159 $3,218.7 152
Intermediate 853.7 18 877.0 18 865.4 18
Wide 376.9 18 403.6 20 371.3 18
Other 29.4 10 19.8 12 23.8 15
-------- --- -------- --- -------- ---
Total $4,933.3 209 $4,716.1 209 $4,479.2 203
======== === ======== === ======== ===
- --------------------------------------------------------------------------------
(1) Comprised of net investments in the U.S. and Canada of $745.7 million (62
aircraft) and $184.7 million (6 aircraft) at June 30, 2004, $822.7 million
(66 aircraft) and $207.0 million (6 aircraft) at December 31, 2003, and
$871.6 million (70 aircraft) and $189.3 million (6 aircraft) at June 30,
2003, 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 Mc Donnell Douglas DC10
series aircraft.
The top five commercial aerospace exposures totaled $1,098.4 million at
June 30, 2004, the largest of which was $316.9 million. All top five are to
carriers outside of the U.S., and three are to European carriers. The largest
exposure to a U.S. carrier at June 30, 2004 was $134.2 million. Of the 209
aircraft, three are off-lease and covered by signed letters of intent. 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 June 30, 2004 consists of 124 planes
with a net investment of $309.2 million, relatively unchanged from December 31,
2003. The carriers are primarily located in North America and Europe. Operating
leases account for about 40% of the portfolio, with the rest capital leases or
loans.
38
The following is a list of our exposure to bankrupt aerospace carriers and
the current status of the related aircraft at June 30, 2004:
o UAL Corp. -- United Airlines leases 4 CIT-owned narrow body aircraft
(2 Boeing 757 aircraft and 2 Boeing 737 aircraft) with a net
investment of $84.5 million.
o Avianca Airlines -- Lessee of one MD 80 aircraft and one Boeing 757,
with a combined net investment of $31.5 million.
o Air Canada -- Our net investment in aircraft is approximately $48.5
million, relating to one CIT-owned Boeing 767 aircraft.
Additionally, we hold Senior A tranche Enhanced Equipment Trust
Certificates ("EETCs") issued by United Airlines, which are debt instruments
collateralized by aircraft operated by the airline, with a fair value of $42.5
million. In connection with the United Airlines' filing under Chapter 11, as of
June 30, 2004, we have an outstanding balance of $27.6 million (with a
commitment of $44 million) relating to a debtor-in-possession facility. In July
2004, as co-arranger with three other lenders, CIT committed to $250 million of
an aggregate $1.0 billion facility, which is secured by unencumbered aircraft,
among other collateral. This new transaction, which is pending final bankruptcy
court approval, is expected to close in the third quarter of 2004. Upon closing,
in conjunction with the other lenders, we anticipate further syndicating our
exposure to $100 million or less.
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. Depreciation expense for
the quarter ended June 30, 2004 included an additional $14.8 million impairment
charge to reduce certain older, out of production aircraft to estimated fair
value. The additional depreciation expense primarily relates to aircraft with a
single lessee with upcoming lease terminations and for which market rental rates
have recently declined. Therefore, the projected cash flows no longer supported
the corresponding carrying value, resulting in the additional depreciation
impairment charge.
Commercial airline equipment utilization is high, with only three aircraft
off-lease (with a book value of $32.1 million) at June 30, 2004, which
demonstrates our ability to place aircraft. However, current placements are at
compressed rental rates, which reflects current market conditions. Generally,
leases are being written for terms between three and five years. Within the
regional aircraft portfolio at June 30, 2004, there were 16 aircraft off-lease
with a total book value of approximately $61.9 million. See table in "Risk
Management" section for additional information regarding commitments to purchase
additional aircraft.
Other Assets
Other assets totaled $2.5 billion at June 30, 2004 and $3.3 billion at
December 31, 2003. The decline in other assets is primarily due to lower
receivables from derivative counterparties in 2004.
Other assets primarily consisted of the following at June 30, 2004:
investments in and receivables from non-consolidated subsidiaries of $0.6
billion, accrued interest and receivables from derivative counterparties of $0.3
39
billion, deposits on commercial aerospace flight equipment of $0.3 billion,
direct and private fund equity investments of $0.2 billion, prepaid expenses of
$0.1 billion and repossessed assets and off-lease equipment of $0.1 billion. The
remaining balance includes furniture and fixtures, miscellaneous receivables and
other assets.
Risk Management
Our risk management process is described in more detail in our 2003 Annual
Report on Form 10-K.
Interest Rate Risk Management -- We monitor our interest rate sensitivity
on a regular basis by analyzing the impact of interest rate changes upon the
financial performance of the business. We also consider factors such as the
strength of the economy, customer prepayment behavior and re-pricing
characteristics of our assets and liabilities.
We evaluate and monitor various risk metrics:
o Value at Risk (VAR), which measures the net economic value of assets
by assessing the duration of assets and liabilities.
Our asset portfolio is generally comprised of loans and leases of short to
intermediate term. As such, the duration of our asset portfolio is generally
less than three years. We target to closely match the duration of our liability
portfolio with that of our asset portfolio. As of June 30, 2004, our liability
portfolio duration was slightly longer than our asset portfolio duration.
o Margin at Risk (MAR), which measures the impact of changing interest
rates upon interest income over the subsequent twelve months.
At the date that interest rate sensitivity is modeled, 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. Market interest rates are then
raised 100 basis points instantaneously and parallel across the entire yield
curve, and a "rate shocked" simulation is run.
An immediate hypothetical 100 basis point parallel increase in the yield
curve on July 1, 2004 modeled against interest rate sensitive assets and
liabilities as shown in the table below would reduce net income by an estimated
$15 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. Although
management believes that this measure provides an estimate of our interest rate
sensitivity, there are certain limitations inherent in this sensitivity
analysis, as it is unlikely that rate movements would be instantaneous or
parallel, nor would our assets and debt reprice immediately. Additionally, it
does not consider any potential remedial actions that management could take such
as the pre-funding of liabilities and other business developments consistent
with an increasing rate environment that may affect net income, for example
asset growth and changes to our liability durations. Further, it does not
account for potential changes in the credit quality, size, composition and
prepayment characteristics of the balance sheet. Accordingly, no assurance can
be given that actual results would not differ materially from the estimated
outcomes of our simulations. Such simulations do not represent management's
current view of future market interest rate movements.
The following table summarizes the composition of our interest sensitive
assets (including operating leases) and liabilities (excluding equity) before
and after derivatives:
Before Swaps After Swaps
-------------------------- -------------------------
Fixed rate Floating rate Fixed rate Floating rate
---------- ------------- ---------- -------------
June 30, 2004
Assets ................... 57% 43% 57% 43%
Liabilities .............. 59% 41% 49% 51%
December 31, 2003
Assets ................... 57% 43% 57% 43%
Liabilities .............. 63% 37% 49% 51%
40
Total interest sensitive assets were $38.4 billion and $36.7 billion at
June 30, 2004 and December 31, 2003, while total interest sensitive liabilities
were $33.0 billion and $31.5 billion at June 30, 2004 and December 31, 2003.
Certain December 31, 2003 amounts have been adjusted to conform to the current
period presentation.
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., Canada and Australia), long-term
debt (U.S. and International) and asset-backed securities (U.S. and Canada).
Outstanding commercial paper totaled $4.2 billion at June 30, 2004 and
December 31, 2003. Our targeted U.S. program size remains at $5.0 billion with
modest foreign 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. Consistent with our liquidity management strategy
to extend our maturity profile, on April 14, 2004 we retired a $2.0 billion bank
facility due in March 2005, and a $2.1 billion line due in October 2004, and we
negotiated two new $2.1 billion facilities due April 2009 and April 2005. We now
have aggregate U.S. bank facilities of $6.3 billion with $4.2 billion in
multi-year facilities.
We maintain registration statements with the Securities and Exchange
Commission ("SEC") covering debt securities that we may sell in the future. At
June 30, 2004, we had $3.9 billion of registered, but unissued, debt securities
available under a shelf registration statement. Term-debt issued during 2004
totaled $6.2 billion: $4.2 billion in variable-rate medium-term notes and $2.0
billion in fixed-rate notes.
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 predominantly in the U.S., we also maintain
facilities for Canadian domiciled assets. As of June 30, 2004, we had
approximately $3.8 billion of availability in our committed asset-backed
facilities, including $1.0 billion relating to our trade receivable facility,
and $2.4 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:
June 30, December 31,
Liquidity Measurement Current Target 2004 2003
- --------------------- ---------------- -------- ------------
Commercial paper to total debt ............................... Maximum of 15% 12% 13%
Short-term debt to total debt ................................ Maximum of 45% 34% 36%
Bank lines to commercial paper ............................... Minimum of 100% 152% 149%
Aggregate alternate liquidity * to short-term debt ........... Minimum of 75% 101% 93%
- --------------------------------------------------------------------------------
* 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
41
The credit ratings previously stated 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 of $4.0 billion.
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of June 30, 2004 ($ in
millions):
Payments and Collections by Period
-----------------------------------------------------------------------
Remaining
Total 2004 2005 2006 2007 2008+
--------- --------- --------- ------- -------- ---------
Commercial Paper ........................ $ 4,170.4 $ 4,170.4 $ -- $ -- $ -- $ --
Variable-rate term debt ................. 10,931.6 2,178.7 3,332.8 2,794.0 1,802.3 823.8
Fixed-rate term debt .................... 19,330.3 1,492.3 4,348.8 2,684.1 3,447.8 7,357.3
Preferred capital securities ............ 254.6 -- -- -- -- 254.6
Lease rental expense .................... 158.5 24.9 43.8 33.4 26.2 30.2
--------- --------- --------- ------- --------- ---------
Total contractual obligations ........ 34,845.4 7,866.3 7,725.4 5,511.5 5,276.3 8,465.9
--------- --------- --------- ------- --------- ---------
Finance receivables(1) .................. 31,828.6 8,554.8 4,874.1 4,143.0 2,836.0 11,420.7
Operating lease rental income ........... 2,843.9 519.8 853.0 562.1 323.5 585.5
Finance receivables held for sale(2) .... 1,595.2 1,595.2 -- -- -- --
Cash-- current balance .................. 1,777.7 1,777.7 -- -- -- --
Retained interest in securitizations .... 1,242.2 387.4 377.6 229.2 127.9 120.1
--------- --------- --------- ------- --------- ---------
Total projected cash availability .... 39,287.6 12,834.9 6,104.7 4,934.3 3,287.4 12,126.3
--------- --------- --------- ------- --------- ---------
Net projected cash inflow (outflow) ..... $ 4,442.2 $ 4,968.6 $(1,620.7) $ (577.2) $(1,988.9) $ 3,660.4
========= ========= ========= ======== ========= =========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amount 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.
Commitment Expiration by Period
--------------------------------------------------------------------
Remaining
Total 2004 2005 2006 2007 2008+
--------- -------- -------- -------- -------- --------
Credit extensions ....................... $ 6,891.3 $1,177.6 $ 622.6 $1,172.9 $ 819.1 $3,099.1
Aircraft purchases ...................... 2,561.0 399.0 906.0 996.0 260.0 --
Letters of credit ....................... 1,322.8 1,184.1 135.1 3.2 0.2 0.2
Sale-leaseback payments ................. 465.8 7.9 28.5 28.5 28.5 372.4
Manufacturer purchase commitments ....... 226.4 226.4 -- -- -- --
Venture capital commitments ............. 104.1 3.4 0.5 -- 3.2 97.0
Guarantees .............................. 131.0 118.6 -- -- 10.5 1.9
Acceptances ............................. 18.4 18.4 -- -- -- --
--------- -------- -------- -------- -------- --------
Total contractual commitments ........... $11,720.8 $3,135.4 $1,692.7 $2,200.6 $1,121.5 $3,570.6
========= ======== ======== ======== ======== ========
Internal Controls
The Internal Controls Committee is responsible for monitoring and
improving internal controls and overseeing the internal controls attestation
mandated by Section 404 of the Sarbanes-Oxley Act of 2002 ("SARBOX"), for which
the implementation year is 2004. The committee, which is chaired by the
Controller, includes the CFO, the Director of Internal Audit and other senior
executives in finance, legal, risk management and information technology. We are
currently finalizing the documentation phase of the SARBOX project and have
entered the testing phase. Our management self-assessment is targeted to be
completed during the second half of 2004.
42
Off-Balance Sheet Arrangements
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and provide an additional
source of liquidity, we use an array of securitization programs, including both
asset-backed commercial paper and term structures, to access both the public and
private asset-backed securitization markets. Current products in these programs
include receivables and leases secured by equipment as well as consumer loans
secured by residential real estate. The following table summarizes data relating
to our securitization balance and activity ($ in millions):
June 30,
---------------------
2004 2003
-------- ---------
Securitized Assets:
Specialty Finance-- commercial .................... $3,480.2 $ 3,473.9
Specialty Finance-- consumer ...................... 2,015.9 3,062.7
Equipment Finance ................................. 2,904.9 3,819.9
-------- ---------
Total securitized assets .......................... $8,401.0 $10,356.5
======== =========
Securitized assets as a % of managed assets ....... 16.9% 21.6%
======== =========
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
------ -------- -------- --------
Volume Securitized:
Specialty Finance-- commercial ........ $475.5 $1,201.0 $1,438.8 $1,610.3
Specialty Finance-- consumer .......... -- 122.1 -- 489.2
Equipment Finance ..................... 371.7 329.4 644.8 790.4
------ -------- -------- --------
Total volume securitized .............. $847.2 $1,652.5 $2,083.6 $2,889.9
====== ======== ======== ========
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.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2004 were as follows:
Commercial Equipment
-----------------------
Specialty Equipment
Finance Finance
------- -------
Weighted average prepayment speed .................... 48.0% 12.1%
Weighted average expected credit losses .............. 0.44% 0.85%
Weighted average discount rate ....................... 6.49% 9.00%
Weighted average life (in years) ..................... 1.24 1.83
43
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at June 30, 2004 were as
follows:
Commercial Equipment Consumer
----------------------- -----------------------------
Home Equity and Recreational
Specialty Equipment Manufactured Vehicles and
Finance Finance Housing Marine
------- ------- ------- ------
Weighted average prepayment speed ............. 28.2% 12.3% 26.2% 19.2%
Weighted average expected credit losses ....... 1.12% 1.42% 1.35% 2.17%
Weighted average discount rate ................ 7.71% 9.67% 13.08% 14.31%
Weighted average life (in years) .............. 1.10 1.36 3.11 2.90
The Specialty Finance -- commercial securitized assets include receivables
originated to consumers through DFS.
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 $2.4
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 totaling $2.4 billion in
notional amount at June 30, 2004.
Joint Ventures -- We utilize joint ventures organized through distinct
legal entities to conduct financing activities with certain strategic vendor
partners. Receivables are originated by the joint venture and purchased by CIT.
The vendor partner and CIT jointly own these distinct legal entities, and there
is no third-party debt involved. These arrangements are accounted for using the
equity method, with profits and losses distributed according to the joint
venture agreement. See disclosure in Item 1. Financial Statements, Note 8 --
Certain Relationships and Related Transactions.
Capitalization
The following table presents information regarding our capital structure
($ in millions):
June 30, December 31, June 30,
2004 2003 2003
--------- --------- ---------
Commercial paper .......................................... $ 4,170.4 $ 4,173.9 $ 4,576.7
Term debt ................................................. 30,261.9 29,239.2 27,854.1
Preferred Capital Securities .............................. 254.6 255.5 256.4
Stockholders' equity(1) ................................... 5,693.1 5,427.8 5,171.8
--------- --------- ---------
Total capitalization ...................................... 40,380.0 39,096.4 37,859.0
Goodwill and other intangible assets ...................... (516.4) (487.7) (404.1)
--------- --------- ---------
Total tangible capitalization ............................. $39,863.6 $38,608.7 $37,454.9
========= ========= =========
Tangible stockholders' equity(1) and Preferred Capital
Securities to managed assets ............................ 10.89% 10.45% 10.50%
Tangible stockholders' equity(1) and Preferred
Capital Securities ...................................... 6.09x 6.14x 6.30x
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 7 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."
44
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.
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. We consider accounting
estimates relating to the following to be critical in applying our accounting
policies:
o Investments
o Charge-off of Finance Receivables
o Impaired Loans
o Reserve for Credit Losses
o Retained Interests in Securitizations
o Lease Residual Values
o Goodwill and Intangibles
o Deferred Income Taxes
There have been no significant changes to the methodologies and processes
used in developing estimates relating to these items from what is described in
our 2003 Annual Report on Form 10-K.
Statistical Data
The following table presents components of net income as a percent of AEA,
along with other selected financial data ($ in millions):
Six Months Ended June 30,
-------------------------
2004 2003
--------- ---------
Finance income ..................................... 9.70% 10.70%
Interest expense ................................... 3.19% 3.93%
--------- ---------
Net finance income ............................... 6.51% 6.77%
Depreciation on operating lease equipment .......... 2.51% 3.14%
--------- ---------
Net finance margin ............................... 4.00% 3.63%
Provision for credit losses ........................ 0.81% 1.16%
--------- ---------
Net finance margin after provision for
credit losses .................................... 3.19% 2.47%
Other revenue ...................................... 2.47% 2.67%
Gain (loss) on venture capital investments ......... 0.02% (0.09)%
--------- ---------
Operating margin ................................... 5.68% 5.05%
Salaries and general operating expenses ............ 2.71% 2.54%
Gain on redemption of debt ......................... 0.23% --
--------- ---------
Income (loss) before provision for income taxes .... 3.20% 2.51%
Provision for income taxes ......................... (1.25)% (0.98)%
Dividends on preferred capital securities,
after tax ........................................ -- (0.03)%
--------- ---------
Net income (loss) ................................ 1.95% 1.50%
========= =========
Average Earning Assets ............................. $37,499.1 $35,194.8
========= =========
45
Non-GAAP Financial Measurements
The SEC adopted Regulation G, which applies to any public disclosure or
release of material information that includes a non-GAAP financial measure. The
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosure about Market
Risk contain certain non-GAAP financial measures. The SEC defines a non-GAAP
financial measure as a numerical measure of a company's historical or future
financial performance, financial position, or cash flows that excludes amounts,
or is subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the financial statements or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures disclosed in this report are meant to provide
additional information and insight relative to historical operating results and
financial position of the business, are used by management in its analysis and,
in certain cases, to provide financial information that is presented to rating
agencies and other users of financial information. These measures are not in
accordance with, or a substitute for, GAAP and may be different from or
inconsistent with non-GAAP financial measures used by other companies.
Selected non-GAAP disclosures are presented and reconciled in the table
below ($ in millions):
June 30, December 31, June 30,
2004 2003 2003
-------- ------------ --------
Managed assets(1)
Finance receivables .................................... $31,828.6 $31,300.2 $28,413.6
Operating lease equipment, net ......................... 7,838.8 7,615.5 7,560.0
Finance receivables held for sale ...................... 1,595.2 918.3 1,210.0
Equity and venture capital investments (included
in other assets) ..................................... 190.9 249.9 325.4
--------- --------- ---------
Total financing and leasing portfolio assets ........... 41,453.5 40,083.9 37,509.0
Securitized assets ..................................... 8,401.0 9,651.7 10,356.5
--------- --------- ---------
Managed assets ......................................... $49,854.5 $49,735.6 $47,865.5
========= ========= =========
Earning assets(2)
Total financing and leasing portfolio assets ........... $41,453.5 $40,083.9 $37,509.0
Credit balances of factoring clients ................... (3,292.1) (3,894.6) (2,471.6)
--------- --------- ---------
Earning assets ......................................... $38,161.4 $36,189.3 $35,037.4
========= ========= =========
Tangible equity(3)
Total equity ........................................... $ 5,691.8 $ 5,394.2 $ 5,057.6
Other comprehensive loss relating to derivative
financial instruments ................................ 8.1 41.3 122.1
Unrealized gain on securitization investments .......... (6.8) (7.7) (7.9)
Goodwill and intangible assets ......................... (516.4) (487.7) (404.1)
--------- --------- ---------
Tangible common equity ................................. 5,176.7 4,940.1 4,767.7
Preferred capital securities ........................... 254.6 255.5 256.4
--------- --------- ---------
Tangible equity ........................................ $ 5,431.3 $ 5,195.6 $ 5,024.1
--------- --------- ---------
Debt, net of overnight deposits(4)
Total debt ............................................. $34,686.9 $33,668.6 $32,430.8
Overnight deposits ..................................... (1,347.4) (1,529.4) (781.3)
Preferred capital securities ........................... (254.6) (255.5) --
--------- --------- ---------
Debt, net of overnight deposits ........................ $33,084.9 $31,883.7 $31,649.5
========= ========= =========
Earnings per share, excluding certain items(5)
GAAP Earnings per share ................................ $ 0.82 $ 0.72 $ 0.65
Gain on debt redemption ................................ -- (0.14) --
--------- --------- ---------
Adjust earnings per share .............................. $ 0.82 $ 0.58 $ 0.65
========= ========= =========
- --------------------------------------------------------------------------------
(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.
(5) The EPS related to the items listed are shown separately, as the items are
not indicative of our on-going operations.
46
Subsequent Events
On and effective July 21, 2004, the CIT Board of Directors elected Jeffrey
M. Peek as the Company's President and Chief Executive Officer. Mr. Peek, who
had previously served as CIT's President and Chief Operating Officer, replaced
Albert R. Gamper Jr., who had served as Chairman and Chief Executive Officer
since 1987. Mr. Gamper will remain as Chairman until his retirement on December
31, 2004.
On July 28, 2004, CIT announced that it has agreed to acquire the vendor
finance leasing business in Western Europe of CitiCapital, a business unit of
Citigroup (NYSE: C). The transaction is subject to customary regulatory
approvals and is expected to close in the fourth quarter of this year. The
business to be acquired, based in Watford, England, will be integrated into
CIT's Specialty Finance Group. The approximately $950 million of acquired assets
are principally comprised of leases and loans secured by technology, healthcare,
and construction and industrial equipment. A significant majority of the
portfolio is located in the U.K. and France, with the remainder in Germany,
Spain and Italy.
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,
47
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.
Item 4. Controls and Procedures
As of the end of the period covered by this report, 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. Jeffrey M. Peek, President and Chief Executive Officer, and Joseph M.
Leone, Vice Chairman and Chief Financial Officer, participated in this
evaluation.
Based on this evaluation, Messrs. Peek and Leone concluded that, during
the last fiscal quarter covered by this report, 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 regarding this condition and
anticipate completing our remediation initiative during the third quarter of
2004.
We have rebuilt our tax reporting and compliance functions, hired and
trained personnel, rebuilt our tax reporting systems, prepared and filed
amendments to prior period U.S. Federal income tax returns, implemented tax
reporting and compliance processes and controls, prepared a tax basis balance
sheet to complete the analysis of deferred tax assets and liabilities as of
December 31, 2003, and conducted proof and reconciliation procedures of the tax
basis balance sheet. The documentation of our tax processes and internal
controls in accordance with Sarbanes-Oxley Section 404 is nearing completion,
with testing of controls scheduled to follow. We plan to file our 2003 U.S.
Federal income tax returns during the third quarter of 2004 and accordingly, to
finalize our December 31, 2003 tax timing differences and related deferred tax
assets and liabilities as steps in completing our remediation initiative.
48
PART II. OTHER INFORMATION
Item 1. 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 former 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 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, has been 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 is
vigorously defending 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 2. Issuer Purchases of Equity Securities
The following table details the repurchase activity of CIT common stock
during 2004:
Total Number of Maximum Number
Shares Purchased of Shares that May
Number of Average Under Publically Yet be Purchased
Shares Price Announced Plans Under the Plans
------ ----- --------------- ---------------
Balance at March 31, 2004 17,522 $39.08
---------
April 1 - April 30, 2004 120,000 $34.63 120,000 2,880,000
May 1 - May 31, 2004 400,000 $35.29 400,000 2,480,000
June 1 - June 30, 2004(1) 475,392 $37.62 420,000 2,060,000
---------
Total Purchases 995,392 $36.32
---------
Reissuances(2) (116,184) $36.13
---------
Balance at June 30, 2004 896,730 $36.40
========
- --------------------------------------------------------------------------------
(1) We repurchased an aggregate of 55,392 shares of our common stock in
open-market transactions outside of our publically announced plan,
including shares purchased to satisfy the requirements of our stock option
plan and other equity compensation plans.
(2) Includes the issuance of shares of our common stock upon exercise of stock
options and the vesting of restricted stock.
On April 21, 2004, our Board of Directors approved a common stock
repurchase program to acquire up to three million shares of our outstanding
common stock. The program authorizes the company to purchase shares on the open
market from time to time over a two-year period beginning April 23, 2004. The
repurchased common stock are held as treasury shares and may be used for the
issuance of shares under CIT's employee stock plans. Acquisitions under the
share repurchase program will be made from time to time at prevailing prices as
permitted by applicable laws, and subject to market conditions and other
factors. The program may be discontinued at any time and is not expected to have
a significant impact on our capitalization.
49
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on May 12, 2004. The following
table includes individuals, comprising all of the directors of CIT, who were
elected to the Board of Directors, each with the number of votes shown, to serve
until the next annual meeting of stockholders, or until succeeded by another
qualified director who has been elected, along with all other proposals and vote
tallies:
Proposal Votes Votes
No. Description Votes For Withheld Abstain
- -------- ------------------------- --------- -------- -------
1 Election of Directors:
GARY C. BUTLER 189,707,094 21,839 314,700
WILLIAM A. FARLINGER 187,717,693 2,011,240 314,700
WILLIAM M. FREEMAN 180,405,318 9,323,615 314,700
ALBERT R. GAMPER, JR. 187,801,702 1,927,231 314,700
HON. THOMAS H. KEAN 178,926,637 10,802,296 314,700
EDWARD J. KELLY, III 183,368,413 6,370,520 314,700
MARIANNE MILLER PARRS 187,724,900 2,004,033 314,700
JEFFERY M. PEEK 189,669,868 59,065 314,700
JOHN R. RYAN 189,716,529 12,404 314,700
PETER J. TOBIN 187,648,056 2,080,877 314,700
LOIS M. VAN DEUSEN 180,419,978 9,308,955 314,700
2 Ratification of
Independent Accountants 187,479,053 30,205 2,534,375
3 Other business 77,225,493 14,095,383 98,722,757
50
Item 6. Exhibits and Reports on Form 8-K
(a) 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 Indenture dated as of August 26, 2002 by and among 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, 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).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to Fixed
Charges.
31.1 Certification of Jeffrey M. Peek pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Joseph M. Leone pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Jeffrey M. Peek 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.
(b) Reports on Form 8-K
Current Report on Form 8-K filed April 22, 2004, reporting (i) that
CIT declared a dividend of $0.13 per share, payable May 28, 2004 to
shareholders of record on May 14, 2004, and (ii) the financial
results of CIT as of and for the quarter ended March 31, 2004.
51
SIGNATURES
Pursuant to the requirements 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/ Joseph M. Leone
..........................................
Joseph M. Leone
Vice Chairman and Chief Financial Officer
By: /s/ William J. Taylor
..........................................
William J. Taylor
Executive Vice President, Controller
and Principal Accounting Officer
August 6, 2004
52