Exhibit 99.01
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CIT Group Inc.:
In our opinion, the accompanying consolidated balance sheets as of December 31,
2003 and 2002 and September 30, 2002, and the related consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of CIT Group Inc. and its subsidiaries
at December 31, 2003 and 2002 and September 30, 2002, and the results of their
operations and their cash flows for the year ended December 31, 2003, the three
months ended December 31, 2002, the fiscal year ended September 30, 2002 and for
the period from June 2, 2001 through September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on June 2, 2001 the Company
changed its basis of accounting for purchased assets and liabilities, and on
October 1, 2001 the Company changed the manner in which it accounts for goodwill
and other intangible assets.
PricewaterhouseCoopers LLP
New York, New York
January 22, 2004, except as to the
effects of changes in reportable
segments as described in Note 21
which is as of July 22, 2004.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CIT Group Inc.:
In our opinion, the accompanying consolidated statements of income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of CIT Group Inc. and its subsidiaries
for the period from January 1, 2001 through June 1, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company changed the manner in which it accounts for derivative instruments and
hedging activities.
PricewaterhouseCoopers LLP
New York, New York
October 18, 2001, except as to the
effects of changes in reportable segments
as described in Note 21 which is as of
July 22, 2004, the reacquisition
of international subsidiaries described in Note 25
which is as of February 11, 2002, and the
reorganization of Tyco Capital Holding Inc.
described in Note 24 which is as of
July 1, 2002.
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
ASSETS
Financing and leasing assets:
Finance receivables ........................................ $31,300.2 $27,621.3 $28,459.0
Reserve for credit losses ..................................... (643.7) (760.8) (777.8)
--------- --------- ---------
Net finance receivables .................................... 30,656.5 26,860.5 27,681.2
Operating lease equipment, net ............................. 7,615.5 6,704.6 6,567.4
Finance receivables held for sale .......................... 918.3 1,213.4 1,019.5
Cash and cash equivalents ..................................... 1,973.7 2,036.6 2,274.4
Retained interests in securitizations ......................... 1,380.8 1,451.4 1,410.4
Goodwill and intangible assets ................................ 487.7 400.9 402.0
Other assets .................................................. 3,310.3 3,265.0 3,355.6
--------- --------- ---------
Total Assets .................................................. $46,342.8 $41,932.4 $42,710.5
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ........................................... $ 4,173.9 $ 4,974.6 $ 4,654.2
Variable-rate bank credit facilities ....................... -- 2,118.0 4,037.4
Variable-rate senior notes ................................. 9,408.4 4,906.9 5,379.0
Fixed-rate senior notes .................................... 19,830.8 19,681.8 18,385.4
Preferred capital securities ............................... 255.5 -- --
--------- --------- ---------
Total debt .................................................... 33,668.6 31,681.3 32,456.0
Credit balances of factoring clients .......................... 3,894.6 2,270.0 2,513.8
Accrued liabilities and payables .............................. 3,346.4 2,853.2 2,725.2
--------- --------- ---------
Total Liabilities ............................................. 40,909.6 36,804.5 37,695.0
--------- --------- ---------
Commitments and Contingencies (Note 17)
Minority interest ............................................. 39.0 -- --
Preferred capital securities .................................. -- 257.2 257.7
Stockholders' Equity:
Preferred stock, $0.01 par value,
100,000,000 authorized; none issued ...................... -- -- --
Common stock, $0.01 par value,
600,000,000 authorized; 211,848,997
issued and 211,805,468 outstanding ....................... 2.1 2.1 2.1
Paid-in capital, net of deferred
compensation of $30.6, $5.5 and $6.4 ..................... 10,677.0 10,676.2 10,674.8
Contributed capital ........................................ --
Accumulated (deficit) ...................................... (5,141.8) (5,606.9) (5,722.8)
Accumulated other comprehensive loss ....................... (141.6) (200.7) (196.3)
Less: Treasury stock, 43,529 shares, at cost .................. (1.5) -- --
--------- --------- ---------
Total Stockholders' Equity .................................... 5,394.2 4,870.7 4,757.8
--------- --------- ---------
Total Liabilities and Stockholders' Equity .................... $46,342.8 $41,932.4 $42,710.5
========= ========= =========
See Notes to Consolidated Financial Statements.
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- ------------
(successor) (successor) (successor) (successor) (predecessor)
Finance income .................................. $ 3,729.5 $ 971.7 $ 4,342.8 $ 1,676.5 $ 2,298.8
Interest expense ................................ 1,319.3 340.0 1,439.3 597.1 1,022.7
--------- --------- --------- --------- ---------
Net finance income .............................. 2,410.2 631.7 2,903.5 1,079.4 1,276.1
Depreciation on operating lease
equipment ..................................... 1,053.0 277.3 1,241.0 448.6 588.1
--------- --------- --------- --------- ---------
Net finance margin .............................. 1,357.2 354.4 1,662.5 630.8 688.0
Provision for credit losses ..................... 387.3 133.4 788.3 116.1 216.4
--------- --------- --------- --------- ---------
Net finance margin after provision
for credit losses ............................. 969.9 221.0 874.2 514.7 471.6
Other revenue ................................... 947.6 263.5 972.6 336.2 230.4
(Loss) gain on venture capital
investments ................................... (88.3) (6.4) (40.3) (1.1) 7.1
--------- --------- --------- --------- ---------
Operating margin ................................ 1,829.2 478.1 1,806.5 849.8 709.1
--------- --------- --------- --------- ---------
Salaries and general operating
expenses ...................................... 942.3 242.1 946.4 348.5 446.0
Interest expense -- TCH ......................... -- -- 662.6 97.7 1.1
Goodwill impairment ............................. -- -- 6,511.7 -- --
Goodwill amortization ........................... -- -- -- 59.8 37.8
Acquisition-related costs ....................... -- -- -- -- 54.0
--------- --------- --------- --------- ---------
Operating expenses .............................. 942.3 242.1 8,120.7 506.0 538.9
--------- --------- --------- --------- ---------
Gain on redemption of debt ...................... 50.4 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes .................................. 937.3 236.0 (6,314.2) 343.8 170.2
Provision for income taxes ...................... (365.0) (92.0) (374.0) (157.4) (84.8)
Dividends on preferred capital
securities, after tax ......................... (5.4) (2.7) (10.5) (3.6) (4.9)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
========= ========= ========= ========= =========
Net income (loss) per basic share ............... $ 2.68 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Net income (loss) per diluted share ............. $ 2.66 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Note: Per share calculations for the periods June 2 through September 30, 2001
and January 1 through June 1, 2001 assume that the shares for the twelve months
ended September 30, 2002 were outstanding for the respective periods.
See Notes to Consolidated Financial Statements.
4
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated Total Total
Common Paid-in Contributed Treasury Earnings/ Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income/(Loss) Equity
------ ------- ----------- -------- --------- ------------- -------------
December 31, 2000 (predecessor) ............ $ 2.7 $ 3,527.2 $ -- $ (137.7) $ 2,603.3 $ 11.7 $ 6,007.2
Net income ................................. 80.5 80.5
Foreign currency translation adjustments ... (33.7) (33.7)
Cumulative effect of new accounting
principle ................................ (146.5) (146.5)
Change in fair values of derivatives
qualifying as cash flow hedges ........... 0.6 0.6
---------
Total comprehensive loss ................... (99.1)
---------
Cash dividends ............................. (52.9) (52.9)
Issuance of treasury stock ................. 27.6 27.6
Restricted common stock grants ............. 12.4 12.4
Merger of TCH .............................. (4,579.9) (4,579.9)
--------- --------- --------- --------- --------- --------- ---------
June 1, 2001 (predecessor) ................. 2.7 3,539.6 (4,579.9) (110.1) 2,630.9 (167.9) 1,315.3
Recapitalization at acquisition ............ (3,539.6) 3,539.6 --
Effect of push-down accounting of
Tyco's purchase price on CIT's net assets. (2.7) 5,945.1 110.1 (2,631.7) 167.9 3,588.7
--------- --------- --------- --------- --------- --------- ---------
June 2, 2001 (successor) ................... -- -- 4,904.8 -- (0.8) -- 4,904.0
Net income ................................. 182.8 182.8
Foreign currency translation adjustments ... (13.4) (13.4)
Change in fair values of derivatives
qualifying as cash flow hedges ........... (63.4) (63.4)
---------
Total comprehensive income ................. 106.0
---------
Cash dividends ............................. (0.1) (0.1)
Tax benefit on stock transactions .......... 39.4 39.4
Capital contribution from Tyco ............. 898.3 898.3
--------- --------- --------- --------- --------- --------- ---------
September 30, 2001 (successor) ............. -- -- 5,842.5 -- 181.9 (76.8) 5,947.6
Net loss ................................... (6,698.7) (6,698.7)
Foreign currency translation adjustments ... (62.4) (62.4)
Change in fair values of derivatives
qualifying as cash flow hedges ........... (57.1) (57.1)
Unrealized gain on equity and
securitization investments, net .......... 21.0 21.0
Minimum pension liability adjustment ....... (21.0) (21.0)
---------
Total comprehensive loss ................... (6,818.2)
---------
Issuance of common stock in connection
with the initial public offering ......... 2.0 10,420.4 (10,422.4) --
Common stock issued -- overallotment ....... 0.1 249.2 249.3
Capital contribution from Tyco
for TCH .................................. 4,579.9 794.0 5,373.9
Restricted common stock grants ............. 5.2 5.2
--------- --------- --------- --------- --------- --------- ---------
September 30, 2002 (successor) ............. 2.1 10,674.8 -- -- (5,722.8) (196.3) 4,757.8
Net income ................................. 141.3 141.3
Foreign currency translation adjustments ... 0.2 0.2
Change in fair values of derivatives
qualifying as cash flow hedges ........... 2.2 2.2
Unrealized losses on equity and
securitization investments, net .......... (6.8) (6.8)
---------
Total comprehensive income ................. 136.9
---------
Cash dividends ............................. (25.4) (25.4)
Restricted common stock grants ............. 1.4 1.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2002 (successor) .............. 2.1 10,676.2 -- -- (5,606.9) (200.7) 4,870.7
Net income ................................. 566.9 566.9
Foreign currency translation adjustments ... (30.2) (30.2)
Change in fair values of derivatives
qualifying as cash flow hedges ........... 77.0 77.0
Unrealized losses on equity and
securitization investments, net .......... (7.4) (7.4)
Minimum pension liability adjustment ....... 19.7 19.7
---------
Total comprehensive income ................. 626.0
---------
Cash dividends ............................. (101.8) (101.8)
Restricted common stock grants ............. 8.8 8.8
Treasury stock purchased, at cost .......... (28.9) (28.9)
Exercise of stock option awards ............ (8.0) 27.4 19.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2003 (successor) .............. $ 2.1 $10,677.0 $ -- $ (1.5) $(5,141.8) $ (141.6) $ 5,394.2
========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
5
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
--------- --------- --------- --------- ---------
(successor) (successor) (successor) (successor) (predecessor)
Cash Flows From Operations:
Net income (loss) .................................. $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
Adjustments to reconcile net income
(loss) to net cash flows from operations:
Provision for credit losses ........................ 387.3 133.4 788.3 116.1 216.4
Depreciation and amortization ...................... 1,086.6 287.5 1,286.5 521.3 642.4
Provision for deferred federal
income taxes ..................................... 265.1 71.9 276.9 113.6 63.7
Gains on equipment, receivable and
investment sales, net ............................ (253.0) (58.2) (243.4) (120.2) (11.1)
Gain on debt redemption ............................ (50.4) -- -- -- --
Loss (gain) on venture capital investments ......... 88.3 6.4 40.3 1.1 (7.1)
Increase (decrease) in accrued
liabilities and payables ......................... 279.2 55.4 57.0 (349.8) (28.2)
(Increase) decrease in other assets ................ (174.2) 26.7 (626.7) (429.7) 69.9
Goodwill impairment ................................ -- -- 6,511.7 -- --
Other .............................................. (8.7) (52.0) 4.0 (67.3) 34.9
--------- --------- --------- --------- ---------
Net cash flows provided by (used for)
operations ....................................... 2,187.1 612.4 1,395.9 (32.1) 1,061.4
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Loans extended ..................................... (53,157.8) (12,873.8) (48,300.6) (15,493.1) (20,803.0)
Collections on loans ............................... 45,123.9 12,089.7 42,584.2 12,750.6 18,520.2
Proceeds from asset and receivable
sales ............................................ 7,714.1 1,085.4 10,992.4 5,213.0 2,879.6
Purchases of assets to be leased ................... (2,096.3) (449.1) (1,877.2) (756.9) (694.0)
Purchases of finance receivable portfolios ......... (1,097.5) (254.7) (372.7) -- --
Net (increase) decrease in short-term
factoring receivables ............................ (396.1) 391.7 (651.9) (471.2) (131.0)
Intangible assets acquired with portfolio
purchases ....................................... (92.6) -- -- -- --
Other .............................................. 14.8 (4.3) (52.5) 3.2 (24.4)
--------- --------- --------- --------- ---------
Net cash flows (used for) provided
by investing activities .......................... (3,987.5) (15.1) 2,321.7 1,245.6 (252.6)
--------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from the issuance of variable
and fixed rate notes ............................. 13,034.6 2,463.2 13,093.4 1,000.0 6,246.6
Repayments of variable and
fixed-rate notes ................................. (10,265.6) (3,558.3) (12,148.8) (3,272.2) (6,491.5)
Net (decrease) increase in commercial
paper ............................................ (800.7) 320.4 (4,186.2) (1,007.8) 813.6
Net repayments of non-recourse
leveraged lease debt ............................. (125.4) (35.0) (187.7) (26.6) (8.7)
Cash dividends paid ................................ (101.8) (25.4) -- -- (52.9)
Other .............................................. (3.6) -- -- -- 27.6
Capital contributions from former Parent ........... -- -- 923.5 744.7 0.8
Proceeds from issuance of common stock ............. -- -- 254.6 -- --
--------- --------- --------- --------- ---------
Net cash flows provided by (used for)
financing activities ............................. 1,737.5 (835.1) (2,251.2) (2,561.9) 535.5
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ...................................... (62.9) (237.8) 1,466.4 (1,348.4) 1,344.3
Cash and cash equivalents, beginning
of period ........................................ 2,036.6 2,274.4 808.0 2,156.4 812.1
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ........... $ 1,973.7 $ 2,036.6 $ 2,274.4 $ 808.0 $ 2,156.4
========= ========= ========= ========= =========
Supplementary Cash Flow Disclosure:
Interest paid ...................................... $ 1,517.6 $ 418.5 $ 1,713.9 $ 652.9 $ 1,067.6
Federal, foreign and state and local
income taxes (refunded) paid -- net ............... $ 80.6 $ 44.2 $ (43.9) $ 31.4 $ 14.7
Supplementary Non-cash Disclosure:
Push-down of purchase price by Parent .............. -- -- -- $ 9,484.7 --
See Notes to Consolidated Financial Statements.
6
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Business and Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global source of financing and leasing capital for companies in a wide
variety of industries, including many of today's leading industries and emerging
businesses, offering vendor, equipment, commercial, factoring, consumer, and
structured financing products. CIT operates primarily in North America, with
locations in Europe, Latin America, Australia and the Asia-Pacific region.
Basis of Presentation
The Consolidated Financial Statements include the results of CIT and its
subsidiaries and have been prepared in U.S. dollars in accordance with
accounting principles generally accepted in the United States. Certain prior
period amounts have been reclassified to conform to the current presentation. On
June 1, 2001, The CIT Group, Inc. was acquired by a wholly-owned subsidiary of
Tyco International Ltd. ("Tyco"), in a purchase business combination recorded
under the "push-down" method of accounting, resulting in a new basis of
accounting for the "successor" period beginning June 2, 2001 and the recognition
of related goodwill. On July 8, 2002, Tyco completed a sale of 100% of CIT's
outstanding common stock in an initial public offering ("IPO"). Immediately
prior to the offering, CIT was merged with its parent Tyco Capital Holding, Inc.
("TCH"), a company used to acquire CIT. As a result, the historical financial
results of TCH are included in the historical consolidated CIT financial
statements.
Following the acquisition by Tyco, our fiscal year end was changed from
December 31 to September 30, to conform to Tyco's fiscal year end. On November
5, 2002, the CIT Board of Directors approved the return to a calendar year end
effective December 31, 2002. As a result, the three months ended December 31,
2002 constitutes a transitional fiscal period.
In accordance with the provisions of FASB Interpretation No. 46R ("FIN
46"), "Consolidation of Variable Interest Entities," CIT consolidates variable
interest entities for which management has concluded that CIT is the primary
beneficiary. Entities that do not meet the definition of a variable interest
entity are subject to the provisions of Accounting Research Bulletin No. 51
("ARB 51"), "Consolidated Financial Statements" and are consolidated when
management has determined that it has the controlling financial interest.
Entities which do not meet the consolidation criteria in either FIN 46 or ARB 51
but which are significantly influenced by the Company, generally those entities
that are twenty to fifty percent owned by CIT, are included in other assets at
cost for securities not readily marketable and presented at the corresponding
share of equity plus loans and advances. Investments in entities which
management does not have significant influence are included in other assets at
cost, less declines in value that are other than temporary. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
qualifying special purpose entities utilized in securitizations are not
consolidated. Inter-company transactions have been eliminated.
Financing and Leasing Assets
CIT provides funding through a variety of financing arrangements,
including term loans, lease financing and operating leases. The amounts
outstanding on loans and direct financing leases are referred to as finance
receivables and, when combined with finance receivables held for sale, net book
value of operating lease equipment, and certain investments, represent financing
and leasing assets.
At the time of designation for sale, securitization or syndication by
management, assets are classified as finance receivables held for sale. These
assets are carried at the lower of cost or fair value.
Income Recognition
Finance income includes interest on loans, the accretion of income on
direct financing leases, and rents on operating leases. Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is
recognized on an accrual basis commencing in the month of origination
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
using methods that generally approximate the interest method. Leveraged lease
income is recognized on a basis calculated to achieve a constant after-tax rate
of return for periods in which CIT has a positive investment in the transaction,
net of related deferred tax liabilities. Rental income on operating leases is
recognized on an accrual basis.
The accrual of finance income on commercial finance receivables is
generally suspended and an account is placed on non-accrual status when payment
of principal or interest is contractually delinquent for 90 days or more, or
earlier when, in the opinion of management, full collection of all principal and
interest due is doubtful. Given the nature of revolving credit facilities,
including those combined with term loan facilities (advances and interest
accruals increase revolving loan balances and payments reduce revolving loan
balances), the placement of revolving credit facilities on non-accrual status
includes the review of other qualitative and quantitative credit-related
factors, and generally does not result in the reversal of significant amounts of
accrued interest. To the extent the estimated fair value of collateral does not
satisfy both the principal and accrued interest outstanding, accrued but
uncollected interest at the date an account is placed on non-accrual status is
reversed and charged against income. Subsequent interest received is applied to
the outstanding principal balance until such time as the account is collected,
charged-off or returned to accrual status. The accrual of finance income on
consumer loans is suspended, and all previously accrued but uncollected income
is reversed, when payment of principal and/or interest is contractually
delinquent for 90 days or more.
Other revenue includes the following: (1) factoring commissions, (2)
commitment, facility, letters of credit and syndication fees, (3) servicing
fees, (4) gains and losses from sales of leasing equipment and sales and
securitizations of finance receivables, and (5) equity in earnings of joint
ventures and unconsolidated subsidiaries.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. Lease
receivables include leveraged leases, for which a major portion of the funding
is provided by third party lenders on a nonrecourse basis, with CIT providing
the balance and acquiring title to the property. Leveraged leases are recorded
at the aggregate value of future minimum lease payments plus estimated residual
value, less nonrecourse third party debt and unearned finance income. Management
performs periodic reviews of the estimated residual values with impairment,
other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables
The consolidated reserve for credit losses is periodically reviewed for
adequacy considering economic conditions, collateral values and credit quality
indicators, including historical and expected charge-off experience and levels
of and trends in past due loans and non-performing assets. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses. In management's judgment, the consolidated reserve for credit losses is
adequate to provide for credit losses inherent in the portfolio.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance receivables. To the extent that
an unrecovered balance remains due, a final charge-off is taken at the time
collection efforts are deemed no longer useful. Charge-offs are recorded on
consumer and certain small ticket commercial finance receivables beginning at
180 days of contractual delinquency based upon historical loss severity.
Collections on accounts previously charged off are recorded as recoveries.
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impaired Loans
Impaired loans include any loans for $500 thousand or greater, other than
homogeneous pools of loans, that are placed on non-accrual status or any
troubled debt restructuring that is subject to periodic individual review by
CIT's Asset Quality Review Committee ("AQR"). The AQR, which is comprised of
members of senior management, reviews overall portfolio performance, as well as
individual accounts meeting certain credit risk grading parameters. Excluded
from impaired loans are: 1) certain individual commercial non-accrual loans for
which the collateral value supports the outstanding balance and the continuation
of earning status, 2) consumer loans, which are subject to automatic charge-off
procedures, and 3) short-term factoring customer receivables, generally having
terms of no more than 30 days. Loan impairment is defined as any shortfall
between the estimated value and the recorded investment in the loan, with the
estimated value determined using the fair value of the collateral and other cash
flows if the loan is collateral dependent, or the present value of expected
future cash flows discounted at the loan's effective interest rate.
Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease
equipment, is performed at least annually and whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Impairment of assets is determined by comparing the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair value is based upon discounted cash
flow analysis and available market data. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Goodwill and Other Identified Intangibles
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets acquired, less the fair value of liabilities assumed from
business combinations. CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. The Company determined that there was no
impact of adopting this standard under the transition provisions of SFAS No.
142. Since adoption, goodwill is no longer amortized, but instead is assessed
for impairment at least annually. During this assessment, management relies on a
number of factors, including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data.
Other intangible assets are comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes.
Other intangible assets are being amortized over periods ranging from five to
twenty years on a straight-line basis, and are assessed for impairment at least
annually.
Other Assets
Assets received in satisfaction of loans are carried at the lower of
carrying value or estimated fair value less selling costs, with write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets, which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.
Realized and unrealized gains (losses) on marketable equity securities
included in CIT's venture capital investment companies are recognized currently
in operations. Unrealized gains and losses, representing the difference between
carrying value and estimated current fair market value, for all other debt and
equity securities are recorded in other accumulated comprehensive income, a
separate component of equity.
Investments in joint ventures are accounted for using the equity method,
whereby the investment balance is carried at cost and adjusted for the
proportionate share of undistributed earnings or losses. Unrealized intercompany
profits and losses are eliminated until realized, as if the joint venture were
consolidated.
Investments in debt and equity securities of non-public companies are
carried at fair value. Gains and losses are recognized upon sale or write-down
of these investments as a component of operating margin.
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securitizations
Pools of assets are originated and sold to special purpose entities which,
in turn, issue debt securities backed by the asset pools or sell individual
interests in the assets to investors. CIT retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected
net cash flows (after payment of principal and interest to certificate and/or
note holders and credit-related disbursements) that exceeds the estimated cost
of servicing is recorded at the time of sale as a "retained interest." Retained
interests in securitized assets are classified as available-for-sale securities
under SFAS No. 115. CIT, in its estimation of those net cash flows and retained
interests, employs a variety of financial assumptions, including loan pool
credit losses, prepayment speeds and discount rates. These assumptions are
supported by both CIT's historical experience, market trends and anticipated
performance relative to the particular assets securitized. Subsequent to the
recording of retained interests, CIT reviews such values quarterly. Fair values
of retained interests are calculated utilizing current and anticipated credit
losses, prepayment speeds and discount rates and are then compared to the
respective carrying values. Unrealized losses, representing the excess of
carrying value over estimated current fair value, are recorded as an impairment
in current earnings. Unrealized gains are not credited to current earnings, but
are reflected in stockholders' equity as part of other comprehensive income.
Derivative Financial Instruments
CIT uses interest rate swaps, currency swaps and foreign exchange forward
contracts as part of a worldwide market risk management program to hedge against
the effects of future interest rate and currency fluctuations. CIT does not
enter into derivative financial instruments for trading or speculative purposes.
On January 1, 2001, CIT adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative instruments are recognized in
the balance sheet at their fair values in other assets and accrued liabilities
and payables, and changes in fair values are recognized immediately in earnings,
unless the derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in accumulated other comprehensive income as
a separate component of equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any
ineffective portion of a hedge is reported in current earnings. Amounts
accumulated in other comprehensive income are reclassified to earnings in the
same period that the hedged transaction impacts earnings.
The net interest differential, including premiums paid or received, if
any, on interest rate swaps, is recognized on an accrual basis as an adjustment
to finance income or as interest expense to correspond with the hedged position.
In the event of early termination of a derivative instrument classified as a
cash flow hedge, the gain or loss remains in accumulated other comprehensive
income until the hedged transaction is recognized in earnings.
CIT utilizes foreign exchange forward contracts or cross-currency swaps to
convert U.S. dollar borrowings into local currency when local borrowings are not
cost effective or available. CIT also utilizes foreign exchange forward
contracts to hedge its net investments in foreign operations. These instruments
are designated as hedges and resulting gains and losses are reflected in
accumulated other comprehensive income as a separate component of equity.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is the local
currency. The value of the assets and liabilities of these operations is
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenue and expense items are translated at the average exchange
rates effective during the year. The resulting foreign currency translation
gains and losses, as well as offsetting gains and losses on hedges of net
investments in foreign operations, are reflected in accumulated other
comprehensive loss.
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been reflected in the Consolidated
Financial Statements. Deferred tax liabilities and assets are determined based
on the differences between the book values and the tax basis of particular
assets and liabilities, using tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided to offset
any net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. U.S. income taxes are generally not provided on undistributed earnings
of foreign operations as such earnings are permanently invested. Income tax
reserves are included in current taxes payable, which is reflected in accrued
liabilities and payables.
Other Comprehensive Income/Loss
Other comprehensive income/loss includes unrealized gains on
securitization retained interests and other investments, foreign currency
translation adjustments pertaining to both the net investment in foreign
operations and the related derivatives designated as hedges of such investments,
the changes in fair values of derivative instruments designated as hedges of
future cash flows and minimum pension liability adjustments.
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
maintained for liquidity purposes. Cash inflows and outflows from commercial
paper borrowings and most factoring receivables are presented on a net basis in
the Statements of Cash Flows, as their original term is generally less than 90
days.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make extensive use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" in accounting for its
stock-based compensation plans. Under APB 25, CIT does not recognize
compensation expense on the issuance of its stock options because the option
terms are fixed and the exercise price equals the market price of the underlying
stock on the grant date. The following table presents the pro forma information
required by SFAS 123 as if CIT had accounted for stock options granted under the
fair value method of SFAS 123, as amended ($ in millions, except per share
data):
Year Three Months Year June 2 January 1
Ended Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- ----------
(successor) (successor) (successor) (successor) (predecessor)
Net income (loss) as reported ................. $ 566.9 $ 141.3 $(6,698.7) $ 182.8 $ 80.5
Stock-based compensation expense
-- fair value method, after tax ............. (23.0) (5.7) (5.7) -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss) ................... $ 543.9 $ 135.6 $(6,704.4) $ 182.8 $ 80.5
========= ========= ========= ========= =========
Basic earnings per share as reported .......... $ 2.68 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Basic earnings per share pro forma ............ $ 2.57 $ 0.64 $ (31.69) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Diluted earnings per share
as reported ................................. $ 2.66 $ 0.67 $ (31.66) $ 0.86 $ 0.38
========= ========= ========= ========= =========
Diluted earnings per share pro forma .......... $ 2.55 $ 0.64 $ (31.69) $ 0.86 $ 0.38
========= ========= ========= ========= =========
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Pronouncements
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003" (FSP 106-1). FSP 106-1 permits
employers that sponsor postretirement benefit plans providing prescription drug
benefits to retirees to make a one-time election to defer accounting for any
effects of the Medicare Prescription Drug Improvement and Modernization Act of
2003. CIT has elected to defer the related accounting pending further guidance
from the FASB.
In December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revision requires
additional disclosures regarding defined benefit pension plan assumptions,
assets, obligations, cash flows and costs for fiscal years ending after December
15, 2003. The additional required disclosures are included in Note 16 -- Post
Retirement and Other Benefit Plans.
In December 2003, the SEC announced that it will release a Staff
Accounting Bulletin that will require issued loan commitments to be accounted
for as written options that would be reported as liabilities until the loan is
made or they expire unexercised. Management is evaluating the impact of this
proposed accounting pending further guidance from the SEC and the FASB.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Prior period restatement is not permitted. On November 7, 2003, certain
measurement and classification provisions of SFAS 150, relating to certain
mandatorily redeemable non-controlling interests, were deferred indefinitely.
The adoption of these delayed provisions, which relate primarily to minority
interests associated with finite-lived entities, is not expected to have a
significant impact on the financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This pronouncement amends and
clarifies financial accounting and reporting for certain derivative instruments,
including certain derivative instruments embedded in other contracts. This
pronouncement is effective for all contracts entered into or modified after June
30, 2003. The implementation of SFAS No. 149 did not have a significant impact
on our financial position or results of operations.
In January 2003, the FASB issued FIN 46, which requires the consolidation
of VIEs by their primary beneficiaries if they do not effectively disperse the
risks among the parties involved. On October 9, 2003, the FASB announced the
delay in implementation of FIN 46 for VIEs in existence as of February 1, 2003.
VIEs are certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The primary beneficiary is
the entity that has the majority of the economic risks and rewards of ownership
of the VIE.
The FIN 46 impact to CIT is primarily related to three types of
transactions: 1) strategic vendor partner joint ventures, 2) securitizations,
and 3) selected financing and private equity transactions. The implementation of
this standard did not change the current equity method of accounting for our
strategic vendor partner joint ventures (see Note 20). Our securitization
transactions outstanding at December 31, 2003 will continue to qualify as
off-balance sheet transactions. The Company may structure certain future
securitization transactions, including factoring trade account receivables
transactions, as on-balance sheet financings. Certain VIEs acquired primarily in
conjunction with selected financing and/or private equity transactions may be
consolidated under FIN 46.
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The consolidation of these entities will not have a significant impact on our
financial position or results of operations. In December 2003, the FASB revised
FIN 46. This revision clarified certain provisions within FIN 46 and delayed
implementation for selected transactions until reporting periods ending after
March 15, 2004. The revisions to FIN 46 do not have a significant impact on our
previous assessments.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing certain guarantees. The expanded disclosure
requirements were required for financial statements ending after December 15,
2002, while the liability recognition provisions were applicable to all
guarantee obligations modified or issued after December 31, 2002.
Note 2 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Loans .................. $25,137.1 $21,030.2 $21,633.8
Leases ................. 6,163.1 6,591.1 6,825.2
--------- --------- ---------
Finance receivables.. $31,300.2 $27,621.3 $28,459.0
========= ========= =========
Finance receivables include unearned income of $3.3 billion, $ 3.2 billion
and $3.3 billion at December 31, 2003, December 31, 2002, and September 30,
2002, respectively. Included in finance receivables are equipment residual
values of $2.4 billion at both December 31, 2003 and December 31, 2002 and $2.3
billion at September 30, 2002. Included in lease receivables at December 31,
2003, December 31, 2002, and September 30, 2002 are leveraged leases of $1.1
billion, $1.2 billion, and $1.1 billion, respectively. Leveraged leases exclude
the portion funded by third party non-recourse debt payable of $3.3 billion at
December 31, 2003, $3.7 billion at December 31, 2002, and $3.6 billion at
September 30, 2002.
Additionally, CIT still managed finance receivables previously securitized
totaling $9.7 billion at December 31, 2003, $10.5 billion at December 31, 2002,
and $11.2 billion at September 30, 2002.
The following table sets forth the contractual maturities of finance
receivables due in the respective fiscal period. The 2003 decline in maturities
for the 'due within one year' category reflects a refinement in the presentation
relating to certain revolving loans. Current year maturities for these loans are
reflected in their contractual maturity date, but in prior years the current
year maturities were grouped in the first year total. Prior year balances have
not been conformed ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- --------- ------- ------- -------
Due within one year ................... $11,698.9 37.4% $12,076.3 43.7% $13,136.8 46.2%
Due within one to two years ........... 4,503.7 14.4 3,598.8 13.0 3,541.2 12.4
Due within two to four years .......... 5,639.0 18.0 4,181.2 15.2 4,375.7 15.4
Due after four years .................. 9,458.6 30.2 7,765.0 28.1 7,405.3 26.0
--------- ----- --------- ----- --------- -----
Total .............................. $31,300.2 100.0% $27,621.3 100.0% $28,459.0 100.0%
========= ===== ========= ===== ========= =====
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth certain information regarding total non-performing assets ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Non-accrual finance receivables .................... $ 566.5 $ 946.4 $ 976.6
Assets received in satisfaction of loans ........... 110.0 139.4 163.2
--------- --------- ---------
Total non-performing assets ........................ $ 676.5 $ 1,085.8 $ 1,139.8
========= ========= =========
Percentage of finance receivables .................. 2.16% 3.93% 4.01%
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2003, December 31, 2002, and September 30, 2002, the
recorded investment in loans considered for impairment totaled $516.5 million,
$959.9 million, and $1,001.2 million, respectively. Loans whose estimated fair
market value is less than current recorded value totaled $279.8 million, $522.3
million, and $449.8 million at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively. The corresponding specific reserve for credit
loss allocations were $120.7 million, $156.9 million, and $197.4 million and is
included in the reserve for credit losses. The average monthly recorded
investment in loans considered for impairment was $690.5 million (including
$316.0 million relating to telecommunications), $980.6 million (including $327.3
million relating to telecommunications), and $818.9 million (including $185.5
million relating to telecommunications) for the year ended December 31, 2003,
three months ended December 31, 2002, and twelve months ended September 30,
2002, respectively. After being classified as impaired, there was no finance
income recognized on these loans because our definition of an impaired loan is
based upon non-accrual classification. The amount of finance income that would
have been recorded under contractual terms for impaired loans would have been
$33.3 million, $19.2 million, $65.2 million, and $46.1 million for the year
ended December 31, 2003, for the three months ended December 31, 2002, for the
twelve months ended September 30, 2002, and for the nine months ended September
30, 2001, respectively.
Note 3 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
For the For the Three For the June 2 January 1
Year Ended Months Ended Year Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -----------
(successor) (successor) (successor) (successor) (predecessor)
Balance, beginning of period .................. $ 760.8 $ 777.8 $ 492.9 $ 462.7 $ 468.5
------- ------- ------- ------- -------
Provision for credit losses ................... 408.8 133.4 453.3 116.1 126.9
Provision for credit losses --
specific reserving actions(1) ............... (21.5) -- 335.0 -- 89.5
Reserves relating to dispositions,
acquisitions, other ......................... 17.5 4.1 (11.1) 0.9 (17.2)
------- ------- ------- ------- -------
Additions to the reserve for
credit losses ............................. 404.8 137.5 777.2 117.0 199.2
------- ------- ------- ------- -------
Finance receivables charged-off ............... (572.9) (173.2) (539.1) (93.7) (215.8)
Recoveries on finance receivables
previously charged-off ...................... 51.0 18.7 46.8 6.9 10.8
------- ------- ------- ------- -------
Net credit losses ........................... (521.9) (154.5) (492.3) (86.8) (205.0)
------- ------- ------- ------- -------
Balance, end of period ........................ $ 643.7 $ 760.8 $ 777.8 $ 492.9 $ 462.7
======= ======= ======= ======= =======
Reserve for credit losses as a
percentage of finance
receivables ................................. 2.06% 2.75% 2.73% 1.55% 1.50%
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
(1) The 2002 amounts consist of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2001 amount consists of a provision for under-performing
loans and leases, primarily in the telecommunications portfolio.
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of $1.5 billion, $1.3 billion, and $1.2 billion) of
operating lease equipment by equipment type at December 31, 2003, December 31,
2002, and September 30, 2002 ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Commercial aircraft .......................... $4,141.1 $3,185.4 $3,005.5
Railcars and locomotives ..................... 1,987.3 1,507.7 1,373.9
Communications ............................... 320.6 507.5 554.5
Business aircraft ............................ 242.5 292.6 341.3
Office equipment ............................. 235.0 132.7 124.9
Information technology ....................... 229.3 337.6 370.3
Other ........................................ 459.7 741.1 797.0
-------- -------- --------
Total ..................................... $7,615.5 $6,704.6 $6,567.4
======== ======== ========
Equipment not currently subject to lease agreements totaled 265.9 million,
$385.9 million and $267.3 million at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively.
Rental income on operating leases, which is included in finance income,
totaled $1.5 billion for the twelve months ended December 31, 2003, $0.4 billion
for the three months ended December 31, 2002, $1.7 billion for the twelve months
ended September 30, 2002, and $1.5 billion for the combined nine months ended
September 30, 2001. The following table presents future minimum lease rentals on
non-cancelable operating leases as of December 31, 2003. Excluded from this
table are variable rentals calculated on the level of asset usage, re-leasing
rentals, and expected sales proceeds from remarketing operating lease equipment
at lease expiration, all of which are components of operating lease
profitability ($ in millions).
Years Ended December 31, Amount
- ------------------------ ------
2004 ............................................................. $ 997.1
2005 ............................................................. 666.5
2006 ............................................................. 411.0
2007 ............................................................. 269.9
2008 ............................................................. 207.1
Thereafter ....................................................... 320.2
--------
Total ..................................................... $2,871.8
========
Note 5 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets at December 31, 2003,
December 31, 2002, and September 30, 2002 ($ in millions):
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Geographic Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- --------
North America:
Northeast .................................... $ 8,319.8 20.8% $ 7,833.8 21.8% $ 8,047.0 22.1%
West ......................................... 7,485.5 18.7 6,223.8 17.4 6,339.1 17.4
Midwest ...................................... 5,996.2 14.9 5,748.3 16.0 5,941.0 16.3
Southeast .................................... 5,558.6 13.9 4,946.8 13.8 4,854.1 13.3
Southwest .................................... 4,423.1 11.0 3,691.9 10.3 3,932.0 10.8
Canada ....................................... 2,055.5 5.1 1,804.9 5.0 1,688.4 4.7
--------- ----- --------- ----- --------- -----
Total North America .......................... 33,838.7 84.4 30,249.5 84.3 30,801.6 84.6
Other foreign ................................ 6,245.2 15.6 5,625.2 15.7 5,586.0 15.4
--------- ----- --------- ----- --------- -----
Total ..................................... $40,083.9 100.0% $35,874.7 100.0% $36,387.6 100.0%
========= ===== ========= ===== ========= =====
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Industry Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- --------
Manufacturing(1) (no industry
greater than 2.7%) ........................ $ 7,340.6 18.3% $ 7,114.3 19.8% $ 7,115.1 19.6%
Retail(2) .................................... 5,630.9 14.0 4,053.6 11.3 4,892.2 13.5
Commercial airlines
(including regional airlines) ............. 5,039.3 12.6 4,570.3 12.7 4,266.2 11.7
Transportation(3) ............................ 2,934.9 7.3 2,703.9 7.5 2,647.7 7.3
Consumer based lending -- Home
mortgage .................................. 2,830.8 7.1 1,292.7 3.6 1,314.2 3.6
Service industries ........................... 2,608.3 6.5 1,571.1 4.4 1,468.1 4.0
Consumer based lending -- non-real
estate(4) ................................. 1,710.9 4.3 2,435.0 6.8 1,858.5 5.1
Construction equipment ....................... 1,571.2 3.9 1,712.7 4.8 1,756.6 4.8
Communications(5) ............................ 1,386.5 3.5 1,662.6 4.6 1,746.8 4.8
Wholesaling .................................. 1,374.7 3.4 1,305.2 3.6 1,248.4 3.4
Automotive Services .......................... 1,152.3 2.9 1,138.8 3.2 1,113.6 3.1
Other (no industry greater
than 2.9%)(6) ............................. 6,503.5 16.2 6,314.5 17.7 6,960.2 19.1
--------- ----- --------- ----- --------- -----
Total ..................................... $40,083.9 100.0% $35,874.7 100.0% $36,387.6 100.0%
========= ===== ========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (6.0%) and general merchandise (4.3%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers for products in various industries
such as manufactured housing, recreational vehicles, marine and computers
and related equipment.
(5) Includes $556.3 million, $685.8 million and $707.2 million of equipment
financed for the telecommunications industry at December 31, 2003,
December 31, 2002 and September 30, 2002, respectively, but excludes
telecommunications equipment financed for other industries.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $949.8 million, or 2.4% of
total financing and leasing assets at December 31, 2003. This amount
includes approximately $651.2 million in project financing and $256.1
million in rail cars on lease.
Note 6 -- Retained Interests in Securitizations
Retained interests in securitizations and other investments designated as
available for sale are shown in the following table ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Retained interests in securitized
commercial loans ...................................... $1,129.7 $1,042.1 $1,039.7
Retained interests in securitized
consumer loans ........................................ 179.6 313.8 274.0
Aerospace equipment trust certificates ................... 71.5 95.5 96.7
-------- -------- --------
Total ................................................. $1,380.8 $1,451.4 $1,410.4
======== ======== ========
Retained interests in securitizations include interest-only strips,
retained subordinated securities and cash reserves related to securitizations.
The composition of retained interests in securitizations was as follows ($ in
millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Retained subordinated securities ......................... $ 623.3 $ 698.2 $ 658.9
Interest-only strips ..................................... 425.7 383.1 362.2
Cash reserve accounts .................................... 260.3 274.6 292.6
-------- -------- --------
Total .................................................. $1,309.3 $1,355.9 $1,313.7
======== ======== ========
The carrying value of the retained interests in securitized assets is
reviewed quarterly for valuation impairment. During the year ended December 31,
2003, net accretion of $81.5 million was recognized in pretax earnings,
including $66.6 million of impairment charges. For the three months ended
December 31, 2002,
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accretion of $33.2 million was recognized in pretax earnings, net of $10.6
million impairment charges. For the twelve months ended September 30, 2002, net
accretion of $97.1 million was recognized in pretax earnings, including $49.9
million in impairment charges. Unrealized after tax gains totaled $7.7 million,
$20.5 million and $25.8 million at December 31, 2003, December 31, 2002 and
September 30, 2002, respectively, and are reflected as a part of accumulated
other comprehensive loss.
The securitization programs cover a wide range of products and collateral
types with different prepayment and credit risk characteristics. The prepayment
speed, in the tables below, is based on Constant Prepayment Rate, which
expresses payments as a function of the declining amount of loans at a compound
annual rate. Weighted average expected credit losses are expressed as annual
loss rates.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2003 were as follows:
Commercial Equipment
---------------------
Specialty Equipment Consumer
Finance Finance Home Equity
--------- --------- -----------
Weighted average prepayment speed ........ 34.11% 12.20% 24.40%
Weighted average expected credit losses .. 0.47% 1.08% 0.90%
Weighted average discount rate ........... 9.13% 9.00% 13.00%
Weighted average life (in years) ......... 1.37 1.92 3.51
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at December 31, 2003 were as
follows:
Commercial Equipment Consumer
------------------------- ------------------------------
Manufactured Recreational
Specialty Equipment Housing & Vehicle &
Finance Finance Home Equity Boat
--------- --------- ------------ ------------
Weighted average prepayment speed .......... 26.57% 12.57% 26.50% 18.26%
Weighted average expected credit losses .... 1.02% 1.44% 1.29% 0.83%
Weighted average discount rate ............. 8.03% 9.86% 13.08% 14.18%
Weighted average life (in years) ........... 1.14 1.41 3.04 3.05
The impact of 10 percent and 20 percent adverse changes to the key
assumptions on the fair value of retained interests as of December 31, 2003 is
shown in the following tables ($ in millions).
Consumer
--------------------------
Manufactured Recreational
Commercial Housing & Vehicle &
Equipment Home Equity Boat
---------- ------------ ------------
Prepayment speed:
10 percent adverse change .......... $ (27.1) $ (11.1) $ (0.6)
20 percent adverse change .......... (51.0) (20.5) (1.3)
Expected credit losses:
10 percent adverse change .......... (11.9) (6.0) (1.3)
20 percent adverse change .......... (23.8) (11.4) (2.7)
Weighted average discount rate:
10 percent adverse change .......... (10.5) (3.5) (1.5)
20 percent adverse change .......... (20.9) (6.8) (2.9)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent or 20 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumptions to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
17
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize static pool credit losses, which represent
the sum of actual losses (life to date) and projected future credit losses,
divided by the original balance of each pool of the respective assets for the
securitizations during the period.
Commercial Equipment
Securitizations During
--------------------------------
2003 2002 2001
---- ---- ----
(successor) (successor) (combined)
Actual and projected losses at:
December 31, 2003 ..................... 1.74% 2.04% 3.39%
December 31, 2002 ..................... -- 1.96% 2.94%
September 30, 2002 .................... -- 1.92% 2.87%
September 30, 2001 .................... -- -- 1.92%
Home Equity Securitizations During
----------------------------------
2003 2002 2001
---- ---- ----
(successor) (successor) (combined)
Actual and projected losses at:
December 31, 2003 ..................... 3.07% 2.72% --
December 31, 2002 ..................... -- 2.65% --
September 30, 2002 .................... -- 2.68% --
September 30, 2001 .................... -- -- --
The tables that follow summarize the roll-forward of retained interest
balances and certain cash flows received from and paid to securitization trusts
($ in millions).
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ------------------ ------------------
Retained Interests
- ------------------
Retained interest at beginning of period ...... $1,355.9 $1,313.7 $ 970.1
New sales ..................................... 640.9 154.9 792.9
Distributions from trusts ..................... (728.6) (175.3) (512.6)
Change in fair value .......................... (21.1) (4.4) 43.1
Other, including net accretion, and
clean-up calls ............................. 62.2 67.0 20.2
-------- -------- --------
Retained interest at end of period ............ $1,309.3 $1,355.9 $1,313.7
======== ======== ========
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Cash Flows During the Periods
- -----------------------------
Proceeds from new securitizations ............ $4,589.5 $1,060.2 $6,603.9
Other cash flows received on
retained interests ........................ 688.2 175.3 551.5
Servicing fees received ...................... 80.2 19.7 72.3
Reimbursable servicing advances, net ......... 7.3 (4.0) (21.9)
Repurchases of delinquent or foreclosed
assets and ineligible contracts ........... (63.0) (3.7) (104.7)
Purchases of contracts through clean
up calls .................................. (439.8) (8.2) (456.9)
Guarantee draws .............................. (2.1) (0.2) (1.2)
-------- -------- --------
Total, net ................................. $4,860.3 $1,239.1 $6,643.0
======== ======== ========
18
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total net charge-offs, for both finance receivables and managed
receivables, and net charge-offs as a percentage of average finance receivables
and managed receivables, are set forth below. Managed receivables include
finance receivables plus finance receivables previously securitized and still
managed by us ($ in millions).
Net Charge-offs of Finance Receivables
------------------------------------------------------------------------------------------
Combined
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
-------------------- ------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
Commercial ........ $466.4 1.75% $143.3 2.33% $445.9 1.65% $243.5 1.13%
Consumer .......... 55.5 2.01% 11.2 2.24% 46.4 1.78% 48.3 1.72%
------ ------ ------ ------
Total ........... $521.9 1.77% $154.5 2.32% $492.3 1.67% $291.8 1.20%
====== ====== ====== ======
Net Charge-offs of Managed Receivables
------------------------------------------------------------------------------------------
Combined
Year Ended Three Months Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
-------------------- ------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
Commercial ....... $578.8 1.72% $187.5 2.29% $701.6 2.71% $351.6 1.87%
Consumer ......... 101.3 1.76% 18.7 1.62% 78.8 1.35% 71.5 1.04%
------ ------ ------ ------
Total .......... $680.1 1.72% $206.2 2.21% $780.4 1.94% $423.1 1.64%
====== ====== ====== ======
Receivables past due 60 days or more, for both finance receivables and
managed receivables, and receivables past due 60 days or more as a percentage of
finance receivables and managed receivables are set forth below. Managed
receivables include finance receivables plus finance receivables previously
securitized and still managed by us ($ in millions).
Finance Receivables Past Due 60 Days or More
------------------------------------------------------------------
December 31, 2003 December 31, 2002 September 30, 2002
------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial.. $526.7 1.90% $ 867.6 3.39% $ 942.8 3.53%
Consumer ... 149.6 4.26% 133.7 6.66% 127.2 7.20%
------ -------- --------
Total ... $676.3 2.16% $1,001.3 3.63% $1,070.0 3.76%
====== ======== ========
Managed Receivables Past Due 60 Days or More
------------------------------------------------------------------
December 31, 2003 December 31, 2002 September 30, 2002
------------------- -------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial.. $ 727.2 2.04% $1,136.2 3.36% $1,289.1 3.64%
Consumer ... 294.8 4.78% 259.4 4.71% 249.5 4.71%
-------- -------- --------
Total .... $1,022.0 2.44% $1,395.6 3.55% $1,538.6 3.78%
======== ======== ========
Note 7 -- Other Assets
Other assets totaled $3.3 billion at both December 31, 2003 and December
31, 2002, and $3.4 billion at September 30, 2002. Other assets primarily
consisted of the following at December 31, 2003: accrued interest and
receivables from derivative counterparties of $0.9 billion, investments in and
receivables from non-consolidated subsidiaries of $0.6 billion, deposits on
commercial aerospace flight equipment of $0.3 billion, direct and private fund
equity investments of $0.2 billion, prepaid expenses of $0.2 billion, and
repossessed assets and off-lease equipment of $0.1 billion. The remaining
balance includes furniture and fixtures, miscellaneous receivables and other
assets.
19
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ------------------
Borrowings outstanding ...................... $4,173.9 $4,974.6 $4,654.2
Weighted average interest rate .............. 1.19% 1.62% 1.87%
Weighted average number of days
to maturity ............................... 50 days 38 days 37 days
Three Combined Nine
Year Ended Months Ended Year Ended Months Ended
December 31, 2003 December 31, 2002 September 30, 2002 September 30, 2001
----------------- ----------------- ------------------ ------------------
Daily average borrowings ........ $4,648.2 $4,758.7 $ 4,564.7 $10,142.5
Maximum amount outstanding ...... 4,999.1 4,994.1 10,713.5 11,726.4
Weighted average interest rate .. 1.25% 1.75% 2.25% 4.67%
The consolidated weighted average interest rates on variable-rate senior
notes at December 31, 2003, December 31, 2002, and September 30, 2002 were
1.87%, 2.08%, and 2.31%, respectively. Fixed-rate senior debt outstanding at
December 31, 2003 matures at various dates through 2028. The consolidated
weighted-average interest rates on fixed-rate senior debt at December 31, 2003,
December 31, 2002, and September 30, 2002 was 6.12%, 6.74%, and 6.82%,
respectively. Foreign currency-denominated debt (stated in U.S. Dollars) totaled
$1,601.4 million at December 31, 2003, all of which was fixed-rate. Foreign
currency-denominated debt (stated in U.S. Dollars) totaled $1,652.4 million at
December 31, 2002, of which $1,334.4 was fixed-rate and $318.0 was
variable-rate. Foreign currency-denominated debt at September 30, 2002 totaled
$1,627.9 million, of which $1,290.5 million was fixed-rate and $337.4 million
was variable-rate debt.
The following tables present calendar year contractual maturities and the
high and low interest rates for total variable-rate and fixed-rate debt at
December 31, 2003 and 2002, and fiscal year contractual maturities at September
30, 2002 ($ in millions).
Commercial Variable-rate December 31, December 31, September 30,
Variable-Rate Paper Senior Notes 2003 Total 2002 2002
- ------------ ---------- ----------- ----------- ------------ -------------
Due in 2003 ................... $ -- $ -- $ -- $10,999.0 $12,601.9
Due in 2004 (rates ranging
from 1.25% to 2.67%) ....... 4,173.9 4,806.4 8,980.3 727.3 1,247.0
Due in 2005 (rates ranging
from 1.39% to 2.66%) ....... -- 3,333.3 3,333.3 29.1 23.4
Due in 2006 (rates ranging
from 1.39% to 2.02%) ....... -- 985.3 985.3 31.0 25.0
Due in 2007 (rates ranging
from 1.93% to 2.02%) ....... -- 37.5 37.5 33.0 26.6
Due in 2008 (rates ranging
from 1.93% to 2.02%) ....... -- 39.8 39.8 35.1 28.5
Due after 2008 (rates ranging
from 1.93% to 2.02%) ....... -- 206.1 206.1 145.0 118.2
-------- -------- --------- --------- ---------
$4,173.9 $9,408.4 $13,582.3 $11,999.5 $14,070.6
======== ======== ========= ========= =========
20
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, December 31, September 30,
Fixed-Rate 2003 2002 2002
- ---------- ------------ ------------ -------------
Due in 2003 ..................................................... $ -- $ 4,245.8 $ 2,784.9
Due in 2004 (rates ranging from 1.85% to 8.26%) ................. 3,930.2 3,231.0 4,321.5
Due in 2005 (rates ranging from 1.85% to 8.26%) ................. 4,328.6 3,939.7 4,704.1
Due in 2006 (rates ranging from 2.10% to 7.80%) ................. 2,639.4 1,137.1 1,179.1
Due in 2007 (rates ranging from 2.70% to 7.80%) ................. 3,498.9 3,386.8 2,307.1
Due in 2008 (rates ranging from 2.90% to 7.80%) ................. 1,740.5 212.1 212.1
Due after 2008 (rates ranging from 4.45% to 7.80%) .............. 3,693.2 3,529.3 2,876.6
--------- --------- ---------
Total ........................................................ $19,830.8 $19,681.8 $18,385.4
========= ========= =========
At December 31, 2003, $10.1 billion of unissued debt securities remained
under a shelf registration statement.
The following table represents information on unsecured committed lines of
credit at December 31, 2003 that can be drawn upon to support commercial paper
borrowings ($ in millions).
Expiration Total Drawn Available
- ---------- ----- ----- ---------
October 13, 2004 .................. $2,100.0 $ -- $2,100.0
March 28, 2005 .................... 2,000.0 -- 2,000.0
October 14, 2008 .................. 2,100.0 281.2 1,818.8
-------- ------ --------
Total credit lines ................ $6,200.0 $281.2 $5,918.8
======== ====== ========
CIT has the ability to issue up to $400 million of letters of credit under
the $2.1 billion facility expiring in 2008, which, when utilized, reduces
available borrowings under this facility. At December 31, 2003, $281.2 million
letters of credit were issued under this facility. The credit line agreements
contain clauses that permit extensions beyond the expiration dates upon written
consent from the participating lenders. Certain foreign operations utilize local
financial institutions to fund operations. At December 31, 2003, local credit
facilities totaled $84.7 million, of which $55.7 million was undrawn and
available.
CIT had $1.25 billion of debt securities outstanding that were callable at
par in December 2003 and January 2004. These notes were listed on the New York
Stock Exchange under the ticker symbols CIC and CIP and are commonly known as
PINEs ("Public Income Notes"). The securities' coupon rates of 8.125% and 8.25%,
were marked down to a yield of approximately 7.5% in CIT's financial statements
through purchase accounting adjustments. In light of the high coupon rates, we
called the securities for redemption pursuant to the terms outlined in the
prospectuses. Once called, we recorded pre-tax gains totaling $50.4 million in
December 2003 and $41.8 million in January 2004 ($30.8 million and $25.5 million
after-tax, respectively), as the cash outlay was less than the carrying value of
the securities.
Preferred Capital Securities
In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned
subsidiary of CIT, issued in a private offering $250.0 million liquidation value
of 7.70% Preferred Capital Securities (the "Capital Securities"), which were
subsequently registered with the Securities and Exchange Commission pursuant to
an exchange offer. Each capital security was recorded at the liquidation value
of $1,000. The Trust subsequently invested the offering proceeds in $250.0
million principal amount Junior Subordinated Debentures (the "Debentures") of
CIT, having identical rates and payment dates. The Debentures of CIT represent
the sole assets of the Trust. Holders of the Capital Securities are entitled to
receive cumulative distributions at an annual rate of 7.70% through either the
redemption date or maturity of the Debentures (February 15, 2027). Both the
Capital Securities issued by the Trust and the Debentures of CIT owned by the
Trust are redeemable in whole or in part on or after February 15, 2007 or at any
time in whole upon changes in specific tax legislation, bank regulatory
guidelines or securities law at the option of CIT at their liquidation value or
principal amount. The securities are redeemable at a specified premium through
February 15, 2017, at which time the redemption price will be at par, plus
accrued interest. Distributions
21
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by the Trust are guaranteed by CIT to the extent that the Trust has funds
available for distribution. The Capital Securities were valued at $260.0 million
on June 1, 2001, the date of acquisition by Tyco, in new basis accounting and
the current balance reflects accretion of the premium.
Note 9 -- Derivative Financial Instruments
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows are presented in the
following table ($ in millions).
Adjustment of Income Total
Fair Value of Tax Unrealized
Derivatives Effects Loss
------------- ------- ----------
Balance at September 30, 2002 -- unrealized loss ................... $ 194.4 $(73.9) $120.5
Changes in values of derivatives qualifying as cash flow hedges .... (3.6) 1.4 (2.2)
------- ------ ------
Balance at December 31, 2002 -- unrealized loss .................... 190.8 (72.5) 118.3
Changes in values of derivatives qualifying as cash flow hedges .... (126.2) 49.2 (77.0)
------- ------ ------
Balance at December 31, 2003 -- unrealized loss .................... $ 64.6 $(23.3) $ 41.3
======= ====== ======
The unrealized loss as of December 31, 2003, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, followed by lower market interest rates.
For the year ended December 31, 2003, the ineffective portion of changes in the
fair value of cash flow hedges amounted to $0.2 million and has been recorded as
an increase to interest expense. For the three months ended December 31, 2002,
the ineffective portion of changes in the fair value of cash flow hedges
amounted to $0.4 million and had been recorded as a decrease to interest
expense. For the year ended September 30, 2002, the ineffective portion of
changes in the fair value of cash flow hedges amounted to $1.4 million and was
recorded as an increase to interest expense. For the combined nine months ended
September 30, 2001, the ineffective portion of changes in the fair value of cash
flow hedges amounted to $3.4 million and was recorded as a decrease to interest
expense. Assuming no change in interest rates, approximately $46.0 million, net
of tax, of Accumulated Other Comprehensive Loss is expected to be reclassified
to earnings over the next twelve months as contractual cash payments are made.
The Accumulated Other Comprehensive Loss (along with the corresponding swap
liability) will be adjusted as market interest rates change over the remaining
life of the swaps.
As part of managing the exposure to changes in market interest rates, CIT,
as an end-user, enters into various interest rate swap transactions, all of
which are transacted in over-the-counter markets with other financial
institutions acting as principal counterparties. We use derivatives for hedging
purposes only, and policy prohibits entering into derivative financial
instruments for trading or speculative purposes. To ensure both appropriate use
as a hedge and hedge accounting treatment, derivatives entered into are
designated according to a hedge objective against a specific liability,
including commercial paper, or a specifically underwritten debt issue or in
limited instances against assets. The notional amounts, rates, indices and
maturities of our derivatives closely match the related terms of our hedged
liabilities and certain assets. CIT exchanges variable-rate interest on certain
debt instruments for fixed-rate amounts. These interest rate swaps are
designated as cash flow hedges. We also exchange fixed-rate interest on certain
of our debt for variable-rate amounts. These interest rate swaps are designated
as fair value hedges.
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position ($ in
millions):
Notional Amount
---------------------------------
December 31, September 30,
---------------- --------------
Interest Rate Swaps 2003 2002 2002
- ------------------- ---- ---- ----
Floating to fixed-rate swaps -- Effectively converts the interest rate on an
cash flow hedges .................. $2,615.0 $3,280.5 $3,585.8 equivalent amount of commercial paper,
variable-rate notes and selected assets to
a fixed rate.
Fixed to floating-rate swaps -- Effectively converts the interest rate on an
fair value hedges ................. 6,758.2 4,489.8 3,479.8 equivalent amount of fixed-rate notes and
-------- -------- -------- selected assets to a variable rate.
Total interest rate swaps ........... $9,373.2 $7,770.3 $7,065.6
======== ======== ========
22
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with securitizations, CIT entered into $2.7 billion in
notional amount of hedge transactions to protect the related trusts against
interest rate risk. CIT is insulated from this risk by entering into offsetting
swap transactions with third parties totalling $2.7 billion in notional amount
at December 31, 2003.
Foreign exchange forward contracts or cross-currency swaps are used to
convert U.S. dollar borrowings into local currency to the extent that local
borrowings are not cost effective or available. We also use foreign exchange
forward contracts to hedge our net investment in foreign operations.
CIT is exposed to credit risk to the extent that the counterparty fails to
perform under the terms of a derivative instrument. This risk is measured as the
market value of interest rate swaps or foreign exchange forwards with a positive
fair value, which totaled $509.0 million at December 31, 2003, reduced by the
effects of master netting agreements as presented in Note 19 -- Fair Values of
Financial Instruments. We manage this credit risk by requiring that all
derivative transactions be conducted with counterparties rated investment grade
by nationally recognized rating agencies, with the majority of the
counterparties rated "AA" or higher, and by setting limits on the exposure with
any individual counterparty. Accordingly, counterparty credit risk at December
31, 2003 is not considered significant.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid on U.S.
dollar interest rate swaps at December 31, 2003 ($ in millions).
Maturity Floating to Fixed-rate Fixed to Floating-rate
- -------- --------------------------------- --------------------------------
Years Ending Notional Receive Pay Notional Receive Pay
December 31, Amount Rate Rate Amount Rate Rate
- ------------ ------ ---- ---- ------ ---- ----
2004 ............................ $ 399.5 1.17% 3.74% $ 11.0 7.85% 1.92%
2005 ............................ 433.5 1.17% 3.80% 257.8 6.92% 2.42%
2006 ............................ 211.9 1.19% 3.65% 340.7 3.15% 1.27%
2007 ............................ 182.6 1.20% 4.04% 3,222.7 6.25% 3.92%
2008 ............................ 146.3 1.20% 4.76% 747.9 4.54% 2.06%
2009 - Thereafter ............... 922.6 1.20% 6.21% 2,178.1 7.11% 3.40%
-------- --------
Total ......................... $2,296.4 1.19% 4.82% $6,758.2 6.21% 3.35%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid, of foreign
currency interest rate swaps that converted floating-rate debt to fixed rate
debt at December 31, 2003 ($ in million).
Foreign Currency Notional Amount Receive Rate Pay Rate Maturity Range
- ---------------- --------------- ------------ -------- --------------
Canadian Dollar ......................... $252.8 2.75% 6.21% 2004 -- 2009
Australian Dollar ....................... $ 48.9 5.45% 5.75% 2004 -- 2006
British Pound ........................... $ 16.9 3.83% 5.43% 2004
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
At December 31, 2003, CIT was party to foreign currency exchange forward
contracts and cross currency swaps. The following table presents the maturity
and notional principal amounts of foreign currency exchange forwards and cross
currency swaps at December 31, 2003 ($ in millions).
Notional Principal Amount
-----------------------------------
Maturity Years Ended Foreign Currency Cross-Currency
December 31, Exchange Forwards Swaps
- -------------------- ----------------- --------------
2004 ................................... $1,985.8 $ 135.5
2005 ................................... 440.7 1,082.3
2006 ................................... 56.7 57.5
2007 ................................... 103.0 14.7
2008 ................................... -- 348.6
2009 - Thereafter ...................... -- 134.3
-------- --------
Total ................................ $2,586.2 $1,772.9
======== ========
23
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10 -- Accumulated Other Comprehensive Loss
The following table details the December 31, 2003, December 31, 2002 and
September 30, 2002 components of accumulated other comprehensive loss, net of
tax ($ in millions):
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Changes in fair values of derivatives qualifying as cash
flow hedges ........................................................ $ (41.3) $(118.3) $(120.5)
Foreign currency translation adjustments ........................... (105.8) (75.6) (75.8)
Minimum pension liability adjustments .............................. (0.8) (20.5) (21.0)
Unrealized gain on equity and securitization investments ........... 6.3 13.7 21.0
------- ------- -------
Total accumulated other comprehensive loss ...................... $(141.6) $(200.7) $(196.3)
======= ======= =======
Note 11 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 17.4 million shares for the year ended December 31, 2003.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the year ended December 31, 2003 ($ in millions,
except per share amounts and shares, which are in whole dollars and thousands,
respectively).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
Income available to common
stockholders ................. $566.9 211,681 $2.68
Effect of Dilutive Securities:
Restricted shares .............. -- 396 --
Stock options .................. -- 1,066 --
------ -------
Diluted EPS ....................... $566.9 213,143 $2.66
====== =======
The following table summarizes the earnings per share amounts for the
three months ended December 31, 2002, year ended September 30, 2002, and the
periods June 2 through September 30, 2001, and January 1 through June 1, 2001,
assuming that the shares outstanding at September 30, 2002 were outstanding for
all historical periods ($ in millions, except per share amounts).
Net (Loss) Diluted
Income Basic EPS(1) EPS(1)
---------- ------------ -------
Three months ended December 31, 2002
(successor) ............................. $ 141.3 $ 0.67 $ 0.67
Year ended September 30, 2002
(successor) ............................. $(6,698.7) $(31.66) $(31.66)
June 2 through September 30, 2001
(successor) ............................. $ 182.8 $ 0.86 $ 0.86
January 1 through June 1, 2001
(predecessor) ........................... $ 80.5 $ 0.38 $ 0.38
- --------------------------------------------------------------------------------
(1) Based on 211.6 million and 211.8 million shares for basic and diluted EPS
for the three months ended December 31, 2002 and 211.6 million and 211.7
million shares for basic and diluted EPS for all prior periods.
24
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12 -- Common Stock
The following table summarizes changes in common stock outstanding for the
respective periods:
Common Stock
----------------------------------------
Issued Less Treasury Outstanding
----------- ------------- -----------
Balance at September 30, 2002 ....... 211,573,200 -- 211,573,200
Activity for the three months ended
December 31, 2002 ................ -- -- --
----------- -------- -----------
Balance at December 31, 2002 ........ 211,573,200 -- 211,573,200
Treasury shares purchased ........... -- (913,886) (913,886)
Stock options exercised ............. -- 870,357 870,357
Restricted shares issued ............ 275,797 -- 275,797
----------- -------- -----------
Balance at December 31, 2003 ........ 211,848,997 (43,529) 211,805,468
=========== ======== ===========
Note 13 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Fees and other income ................ $586.2 $169.2 $644.5 $212.3 $174.9
Factoring commissions ................ 189.8 55.1 165.5 50.7 61.2
Gains on securitizations ............. 100.9 30.5 149.0 59.0 38.7
Gains on sales of leasing equipment .. 70.7 8.7 13.6 14.2 33.7
Other charges(1) ..................... -- -- -- -- (78.1)
------ ------ ------ ------ ------
Total .............................. $947.6 $263.5 $972.6 $336.2 $230.4
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) Write-downs of $78.1 million were recorded for certain equity investments
in the telecommunications industry and e-commerce markets, including $19.6
million relating to venture capital investments.
Note 14 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Year Three June 2 January 1
Ended Months Ended Year Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Salaries and employee benefits .... $529.6 $126.8 $517.4 $204.7 $262.0
Other operating expenses-- CIT .... 412.7 115.3 406.0 134.2 184.0
Other operating expenses-- TCH .... -- -- 23.0 9.6 --
------ ------ ------ ------ ------
Total ........................... $942.3 $242.1 $946.4 $348.5 $446.0
====== ====== ====== ====== ======
25
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows:
Percentage of Pretax Income
------------------------------------------------------------------------
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Federal income tax rate ............. 35.0% 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes, net of
federal income tax benefit ........ 3.7 2.6 (0.3) 2.2 2.2
Foreign income taxes ................ 1.0 1.6 (0.4) 2.2 2.2
Goodwill impairment ................. -- -- (36.1) -- --
Interest expense-- TCH .............. -- -- (4.2) -- --
Goodwill amortization ............... -- -- -- 6.2 7.8
Other ............................... (0.7) (0.2) 0.1 0.2 2.6
------- ------- -------- -------- --------
Effective tax rate .................. 39.0% 39.0% (5.9)% 45.8% 49.8%
======= ======= ======== ======== ========
The provision for income taxes is comprised of the following ($ in
millions):
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------------
(successor) (successor) (successor) (successor) (predecessor)
Current federal income
tax provision ................... $ -- $ -- $ -- $ -- $ --
Deferred federal income
tax provision ................... 265.1 71.9 276.9 113.6 63.7
------ ----- ------ ------ -----
Total federal income taxes ........ 265.1 71.9 276.9 113.6 63.7
State and local income taxes ...... 53.5 9.4 30.4 11.7 5.7
Foreign income taxes .............. 46.4 10.7 66.7 32.1 15.4
------ ----- ------ ------ -----
Total provision for income taxes $365.0 $92.0 $374.0 $157.4 $84.8
====== ===== ====== ====== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities are presented below
($ in millions).
December 31, December 31, September 30,
2003 2002 2002
----------- ----------- -------------
(successor) (successor) (successor)
Assets:
Net operating loss carryforwards .............. $ 834.1 $ 849.9 $ 834.4
Provision for credit losses ................... 202.4 254.8 282.1
Alternative minimum tax credits ............... 142.0 142.0 142.0
Purchase price adjustments .................... 67.9 176.9 207.7
Goodwill ...................................... 65.6 91.5 98.4
Other comprehensive income items .............. 47.6 84.3 86.0
Accrued liabilities and reserves .............. 43.8 46.5 59.9
Other ......................................... 14.1 -- --
--------- --------- ---------
Total deferred tax assets .................. 1,417.5 1,645.9 1,710.5
--------- --------- ---------
Liabilities:
Leasing transactions .......................... (1,311.7) (1,189.6) (1.215.6)
Securitization transactions ................... (633.0) (614.4) (590.0)
Market discount income ........................ -- (1.4) (1.5)
--------- --------- ---------
Total deferred tax liabilities ............. (1,944.7) (1,805.4) (1,807.1)
--------- --------- ---------
Net deferred tax (liability) .................. $ (527.2) $ (159.5) $ (96.6)
========= ========= =========
26
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The presentation of deferred tax assets and liabilities in prior years has
been modified to reflect amounts included on completed and amended income tax
returns. At December 31, 2003, CIT was continuing to develop an analysis of
deferred tax assets and liabilities. Future income tax return filings and the
completion of the aforementioned analysis of deferred tax assets and liabilities
could result in reclassifications to the deferred tax assets and liabilities
shown in the preceding table.
At December 31, 2003, CIT had U.S. federal net operating losses of
approximately $1,973.7 million, which expire in various years beginning in 2011.
In addition, CIT has various state net operating losses that will expire in
various years beginning in 2004. Federal and state net operating losses may be
subject to annual use limitations under section 382 of the Internal Revenue Code
of 1986, as amended, and other limitations under certain state laws. Management
believes that CIT will have sufficient taxable income in future years and can
avail itself of tax planning strategies in order to fully utilize these losses.
Accordingly, CIT does not believe a valuation allowance is required with respect
to these net operating losses.
Note 16 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
CIT has a number of funded and unfunded noncontributory defined benefit
pension plans covering certain of its U.S. and non-U.S. employees, designed in
accordance with conditions and practices in the countries concerned. The
retirement benefits under the defined benefit pension plans are based on the
employee's age, years of service and qualifying compensation. CIT's funding
policy is to make contributions to the extent such contributions are not less
than the minimum required by applicable laws and regulations, are consistent
with our long-term objective of ensuring sufficient funds to finance future
retirement benefits, and are tax deductible as actuarially determined. CIT made
cash contributions of $69.4 million to its pension plans for the year ended
December 31, 2003. Contributions are charged to the salaries and employee
benefits expense on a systematic basis over the expected average remaining
service period of employees expected to receive benefits.
The largest plan is the CIT Group Inc. Retirement Plan (the "Plan"), which
accounts for 77% of the total benefit obligation at December 31, 2003. The Plan
covers U.S. employees of CIT who have completed one year of service and have
attained the age of 21. The Company also maintains a Supplemental Retirement
Plan for employees whose benefit in the Plan is subject to Internal Revenue Code
limitations.
The Plan has a "cash balance" formula that became effective January 1,
2001. Certain eligible members had the option of remaining under the Plan
formula as in effect prior to January 1, 2001. Under the cash balance formula,
each member's accrued benefits as of December 31, 2000 were converted to a lump
sum amount, and every year thereafter, the balance is credited with a percentage
(5% to 8% depending on years of service) of the member's "Benefits Pay"
(comprised of base salary, plus certain annual bonuses, sales incentives and
commissions). These balances also receive annual interest credits, subject to
certain government limits. The interest credit was 5.01% and 5.76% for the plan
years ended December 31, 2003 and 2002, respectively. Upon termination or
retirement after five years of employment, the amount credited to a member is to
be paid in a lump sum or converted into an annuity at the option of the member.
CIT also provides certain healthcare and life insurance benefits to
eligible retired U.S. employees. The healthcare benefit is contributory for
eligible retirees; the life insurance benefit is noncontributory. Salaried
participants generally become eligible for retiree healthcare benefits after
reaching age 55 with 11 years of continuous CIT service immediately prior to
retirement. Generally, the medical plan pays a stated percentage of most medical
expenses, reduced by a deductible as well as by payments made by government
programs and other group coverage. The retiree health care benefit includes a
limit on CIT's share of costs for all employees who retired after January 31,
2002. The plans are funded on a pay as you go basis.
CIT uses its disclosure date as the measurement date for all Retirement
and Postretirement Medical and Life Insurance Benefit Plans. The measurement
dates included in this report for the Retirement and Postretirement Medical and
Life Insurance Plans are December 31, 2003, December 31, 2002, and September 30,
2002.
27
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the change in benefit obligation, plan
assets and funded status of the retirement plans as well as the net periodic
benefit cost ($ in millions). All periods presented include amounts and
assumptions relating to the Plan, the unfunded Supplemental Retirement Plan, an
Executive Retirement Plan and various international plans.
Retirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period .................. $225.2 $ 214.4 $184.4
Service cost ............................................... 15.6 4.0 12.6
Interest cost .............................................. 14.4 3.5 13.0
Actuarial loss ............................................. 23.9 6.2 15.6
Benefits paid .............................................. (4.6) (1.1) (4.2)
Plan settlements and curtailments .......................... (4.5) (2.3) (7.6)
Currency translation adjustment ............................ 2.2 0.5 0.6
Other ...................................................... 0.8 -- --
------ ------- ------
Benefit obligation at end of period ........................ $273.0 $ 225.2 $214.4
====== ======= ======
Change in Plan Assets
Fair value of plan assets at beginning of period ........... $123.1 $ 119.6 $126.5
Actual return on plan assets ............................... 28.7 6.1 (12.7)
Employer contributions ..................................... 69.4 0.6 16.9
Plan settlements ........................................... (4.5) (2.3) (7.1)
Benefits paid .............................................. (4.6) (1.1) (4.2)
Currency translation adjustment ............................ 0.7 0.2 0.2
------ ------- ------
Fair value of plan assets at end of period ................. $212.8 $ 123.1 $119.6
====== ======= ======
Reconciliation of Funded Status
Funded status .............................................. $(60.2) $(102.1) $(94.8)
Unrecognized net actuarial loss ............................ 57.8 56.5 54.7
Unrecognized prior service cost ............................ -- -- --
------ ------- ------
Net amount recognized ...................................... $ (2.4) $ (45.6) $(40.1)
====== ======= ======
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost ....................................... $ 45.2 $ -- $ --
Accrued benefit liability .................................. (48.9) (79.2) (75.0)
Intangible asset ........................................... -- -- --
Accumulated other comprehensive income ..................... 1.3 33.6 34.9
------ ------- ------
Net amount recognized ...................................... $ (2.4) $ (45.6) $(40.1)
====== ======= ======
Weighted-average Assumptions Used to Determine Benefit
Obligations at Period End
Discount rate .............................................. 5.96% 6.45% 6.68%
Rate of compensation increase .............................. 4.26% 4.24% 4.22%
Weighted-average Assumptions Used to Determine
Net Periodic Pension Cost for Periods
Discount rate .............................................. 6.45% 6.68% 7.40%
Rate of compensation increase .............................. 4.24% 4.22% 4.70%
Expected long-term return on plan assets ................... 7.92% 7.90% 9.93%
Components of Net Periodic Benefit Cost
Service cost ............................................... $ 15.6 $ 4.0 $ 12.6
Interest cost .............................................. 14.4 3.5 13.0
Expected return on plan assets ............................. (9.4) (2.3) (11.9)
Amortization of net loss ................................... 3.5 0.8 0.3
Amortization of prior service cost ......................... -- -- --
------ ------- ------
Total net periodic expense ................................. $ 24.1 $ 6.0 $ 14.0
====== ======= ======
28
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected long-term rate of return assumptions for pension assets are based
on projected asset allocation and historical and expected future returns for
each asset class. Independent analysis of historical and projected asset class
returns, inflation and interest rates are provided by our investment consultants
and reviewed as part of the process to develop our assumptions.
The accumulated benefit obligation for all defined benefit pension plans
was $232.4 million, $193.0 million, and $184.6 million at December 31, 2003,
December 31, 2002, and September 30, 2002, respectively.
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Information for Pension Plans with an Accumulated
Benefit Obligation in Excess of Plan Assets
Projected benefit obligation ........................................ $ 61.2 $225.2 $214.4
Accumulated benefit obligation ...................................... 47.4 193.0 184.6
Fair value of plan assets ........................................... 7.1 123.1 119.6
Additional Information
(Decrease) increase in Minimum Liability Included in
Other Comprehensive Income ....................................... $(32.3) $ (1.3) $ 34.9
Pension Plan Weighted-average Asset Allocations
Equity securities ................................................... 67.6% 61.1% 58.2%
Debt securities ..................................................... 32.1% 38.6% 41.7%
Real estate ......................................................... -- -- --
Other ............................................................... 0.3% 0.3% 0.1%
------ ------ ------
Total pension assets ................................................ 100.0% 100.0% 100.0%
====== ====== ======
CIT maintains a "Statement of Investment Policies and Objectives" that
specifies investment guidelines pertaining to the investment, supervision and
monitoring of pension assets to ensure consistency with the long-term objective
of ensuring sufficient funds to finance future retirement benefits. The policy
asset allocation guidelines allows for assets to be allocated between 50% to 70%
in Equities and 30% to 50% in Fixed-Income investments. CIT expects the actual
Equity and Fixed Income allocation to approximate the "neutral" or mid-point of
the policy ranges over the long-term. The guidelines provide specific guidance
related to asset class objectives, fund manager guidelines and identification of
both prohibited and restricted transactions, and are reviewed on a periodic
basis by the Employee Benefit Plans Committee of CIT to ensure the long-term
investment objectives are achieved. Members of the Committee are appointed by
the Chief Executive Officer of CIT and include the Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, General Counsel, and other
senior executives.
There was no CIT common stock included in the pension plan assets at
December 31, 2003, December 31, 2002, or September 30, 2002.
CIT expects to contribute $3.8 million to its pension plans and $3.6
million to its other postretirement benefit plans in 2004.
29
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period ........................... $ 48.1 $ 46.7 $ 39.5
Service cost ........................................................ 1.5 0.3 1.2
Interest cost ....................................................... 3.0 0.8 2.9
Actuarial loss ...................................................... 9.6 0.8 5.3
Net benefits paid ................................................... (4.2) (0.5) (2.2)
Plan amendments ..................................................... -- -- --
------ ------ ------
Benefit obligation at end of period ................................. $ 58.0 $ 48.1 $ 46.7
====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period .................... $ -- $ -- $ --
Net benefits paid ................................................... (4.2) (0.5) (2.2)
Employer contributions .............................................. 4.2 0.5 2.2
------ ------ ------
Fair value of plan assets at end of period .......................... $ -- $ -- $ --
====== ====== ======
Reconciliation of Funded Status
Funded status ....................................................... $(58.0) $(48.1) $(46.7)
Unrecognized net actuarial loss ..................................... 15.5 6.0 5.2
------ ------ ------
Accrued cost ........................................................ $(42.5) $(42.1) $(41.5)
------ ------ ------
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost ................................................ $ -- $ -- $ --
Accrued benefit liability ........................................... (42.5) (42.1) (41.5)
Intangible asset .................................................... -- -- --
Accumulated other comprehensive income .............................. -- -- --
------ ------ ------
Net amount recognized ............................................... $(42.5) $(42.1) $(41.5)
====== ====== ======
Weighted-average Assumptions Used to Determine
Benefit Obligations at Period End
Discount rate ....................................................... 6.00% 6.50% 6.75%
Rate of compensation increase ....................................... 4.25% 4.25% 4.25%
Weighted-average Assumptions Used to Determine Net
Periodic Benefit Cost for periods
Discount rate ....................................................... 6.50% 6.75% 7.50%
Rate of compensation increase ....................................... 4.25% 4.25% 4.50%
Components of Net Periodic Benefit Cost
Service cost ........................................................ $ 1.5 $ 0.3 $ 1.2
Interest cost ....................................................... 3.0 0.8 2.9
Amortization of prior service cost .................................. -- -- --
Amortization of net loss ............................................ 0.1 -- 0.1
------ ------ ------
Total net periodic expense .......................................... $ 4.6 $ 1.1 $ 4.2
====== ====== ======
For the period ended December 31, 2003, the assumed health care cost trend
rates decline for all retirees to an ultimate level of 5.00% in 2018; for the
period ended December 31 2002, 5.00% in 2008; and for the period ended September
30, 2002, 5.00% in 2008.
30
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------ ------------ -------------
Assumed Health Care Trend Rates at Period End
Health care cost trend rate assumed for next year ............... 12.00% 10.00% 11.00%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) ............................ 5.00% 5.00% 5.00%
Year that the rate reaches the ultimate trend rate .............. 2018 2008 2008
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following estimated effects
($ in millions).
Postretirement Benefits
------------------------------------------
Year Three Months Year
Ended Ended Ended
December 31, December 31, September 30,
2003 2002 2002
------------------------------------------
Effect of One-percentage Point Increase on:
Period end postretirement benefit obligation ..................... $ 2.7 $ 2.3 $ 2.2
Total of service and interest
cost components ............................................... $ 0.1 $ -- $ 0.1
Effect of One-percentage Point Decrease on:
Period end postretirement benefit obligation ..................... $(2.6) $(2.2) $(2.1)
Total of service and interest cost components .................... $(0.1) $ -- $(0.1)
On December 8, 2003, the President of the United States signed into law
the Medicare Prescription Drug Improvement and Modernization Act of 2003. The
Act introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003", any measures of the accumulated postretirement
benefit obligation or net periodic postretirement benefit cost in the financial
statements or accompanying notes do not reflect the effects of the act. Specific
authoritative guidance on the accounting for the federal subsidy is pending and
that guidance, when issued, could require CIT to change previously reported
information.
Savings Incentive Plan
CIT also has a number of defined contribution retirement plans covering
certain of its U.S. and non-U.S. employees, designed in accordance with
conditions and practices in the countries concerned. Employee contributions to
the plans are subject to regulatory limitations and the specific plan
provisions. The largest plan is the CIT Group Inc. Savings Incentive Plan, which
qualifies under section 401(k) of the Internal Revenue Code and accounts for 80%
of CIT's total Savings Incentive Plan expense for the year ended December 31,
2003. CIT's expense is based on specific percentages of employee contributions
and plan administrative costs and aggregated $16.9 million, $4.0 million, and
$14.5 million for the year ended December 31, 2003, the three months ended
December 31, 2002, and the year ended September 30, 2002, respectively.
Corporate Annual Bonus Plan
The CIT Group Inc. Annual Bonus Plan and Discretionary Bonus Plan together
make-up CIT's annual bonus plan. The amount of awards depends on a variety of
factors, including corporate performance and individual performance during the
fiscal period for which awards are made and is subject to approval by the
Compensation Committee of the Board of Directors. Bonus payments of $59.0
million for the year ended December 31, 2003, were paid in February 2004. A
bonus of $20.1 million for the six months performance period from July 1, 2002
31
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through December 31, 2002 was paid in February 2003. For the fiscal year ended
September 30, 2002, $25.1 million of bonuses were paid relative to the
nine-month performance period ended June 30, 2002. Certain senior executive
officers received a portion of their corporate bonuses in the form of restricted
stock based on the closing price of CIT shares on the date of approval.
Long-Term Equity Compensation Plan
CIT sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP
allows CIT to issue to employees up to 36,000,000 shares of common stock through
grants of annual incentive awards, incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares and performance
units. Of the 36,000,000 shares, no more than 5,000,000 shares may be issued in
connection with awards of restricted stock, performance shares and performance
units. Common stock issued under the ECP may be either authorized but unissued
shares, treasury shares or any combination thereof. All options granted to
employees in 2003 have a vesting schedule of one third per year for three years,
have a 10-year term from the date of grant and are issued with strike prices
equal to the fair market value of the common stock on the date of grant.
Restricted stock granted in 2003 has a three-year cliff vesting.
Data for the stock option plans is summarized as follows.
Year Ended Three Months Ended Year Ended
December 31, 2003 December 31, 2002 September 30, 2002
---------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Option Price Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share
------ ------------ ------ ------------ ------- ------------
Outstanding at beginning of period ... 15,335,255 $33.13 15,494,009 $33.15 -- --
January Grant ........................ 4,240,644 $21.05 -- -- -- --
July Grant ........................... 648,485 $27.74 -- -- -- --
Converted Tyco options ............... -- -- -- -- 4,808,585 $56.20
Granted -- IPO ....................... -- -- -- -- 10,823,631 $23.00
Granted -- other ..................... 485,625 $27.27 27,500 $20.14 52,258 $22.20
Exercised ............................ (870,357) $23.02 -- -- -- --
Forfeited ............................ (1,072,828) $34.25 (186,254) $32.16 (190,465) $35.50
---------- ------ ---------- ------ ---------- ------
Outstanding at end of period ......... 18,766,824 $30.48 15,335,255 $33.13 15,494,009 $33.15
========== ====== ========== ====== ========== ======
Options exercisable at end of period.. 6,730,863 $43.18 3,960,926 $59.19 4,020,790 $59.06
========== ====== ========== ====== ========== ======
In 2003, 4,889,129 options were granted to employees as part of the
long-term incentive process. In addition, 485,625 CIT options were granted to
new hires and employees returning from a leave of absence.
The weighted average fair value of new options granted in 2003 is $5.30
and $4.74 for the three month period ended December 31, 2002. The fair value of
new options granted was determined at the date of grant using the Black-Scholes
option-pricing model, based on the following assumptions. Due to limited Company
history as a public company, no forfeiture rate was used.
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2003
January, 2003 ......................... 3-5 years 2.28% 31.6% - 33.4% 2.11% - 3.00%
January, 2003 -- Director Grant ....... 10 Years 2.28% 28.2% 4.01%
March 2003 -- Other ................... 3-5 Years 2.65% 29.5% - 33.2% 2.12% - 2.97%
May, 2003 -- Director Grant ........... 10 Years 2.11% 28.2% 3.44%
July, 2003 ............................ 3-5 years 1.70% 29.3% - 31.0% 2.06% - 3.10%
July, 2003 -- Director Grant .......... 10 Years 1.70% 28.1% 4.20%
September, 2003 -- Other .............. 3-5 Years 1.70% 29.3% - 31.0% 2.62% - 3.61%
32
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2002
July, 2002 (Tyco replacement) ......... 3.6-5.6 years 2.09% 32.3% - 33.2% 3.43% - 4.11%
July, 2002 (IPO) ...................... 3-6 years 2.09% 32.3% - 33.2% 3.24% - 4.22%
July, 2002 (other) .................... 10 years 2.09% 27.8% 5.21%
August, 2002 (other) .................. 3-5 years 2.09% 32.5% - 33.2% 2.47% - 3.19%
August, 2002 (other) .................. 10 years 2.16% 27.8% 4.57%
November, 2002 (other) ................ 3-5 years 2.40% 32.4% - 33.4% 2.26% - 3.95%
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 2003 and 2002.
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ----------- -------------- ----------- --------------
2003
$18.14 - $27.21 ......... 13,343,619 8.7 $ 22.38 2,850,463 $ 22.98
$27.22 - $40.83 ......... 2,598,485 8.3 $ 32.93 1,055,680 $ 35.38
$40.84 - $61.26 ......... 899,290 5.9 $ 51.27 899,290 $ 51.27
$61.27 - $91.91 ......... 1,779,982 4.4 $ 68.90 1,779,982 $ 68.90
$91.92 - $137.87 ........ 143,858 4.1 $130.82 143,858 $130.82
$137.88 - $206.82 ........ 1,590 4.4 $160.99 1,590 $160.99
---------- ---------
Totals .............. 18,766,824 6,730,863
========== =========
2002
$19.25 - $33.30 ......... 10,654,783 9.5 $ 25.66 4,019 $ 23.00
$33.31 - $49.96 ......... 1,691,276 8.3 $ 37.02 967,711 $ 34.89
$49.97 - $74.95 ......... 2,763,934 5.8 $ 62.86 2,763,934 $ 62.86
$74.96 - $112.44 ........ 61,152 6.2 $ 88.37 61,152 $ 88.37
$112.45 - $168.67 ........ 164,110 5.1 $130.64 164,110 $130.64
---------- ---------
Totals .............. 15,335,255 3,960,926
========== =========
Employee Stock Purchase Plan
In October 2002, CIT adopted an Employee Stock Purchase Plan (the "ESPP")
for all employees customarily employed at least 20 hours per week. The ESPP is
available to employees in the United States and to certain international
employees. Under the ESPP, CIT is authorized to issue up to 1,000,000 shares of
common stock to eligible employees. Employees can choose to have between 1% and
10% of their base salary withheld to purchase shares quarterly, at a purchase
price equal to 85% of the fair market value of CIT common stock on either the
first business day or the last business day of the quarterly offering period,
whichever is lower. The amount of common stock that may be purchased by a
participant through the plan is generally limited to $25,000 per year. A total
of 88,323 shares were purchased under the plan in 2003.
Restricted Stock
In 2003, CIT issued 1,229,450 restricted shares to employees under the
Long-Term Equity Compensation Plan. These shares were issued at the fair market
value on the date of the grant and have a three-year cliff-vest period. In
addition, 6,488 shares were granted to outside members of the Board of
Directors, who elected to receive shares in lieu of cash compensation for their
retainer. These restricted shares vest on the first anniversary of the grant.
For the year ended December 31, 2003, three months ended December 31, 2002 and
year ended September 30, 2002, $8.8 million, $1.2 million and $5.2 million,
respectively, of expenses are included in salaries and general operating
expenses on the consolidated statements of income.
33
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including standby letters of
credit, which obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. In the event that the customer is unable to pay
according to the contractual terms, then the receivables would be purchased. As
of December 31, 2003, there were no outstanding liabilities relating to these
credit-related commitments or guarantees, as amounts are generally billed and
collected on a monthly basis.
The accompanying table summarizes the contractual amounts of
credit-related commitments. The reduction in guarantees outstanding from
December 31, 2002 reflects the transition to on-balance sheet with respect to
certain factoring products, which are included in credit balances of factoring
clients in the CIT consolidated balance sheet ($ in millions).
At At
December 31, September 30,
December 31,2003 2002 2002
------------------------------- ------------ -------------
Due to Expire
-------------------
Within After Total Total Total
One Year One Year Outstanding Outstanding Outstanding
-------- --------- ----------- ----------- -----------
Financing and leasing assets .................... $1,611.5 $4,322.8 $5,934.3 $3,618.9 $3,075.8
Letters of credit and acceptances:
Standby letters of credit ....................... 506.1 2.6 508.7 519.8 469.0
Other letters of credit ......................... 621.2 72.8 694.0 583.3 641.8
Acceptances ..................................... 9.3 -- 9.3 5.6 8.4
Guarantees ...................................... 120.7 12.5 133.2 745.8 724.5
Venture capital fund commitments ................ -- 124.2 124.2 164.9 176.6
Venture capital direct investment commitments ... -- -- -- 4.4 4.4
As of December 31, 2003, commitments to purchase commercial aircraft from
both Airbus Industrie and The Boeing Company are detailed below ($ in millions).
Calendar Year: Amount Number
- -------------- ------ ------
2004 .............................................. $ 634.0 15
2005 .............................................. 952.0 20
2006 .............................................. 1,088.0 21
2007 .............................................. 260.0 5
-------- --
Total ............................................. $2,934.0 61
======== ==
The order amounts exclude CIT's options to purchase additional aircraft.
Lease commitments are in place for twelve of the fifteen units to be delivered
in 2004.
Outstanding commitments to purchase equipment, other than the aircraft
detailed above, totaled $197.2 million at December 31, 2003. CIT is party to a
railcar sale-leaseback transaction under which it is obligated to pay a
remaining total of $486.4 million, approximately $28 million per year through
2010 and declining thereafter
34
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through 2024, which is more than offset by CIT's re-lease of the assets,
contingent on its ability to maintain railcar usage. In conjunction with this
sale-leaseback transaction, CIT has guaranteed all obligations of the related
consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
27 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies. In addition, CIT has guaranteed, on behalf of certain
non-consolidated subsidiaries, $11.9 million of third party debt, which is not
reflected in the consolidated balance sheet at December 31, 2003.
Note 18 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at December 31, 2003 ($ in
millions).
Years Ended December 31, Amount
- ------------------------ ------
2004 .................................................. $ 53.2
2005 .................................................. 38.3
2006 .................................................. 28.6
2007 .................................................. 20.7
2008 .................................................. 9.0
Thereafter ............................................ 14.9
------
Total ............................................... $164.7
======
In addition to fixed lease rentals, leases generally require payment of
maintenance expenses and real estate taxes, both of which are subject to rent
escalation provisions. Minimum payments have not been reduced by minimum
sublease rentals of $32.8 million due in the future under noncancellable
subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
Year Three Year June 2 January 1
Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------- -------
(successor) (successor) (successor) (successor) (predecessor)
Premises .................... $ 34.0 $ 9.2 $38.4 $14.8 $19.0
Equipment ................... 9.3 2.1 8.4 3.0 3.7
Less sublease income ........ (9.4) (1.8) (9.0) (2.7) (3.4)
------ ----- ----- ----- -----
Total ..................... $ 33.9 $ 9.5 $37.8 $15.1 $19.3
====== ===== ===== ===== =====
Note 19 -- Fair Values of Financial Instruments
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the estimated fair value of CIT's financial instruments,
excluding leasing transactions accounted for under SFAS 13. The fair value
estimates are made at a discrete point in time based on relevant market
information and information about the financial instrument, assuming adequate
market liquidity. Because no established trading market exists for a significant
portion of CIT's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involving uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations, management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.
35
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Actual fair values in the marketplace are affected by other significant
factors, such as supply and demand, investment trends and the motivations of
buyers and sellers, which are not considered in the methodology used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing financial instruments without attempting to estimate the
value of future business transactions and the value of assets and liabilities
that are part of CIT's overall value but are not considered financial
instruments. Significant assets and liabilities that are not considered
financial instruments include customer base, operating lease equipment, premises
and equipment, assets received in satisfaction of loans, and deferred tax
balances. In addition, tax effects relating to the unrealized gains and losses
(differences in estimated fair values and carrying values) have not been
considered in these estimates and can have a significant effect on fair value
estimates. The carrying amounts for cash and cash equivalents approximate fair
value because they have short maturities and do not present significant credit
risks. Credit-related commitments, as disclosed in Note 17 -- "Commitments and
Contingencies", are primarily short-term floating-rate contracts whose terms and
conditions are individually negotiated, taking into account the creditworthiness
of the customer and the nature, accessibility and quality of the collateral and
guarantees. Therefore, the fair value of credit-related commitments, if
exercised, would approximate their contractual amounts.
36
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments are set forth below ($ in millions).
December 31, 2003 December 31, 2002 September 30, 2002
Asset/(Liability) Asset/(Liability) Asset/(Liability)
------------------------ ------------------------ ------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
----------- ----------- ----------- ----------- ----------- -----------
Finance receivables-loans(1) .... $24,620.1 $24,711.3 $ 20,450.9 $ 20,608.0 $ 21,065.3 $ 21,218.0
Finance receivables
held for sale ................ 918.3 918.3 1,213.4 1,213.4 1,019.5 1,019.5
Retained interests in
securitizations(2) ........... 1,380.8 1,380.8 1,451.4 1,451.4 1,410.4 1,410.4
Other assets(3) ................. 1,287.8 1,287.8 1,322.4 1,322.4 1,337.4 1,337.4
Commercial paper(4) ............. (4,173.9) (4,173.9) (4,974.6) (4,974.6) (4,654.2) (4,654.2)
Fixed-rate senior notes and
subordinated fixed-rate
notes(5) ..................... (20,123.7) (20,291.6) (19,952.5) (20,621.3) (18,718.8) (18,844.7)
Variable-rate bank credit
facilities(5) ................ -- -- (2,118.0) (2,118.0) (4,040.0) (4,040.0)
Variable-rate senior notes(5) ... (9,428.9) (9,440.5) (4,917.6) (4,893.1) (5,392.4) (5,361.5)
Credit balances of factoring
clients and other
liabilities(5)(6) ............ (6,318.7) (6,318.7) (4,586.9) (4,586.9) (4,682.1) (4,682.1)
Preferred capital securities(7).. (263.0) (286.4) (257.2) (273.4) (257.7) (262.7)
Derivative financial
instruments:(8)
Interest rate swaps, net ........ (36.1) (36.1) (60.5) (60.5) (16.3) (16.3)
Cross-currency swaps, net ....... 254.3 254.3 145.8 145.8 142.2 142.2
Foreign exchange
forwards, net ................ (216.0) (216.0) (95.4) (95.4) (43.3) (43.3)
- --------------------------------------------------------------------------------
(1) The fair value of performing fixed-rate loans was estimated based upon a
present value discounted cash flow analysis, using interest rates that were
being offered at the end of the year for loans with similar terms to
borrowers of similar credit quality. Discount rates used in the present
value calculation range from 4.63% to 7.36% for December 31, 2003, 4.78% to
7.75% for December 31, 2002 and 4.91% to 7.52% for September 30, 2002. The
maturities used represent the average contractual maturities adjusted for
prepayments. For floating-rate loans that reprice frequently and have no
significant change in credit quality, fair value approximates carrying
value. The net carrying value of lease finance receivables not subject to
fair value disclosure totaled $6.0 billion at December 31, 2003, $6.4
billion at December 31, 2002 and $6.6 billion at September 30, 2002.
(2) Fair values of retained interests in securitizations are calculated
utilizing current and anticipated credit losses, prepayment speeds and
discount rates. Other investment securities actively traded in a secondary
market were valued using quoted available market prices.
(3) Other assets subject to fair value disclosure include accrued interest
receivable, certain investment securities and miscellaneous other assets.
The carrying amount of accrued interest receivable approximates fair value.
The carrying value of other assets not subject to fair value disclosure
totaled $2,022.5 at December 31, 2003, $1,959.1 million at December 31,
2002 and $2,035.8 million at September 30, 2002.
(4) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(5) The carrying value of fixed-rate senior notes and subordinated fixed-rate
notes includes $292.9 million, $270.6 million and $333.4 million of
accrued interest at December 31, 2003, December 31, 2002 and September 30,
2002, respectively. The carrying value of variable-rate bank credit
facilities includes $2.6 million of accrued interest at September 30,
2002. Accrued interest was negligible at December 31, 2002. The
variable-rate senior notes include $20.5 million, $10.7 million and $13.4
million of accrued interest at December 31, 2003, December 31, 2002, and
September 30, 2002, respectively. These amounts are excluded from the
other liabilities balances in this table. Fixed-rate notes were valued
using a present value discounted cash flow analysis with a discount rate
approximating current market rates for issuances by CIT of similar term
debt at the end of the year. Discount rates used in the present value
calculation ranged from 1.54% to 6.32% at December 31, 2003, 1.65% to
6.02% at December 31, 2002; and 2.23% to 7.61% at September 30, 2002.
(6) The estimated fair value of credit balances of factoring clients
approximates carrying value due to their short settlement terms. Other
liabilities include accrued liabilities and deferred federal income taxes.
Accrued liabilities and payables with no stated maturities have an
estimated fair value that approximates carrying value. The carrying value
of other liabilities not subject to fair value disclosure totaled $601.4
million, $255.0 million and $207.5 million at December 31, 2003, December
31, 2002 and September 30, 2002, respectively.
(7) Preferred capital securities were valued using a present value discounted
cash flow analysis with a discount rate approximating current market rates
of similar issuances at the end of the year, and includes $7.5 million of
accrued interest at December 31, 2003.
(8) CIT enters into derivative financial instruments for hedging purposes only.
The estimated fair values are calculated internally using market data and
represent the net amount receivable or payable to terminate the agreement,
taking into account current market rates. See Note 9 -- "Derivative
Financial Instruments" for notional principal amounts associated with the
instruments.
37
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20 -- Certain Relationships and Related Transactions
CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P.
("DFS"), a joint venture that offers financing to Dell customers. The joint
venture provides Dell with financing and leasing capabilities that are
complementary to its product offerings and provides CIT with a steady source of
new financings. CIT acquired this relationship through an acquisition during
November 1999, and the current agreement extends until October 2005. CIT
regularly purchases finance receivables from DFS at a premium, portions of which
are typically securitized within 90 days of purchase from DFS. CIT has limited
recourse to DFS on defaulted contracts. In accordance with the joint venture
agreement, net income generated by DFS as determined under U.S. GAAP is
allocated 70% to Dell and 30% to CIT, after CIT has recovered any cumulative
losses. The DFS board of directors voting representation is equally weighted
between designees of CIT and Dell with one independent director. Any losses
generated by DFS as determined under U.S. GAAP are allocated to CIT. DFS is not
consolidated in CIT's December 31, 2003 financial statements and is accounted
for under the equity method. At December 31, 2003, financing and leasing assets
originated by DFS and purchased by CIT (included in the CIT Consolidated Balance
Sheet) were $1.4 billion and securitized assets included in managed assets were
$2.5 billion. In addition to the owned and securitized assets acquired from DFS,
CIT's maximum exposure to loss with respect to activities of the joint venture
is approximately $205 million pretax at December 31, 2003, which is comprised of
the investment in and loans to the joint venture.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. CIT
acquired this relationship through an acquisition during November 1999. The
agreement with Snap-on extends until January 2007. CIT and Snap-on have 50%
ownership interests, 50% board of directors representation and share income and
losses equally. The Snap-on joint venture is accounted for under the equity
method and is not consolidated in CIT's financial statements. As of December 31,
2003, the related financing and leasing assets and securitized assets were $1.1
billion and $0.1 billion, respectively. In addition to the owned and securitized
assets purchased from the Snap-on joint venture, CIT's maximum exposure to loss
with respect to activities of the joint venture is approximately $17 million
pretax at December 31, 2003, which is comprised of the investment in and loans
to the joint venture.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based
lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint
venture and share income and losses equally. This entity is not consolidated in
CIT's financial statements and is accounted for under the equity method. As of
December 31, 2003, CIT's maximum exposure to loss with respect to activities of
the joint venture is $119 million pretax, which is comprised of the investment
in and loans to the joint venture.
CIT invests in various trusts, partnerships, and limited liability
corporations established in conjunction with structured financing transactions
of equipment, power and infrastructure projects. CIT's interests in certain of
these entities were acquired by CIT in November 1999, and others were
subsequently entered into in the normal course of business. At December 31,
2003, other assets included $21 million of investments in non-consolidated
entities relating to such transactions that are accounted for under the equity
or cost methods. This investment is CIT's maximum exposure to loss with respect
to these interests as of December 31, 2003.
As of December 31, 2003, CIT bought receivables totaling $350.0 million
from certain subsidiaries of Tyco in a factoring transaction on an arms-length
basis. CIT and Tyco engaged in similar factoring transactions, the highest
amount of which was $384.4 million, at various times during Tyco's ownership of
CIT.
Certain shareholders of CIT provide investment management services in
conjunction with employee benefit plans. These services are provided in the
normal course of business.
38
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21 -- Business Segment Information
Management's Policy in Identifying Reportable Segments
CIT's reportable segments are comprised of strategic business units
aggregated into segments based upon the core competencies relating to product
origination, distribution methods, operations and servicing, and the nature of
their regulatory environment. This segment reporting is consistent with the
presentation to management.
Types of Products and Services
CIT has four reportable segments: Specialty Finance, Commercial Finance,
Equipment Finance and Capital Finance. These segments, other than Commercial
Finance, offer secured lending and leasing products to midsize and larger
companies across a variety of industries, including aerospace, construction,
rail, machine tool, business aircraft, technology, manufacturing and
transportation. The Commercial Finance segment offers secured lending and
receivables collection as well as other financial products to small and midsize
companies. These include secured revolving lines of credit and term loans,
credit protection, accounts receivable collection, import and export financing
and factoring, debtor-in-possession and turnaround financing. The Specialty
Finance segment also offers home equity products to consumers primarily through
a network of brokers and correspondents.
Segment Profit and Assets
Because CIT generates a majority of its revenue from interest, fees and
asset sales, management relies primarily on operating revenues to assess the
performance of a segment. CIT also evaluates segment performance based on profit
after income taxes, as well as asset growth, credit risk management and other
factors.
Segment reporting was modified, beginning in the quarter ended March 31,
2003, to reflect Equipment Finance and Capital Finance as separate segments.
Prior periods have been restated to conform to this current presentation.
Previously, these two strategic business units were combined as the Equipment
Financing and Leasing segment. This new presentation is consistent with
reporting to management. The business segments' operating margins and net income
for the year ended December 31, 2003 include the allocation (from Corporate and
Other) of additional borrowing costs stemming from the 2002 disruption to the
Company's funding base and increased liquidity levels. These additional
borrowing and liquidity costs had a greater impact in 2003 than in 2002 and were
included in Corporate and Other in 2002. Also, for the year ended December 31,
2003, Corporate and Other included an after-tax charge of $38.4 million related
to the write-down of equity investments, an after-tax benefit of $30.8 million
from a gain on a call of debt as well as unallocated expenses. During 2003, in
order to better align competencies, we transferred certain small business loans
and leases, including the small business lending unit, totaling $1,078.6 million
from Equipment Finance to Specialty Finance. Prior periods have not been
restated to conform to this current presentation.
The Corporate and Other segment included the following items in the year
ended September 30, 2002: (1) goodwill impairment of $6,511.7 million, (2)
provision for telecommunications of $200.0 million ($124.0 million after tax),
(3) Argentine provision of $135.0 million ($83.7 million after tax), (4) funding
costs of $85.9 million ($53.2 million after tax), and (5) unallocated corporate
operating items totaling $7.2 million pre-tax (income) or $3.9 million after
tax. For the 2001 periods shown in the table, the corporate segment included
funding costs and unallocated corporate operating expenses. Corporate segment
funding costs increased significantly in 2002 from 2001, reflecting management's
decision to not allocate to the business units the incremental costs of
borrowing and liquidity relating to the disruption to our funding base and
credit downgrades. Such 2002 additional costs included higher debt quality
spreads, use of bank line versus commercial paper borrowings, incremental cost
of liquidity facilities, and excess cash held to enhance liquidity. Although
management chose to not allocate these incremental costs because they were
viewed as relating to temporary conditions, costs have been allocated since
January 1, 2003. For all periods shown, Corporate and Other includes the results
of the venture capital business.
39
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated total managed assets. The selected financial
information by business segment presented below is based upon a fixed leverage
ratio across business units and the allocation of most corporate expenses. ($ in
millions)
Total Corporate
Specialty Commercial Equipment Capital Business and
Finance Finance Finance Finance Segments Other Consolidated
------- ------- ------- ------- -------- ----- ------------
At or for the Year Ended
December 31, 2003
Operating margin ............. $ 842.5 $ 578.8 $ 148.0 $ 214.4 $ 1,783.7 $ 16.1 $ 1,799.8
Income taxes ................. 166.8 156.8 24.6 46.4 394.6 (29.6) 365.0
Net income (loss)............. 260.9 245.0 38.5 72.6 617.0 (50.1) 566.9
Total financing and
leasing assets ............. 12,318.4 11,572.9 6,957.7 9,234.9 40,083.9 -- 40,083.9
Total managed assets ......... 18,743.9 11,572.9 10,183.9 9,234.9 49,735.6 -- 49,735.6
At or for the Three Months
Ended December 31, 2002
Operating margin ............. $ 216.8 $ 163.0 $ 64.7 $ 67.0 $ 511.5 $ (42.9) $ 468.6
Income taxes ................. 47.1 45.4 8.7 18.5 119.7 (27.7) 92.0
Net Income (loss)............. 73.7 71.0 13.4 29.1 187.2 (45.9) 141.3
Total financing and
leasing assets ............. 10,316.8 9,305.2 8,145.2 8,107.5 35,874.7 -- 35,874.7
Total managed assets ......... 16,863.0 9,305.2 12,081.4 8,107.5 46,357.1 -- 46,357.1
At or for the year ended
September 30, 2002
Operating margin ............. $ 932.1 $ 532.4 $ 378.7 $ 260.2 $ 2,103.4 $ (322.3) $ 1,781.1
Income taxes ................. 214.4 140.1 74.3 71.4 500.2 (126.2) 374.0
Net Income (loss)............. 349.8 228.5 121.1 116.5 815.9 (7,514.6) (6,698.7)
Total financing and
leasing assets ............. 10,119.4 10,079.9 8,398.8 7,789.5 36,387.6 -- 36,387.6
Total managed assets ......... 16,970.0 10,079.9 12,782.9 7,789.5 47,622.3 -- 47,622.3
At or for the Combined
Nine Months Ended
September 30, 2001
Operating margin ............. $ 649.4 $ 384.6 $ 398.6 $ 148.3 $ 1,580.9 $ (39.1) $ 1,541.8
Income taxes ................. 119.7 97.5 81.7 44.2 343.1 (100.9) 242.2
Net Income (loss)............. 196.7 154.5 130.6 110.6 592.4 (329.1) 263.3
Total financing and
leasing assets ............. 12,791.1 9,978.7 11,063.7 6,895.7 40,729.2 -- 40,729.2
Total managed assets ......... 18,474.2 9,978.7 15,528.5 6,895.7 50,877.1 -- 50,877.1
During the quarter ended June 30, 2004, 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 realignment,
approximately $1.3 billion of communications and media assets were transferred
to Commercial Finance. The table above has been revised from the historical
presentation to this new segment reporting structure.
Finance income and other revenues derived from United States based
financing and leasing assets were $3,695.2 million, $977.1 million, $4,284.8
million, and $3,718.7 million for the year ended December 31, 2003, the three
months ended December 31, 2002, the year ended September 30, 2002, and the nine
months ending September 30, 2001, respectively. Finance income and other
revenues derived from foreign based financing and leasing assets, were $944.0
million, $251.7 million, $990.3 million and $829.2 million for the year ended
December 31, 2003, the three months ended December 31, 2002, the year ended
September 30, 2002 and the nine months ended September 31, 2001, respectively.
Note 22 -- Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contained allegations that the
registration statement and prospectus prepared and filed in connection with
CIT's 2002 IPO were materially false and misleading, principally with respect to
the adequacy of CIT's telecommunications-related loan loss reserves at the time.
The lawsuit purported to have been brought on behalf of all those who purchased
CIT common stock in or traceable to the IPO, and sought, among other relief,
unspecified damages or rescission for those alleged class members who still hold
CIT stock and unspecified damages for other alleged class members. On June 25,
2003, by order of the United States District
40
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Court, the lawsuit was consolidated with five other substantially similar suits,
all of which had been filed after April 10, 2003 and one of which named as
defendants some of the underwriters in the IPO and certain former directors of
CIT. Glickenhaus & Co., a privately held investment firm, was named lead
plaintiff in the consolidated action.
On September 16, 2003, an amended and consolidated complaint was filed.
That complaint contains substantially the same allegations as the original
complaints. In addition to the foregoing, two similar suits were brought by
certain shareholders on behalf of CIT against CIT and some of its present and
former directors under Delaware corporate law.
CIT believes that the allegations in each of these actions are without
merit and that its disclosures were proper, complete and accurate. CIT intends
to vigorously defend itself in these actions.
In addition, there are various legal proceedings pending against CIT,
which have arisen in the ordinary course of business. Management believes that
the aggregate liabilities, if any, arising from such actions, including the
class action suit above, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Note 23 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $487.7 million, $400.9 million,
$402.0 million and $6,569.5 million at December 31, 2003, December 31, 2002,
September 30, 2002 and September 30, 2001, respectively. The Company
periodically reviews and evaluates its goodwill and other intangible assets for
potential impairment. Effective October 1, 2001, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill
is no longer amortized but instead is assessed for impairment at least annually.
As part of the adoption, the Company allocated its existing goodwill to each of
its reporting units as of October 1, 2001. Under the transition provisions of
SFAS 142, there was no goodwill impairment as of October 1, 2001.
During the quarter ended March 31, 2002, CIT's former parent, Tyco,
experienced disruptions to its business surrounding its announced break-up plan,
downgrades in its credit ratings, and a significant decline in its market
capitalization, which caused a disruption in the Company's ability to access
capital markets. As a result, management performed impairment analyses during
the quarters ended March 31, 2002 and June 30, 2002. These analyses resulted in
goodwill impairment charges of $4.513 billion and $1.999 billion for the
quarters ended March 31, 2002 and June 30, 2002, respectively. Management
performed a goodwill impairment analysis as of October 1, 2003, which indicated
that the fair value of goodwill was in excess of the carrying value. Therefore,
additional impairment charges were not necessary.
There were no changes in the carrying values of goodwill during the
transition period ended December 31, 2002. The changes in the carrying amount of
goodwill for the year ended December 31, 2003 were as follows ($ in millions):
Specialty Commercial
Finance Finance Total
--------- ----------- --------
Balance as of December 31, 2002 ......... $14.0 $370.4 $384.4
Severance reduction ..................... (1.3) -- (1.3)
----- ------ ------
Balance as of December 31, 2003 ......... $12.7 $370.4 $383.1
===== ====== ======
The downward revision to severance liabilities during the year ended
December 31, 2003 was related to Specialty Finance restructuring activities and
was recorded as a reduction to goodwill, as the severance liability was
established in conjunction with Tyco acquisition purchase accounting
adjustments.
Other intangible assets, comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
totaled $104.6 million, $16.5 million, $17.6 million and $22.0 million at
December 31, 2003 and 2002 and September 30, 2002 and 2001, respectively, and
are included in Goodwill and Intangible Assets on the Consolidated Balance
Sheets. The increase in other intangible assets during the year ended December
31, 2003 was due to customer relationships acquired in the purchase of two
factoring businesses. Other intangible assets are being amortized over periods
ranging from five to twenty years on a straight-line basis. Amortization expense
totaled $4.9 million for the year ended December 31, 2003, $1.1 million for the
three months
41
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 2002, $4.4 million for the year ended September 30, 2002 and
$0 million for the combined nine month period ended September 30, 2001. The
projected amortization for the years ended December 31, 2004 through December
31, 2008 are: $9.1 million for 2004 and 2005; $8.0 million for 2006; and $4.7
million for 2007 and 2008.
Following is a reconciliation of previously reported net income to net
income excluding goodwill amortization ($ in millions, except per share
amounts):
Three Year June 2 January 1
Year Ended Months Ended Ended through through
December 31, December 31, September 30, September 30, June 1,
2003 2002 2002 2001 2001
------------ ------------ ------------- ------------ ----------
(successor) (successor) (successor) (successor) (predecessor)
Net income (loss) as reported ............... $566.9 $141.3 $(6,698.7) $182.8 $ 80.5
Goodwill amortization, net of tax ........... -- -- -- 59.8 32.7
------ ------ --------- ------ ------
Net income (loss) as adjusted ............... $566.9 $141.3 $(6,698.7) $242.6 $113.2
====== ====== ========= ====== ======
Net income (loss) as adjusted per
share -- basis ......................... $ 2.68 $ 0.67 $ (31.66) $ 1.15 $ 0.53
Net income (loss) as adjusted per
share -- diluted ....................... $ 2.66 $ 0.67 $ (31.66) $ 1.15 $ 0.53
Note 24 -- Consolidating Financial Statements -- Tyco Capital Holdings Inc.
(TCH)
TCH's activity was in connection with its capacity as the holding company
for the acquisition of CIT by Tyco, which included an outstanding loan from and
related interest expense payable to an affiliate of Tyco. Immediately prior to
the IPO of CIT on July 8, 2002, TCH was merged with CIT and the activity of TCH
(accumulated net deficit) was relieved via a capital contribution from Tyco. As
a result, TCH had no subsequent impact on the CIT consolidated financial
statements.
($ in millions) Year Ended Nine Months Ended
September 30, 2002 September 30, 2001
-------------------------------------- -----------------------------------
CIT TCH Consolidated CIT TCH Consolidated
--- --- ------------ --- --- ------------
(successor) (combined)
Finance Income ...................... $ 4,342.8 $ -- $ 4,342.8 $3,975.3 $ -- $3,975.3
Interest expense .................... 1,439.3 -- 1,439.3 1,619.8 -- 1,619.8
--------- ------- --------- -------- ------- --------
Net finance income .................. 2,903.5 -- 2,903.5 2,355.5 -- 2,355.5
Depreciation on operating lease
equipment ........................ 1,241.0 -- 1,241.0 1,036.7 -- 1,036.7
--------- ------- --------- -------- ------- --------
Net finance margin .................. 1,662.5 -- 1,662.5 1,318.8 -- 1,318.8
Provision for credit losses ......... 788.3 -- 788.3 332.5 -- 332.5
--------- ------- --------- -------- ------- --------
Net finance margin after provision
for credit losses ................ 874.2 -- 874.2 986.3 -- 986.3
Other revenue ....................... 932.3 -- 932.3 572.6 -- 572.6
--------- ------- --------- -------- ------- --------
Operating margin .................... 1,806.5 -- 1,806.5 1,558.9 -- 1,558.9
--------- ------- --------- -------- ------- --------
Salaries and general operating
expenses ......................... 923.4 23.0 946.4 784.9 9.6 794.5
Interest expense -- TCH ............. -- 662.6 662.6 -- 98.8 98.8
Goodwill impairment ................. 6,511.7 -- 6,511.7 -- -- --
Goodwill amortization ............... -- -- -- 97.6 -- 97.6
Acquisition related costs ........... -- -- -- 54.0 -- 54.0
--------- ------- --------- -------- ------- --------
Operating expenses .................. 7,435.1 685.6 8,120.7 936.5 108.4 1,044.9
--------- ------- --------- -------- ------- --------
(Loss) income before provision for
income taxes ..................... (5,628.6) (685.6) (6,314.2) 622.4 (108.4) 514.0
(Provision) benefit for income taxes (336.1) (37.9) (374.0) (280.1) 37.9 (242.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax ............... (10.5) -- (10.5) (8.5) -- (8.5)
--------- ------- --------- -------- ------- --------
Net (loss) income ................... $(5,975.2) $(723.5) $(6,698.7) $ 333.8 $ (70.5) $ 263.3
========= ======= ========= ======== ======= ========
42
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25 -- Initial Public Offering and Acquisition by Tyco International Ltd.
On July 8, 2002, the former parent of CIT, Tyco International Ltd.
("Tyco") completed a sale of 100% of CIT's outstanding common stock in an
initial public offering ("IPO"). All proceeds from the IPO were collected by
Tyco. Immediately prior to the offering, a restructuring was effectuated whereby
the predecessor, CIT Group Inc., a Nevada corporation, was merged with and into
its parent Tyco Capital Holding, Inc. ("TCH") and that combined entity was
further merged with and into CIT Group Inc. (Del), a Delaware corporation. In
connection with the reorganization, CIT Group Inc. (Del) was renamed CIT Group
Inc. As a result of the reorganization, CIT is the successor to CIT Group Inc.
(Nevada)'s business, operations, and obligations. On July 12, 2002, the
underwriters of the IPO exercised a portion of their over-allotment option to
purchase an additional 11.6 million shares of the Company's Common Stock from
CIT at the IPO price of $23.00 per share, before underwriting discounts and
commissions. CIT received the funds from this sale.
The purchase price paid by Tyco for CIT was valued at approximately $9.5
billion. The $9.5 billion value consisted of the following: the issuance of
approximately 133.0 million Tyco common shares valued at $6,650.5 million on
June 1, 2001 in exchange for approximately 73% of the outstanding CIT common
stock (including exchangeable shares of CIT Exchangeco, Inc.); the payment of
$2,486.4 million in cash to Dai-Ichi Kangyo Bank, Limited ("DKB") on June 1,
2001 for approximately 27% of the outstanding CIT common stock; options for Tyco
common shares valued at $318.6 million issued in exchange for CIT stock options;
and $29.2 million in acquisition-related costs incurred by Tyco. In addition,
$22.3 million in acquisition-related costs incurred by Tyco were paid and were
reflected in CIT's equity as an additional capital contribution. The purchase of
the CIT common stock held by DKB, which was contingent upon the satisfaction of
the conditions of the merger, took place immediately prior to the closing of the
merger on June 1, 2001. Additionally, Tyco made capital contributions totaling
$898.3 million for the period June 2, 2001 through September 30, 2001, including
a note receivable of $200.0 million that was subsequently paid by Tyco during
the first fiscal quarter of 2002. Except for the capital contribution used to
unwind the activity of TCH, there were no further capital contributions from
Tyco subsequent to September 30, 2001.
In connection with the acquisition by Tyco, CIT recorded acquired assets
and liabilities at their estimated June 2, 2001 fair values. During the first
six months of fiscal 2002, CIT recorded additions to goodwill of $348.6 million.
The goodwill adjustments were related to fair value adjustments to purchased
assets and liabilities, and accruals related to severance, facilities or other
expenses incurred as a result of the purchase transaction. The accruals recorded
during the six months ended March 31, 2002 related to finalizing integration and
consolidation plans for the elimination of additional corporate administrative
and other personnel located primarily in North America and Europe. These
accruals resulted in additional purchase accounting liabilities, which also
increased goodwill and deferred tax assets. The severance reserve established at
the acquisition date was primarily related to corporate administrative personnel
in North America. The Other Reserve established consisted primarily of
acquisition-related costs incurred by Tyco.
The following table summarizes purchase accounting liabilities (pre-tax)
related to severance of employees and closing facilities that were recorded in
connection with the acquisition by Tyco, as well as utilization during the
respective periods ($ in millions).
43
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Severance Facilities
------------------- ---------------------
Number of Number of Other Total
Employees Reserves Facilities Reserves Reserves Reserves
--------- -------- ---------- -------- -------- --------
Reserves established in fiscal 2001 ...... 671 $ 45.8 -- $ -- $ 55.9 $101.7
Fiscal 2001 utilization .................. (408) (20.2) -- -- (51.5) (71.7)
---- ----- ---- ----- ----- ------
Ending balance at September 30, 2001 ..... 263 25.6 -- -- 4.4 30.0
Fiscal 2002 acquisition reserves ......... 826 58.4 29 20.7 -- 79.1
Fiscal 2002 utilization .................. (808) (60.8) (5) (6.5) (4.4) (71.7)
---- ----- ---- ----- ----- ------
Balance September 30, 2002 ............... 281 23.2 24 14.2 -- 37.4
October 1 -- December 31, 2002
utilization ........................... (41) (6.0) (2) (1.8) -- (7.8)
---- ----- ---- ----- ----- ------
Balance December 31, 2002 ................ 240 17.2 22 12.4 -- 29.6
2003 Utilization ......................... (97) (13.1) (10) (5.2) -- (18.3)
2003 Reduction ........................... (100) (1.8) -- -- -- (1.8)
---- ----- ---- ----- ----- ------
Balance December 31, 2003 ................ 43 $ 2.3 12 $ 7.2 $ -- $ 9.5
==== ===== ==== ===== ===== ======
The downward revision to the severance reserves during the year ended
December 31, 2003 related to Specialty Finance restructuring activities and was
recorded as a reduction to goodwill. The reserves remaining at December 31, 2003
primarily relate to the restructuring of European operations. The facility
reserves relate primarily to shortfalls in sublease transactions and will be
utilized over the remaining lease terms, generally within 6 years. Severance
reserves also include amounts payable within the next year to individuals who
chose to receive payments on a periodic basis.
On September 30, 2001, CIT sold at net book value certain international
subsidiaries to a non-U.S. subsidiary of Tyco. As a result of this sale, there
were receivables from affiliates totaling $1,440.9 million, representing the
debt investment in these subsidiaries. CIT charged arm's length, market-based
interest rates on these receivables, and recorded $19.0 million of interest
income, as an offset to interest expense, related to those notes for the quarter
ended December 31, 2001. A note receivable issued at the time of this
transaction of approximately $295 million was collected. Following Tyco's
announcement on January 22, 2002 that it planned to separate into four
independent, publicly traded companies, CIT repurchased at net book value the
international subsidiaries on February 11, 2002. In conjunction with this
repurchase, the receivables from affiliates of $1,588.1 million at December 31,
2001 were satisfied. The reacquisition of these subsidiaries has been accounted
for as a merger of entities under common control. Accordingly, the balances
contained within the financial statements and footnotes include the results of
operations, financial position and cash flows of the international subsidiaries
repurchased from Tyco for all periods presented.
Note 26 -- Acquisition-Related Costs
For the combined nine months ended September 30, 2001, acquisition-related
costs of $54.0 million, consisting primarily of investment banking and other
professional fees, were incurred by CIT prior to and in connection with the
acquisition of CIT by Tyco.
Note 27 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented financial statements or other
information for these subsidiaries on a stand-alone basis. ($ in millions).
44
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------------------- --- ------------ ------------ -----
(successor)
December 31, 2003
ASSETS
Net finance receivables ............ $ 1,581.3 $3,755.4 $1,208.8 $24,111.0 $ -- $30,656.5
Operating lease equipment, net ..... -- 580.3 146.4 6,888.8 -- 7,615.5
Finance receivables held for sale .. -- 80.0 163.8 674.5 -- 918.3
Cash and cash equivalents .......... 1,479.9 410.6 227.5 (144.3) -- 1,973.7
Other assets ....................... 8,308.2 198.1 174.1 1,892.6 (5,394.2) 5,178.8
----------- -------- -------- --------- ---------- ---------
Total Assets ..................... $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $ (5,394.2) $46,342.8
=========== ======== ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 30,656.7 $1,003.5 $1,407.7 $ 600.7 $ -- $33,668.6
Credit balances of
factoring clients ................ -- -- -- 3,894.6 -- 3,894.6
Accrued liabilities and
payables ......................... (24,681.5) 3,412.0 (701.2) 25,317.1 -- 3,346.4
----------- -------- -------- --------- ---------- ---------
Total Liabilities ................ 5,975.2 4,415.5 706.5 29,812.4 -- 40,909.6
Minority interest .................. -- -- -- 39.0 -- 39.0
Total Stockholders' Equity ......... 5,394.2 608.9 1,214.1 3,571.2 (5,394.2) 5,394.2
----------- -------- -------- --------- ---------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $ (5,394.2) $46,342.8
=========== ======== ======== ========= ========== =========
December 31, 2002
ASSETS
Net finance receivables ............ $ 633.5 $3,541.4 $ 935.7 $21,749.9 $ -- $26,860.5
Operating lease equipment, net ..... -- 734.6 157.1 5,812.9 -- 6,704.6
Finance receivables held for sale .. -- 159.1 62.8 991.5 -- 1,213.4
Cash and cash equivalents .......... 1,310.9 231.1 293.7 200.9 -- 2,036.6
Other assets ....................... 6,940.5 283.3 391.6 2,372.6 (4,870.7) 5,117.3
----------- -------- -------- --------- ---------- ---------
Total Assets ..................... $ 8,884.9 $4,949.5 $1,840.9 $31,127.8 $ (4,870.7) $41,932.4
=========== ======== ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 28,194.8 $1,815.7 $2,116.8 $ (446.0) $ -- $31,681.3
Credit balances of
factoring clients ................ -- -- -- 2,270.0 -- 2,270.0
Accrued liabilities and
payables ......................... (24,180.6) 2,574.1 (1,400.3) 25,860.0 -- 2,853.2
----------- -------- -------- --------- ---------- ---------
Total Liabilities ................ 4,014.2 4,389.8 716.5 27,684.0 -- 36,804.5
Preferred capital securities ....... -- -- -- 257.2 -- 257.2
Total Stockholders' Equity ......... 4,870.7 559.7 1,124.4 3,186.6 (4,870.7) 4,870.7
----------- -------- -------- --------- ---------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 8,884.9 $4,949.5 $1,840.9 $31,127.8 $ (4,870.7) $41,932.4
=========== ======== ======== ========= ========== =========
45
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------------------- --- ------------ ------------ -----
(successor)
September 30, 2002
ASSETS
Net finance receivables ............ $ 864.3 $2,504.8 $ 893.5 $23,418.6 $ -- $27,681.2
Operating lease equipment, net ..... -- 797.2 185.3 5,584.9 -- 6,567.4
Finance receivables held
for sale ......................... -- 156.7 47.7 815.1 -- 1,019.5
Cash and cash equivalents .......... 1,737.8 225.8 330.3 (19.5) -- 2,274.4
Other assets ....................... 4,855.0 444.4 452.5 4,173.9 (4,757.8) 5,168.0
---------- -------- -------- --------- --------- ---------
Total Assets ..................... $ 7,457.1 $4,128.9 $1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 28,860.8 $1,858.0 $2,147.6 $ (410.4) $ -- $32,456.0
Credit balances of factoring clients -- -- -- 2,513.8 -- 2,513.8
Accrued liabilities and
payables ......................... (26,161.5) 1,799.5 (1,348.1) 28,435.3 -- 2,725.2
---------- -------- -------- --------- --------- ---------
Total Liabilities ................ 2,699.3 3,657.5 799.5 30,538.7 -- 37,695.0
Preferred capital securities ....... -- -- -- 257.7 -- 257.7
Total Stockholders' Equity ......... 4,757.8 471.4 1,109.8 3,176.6 (4,757.8) 4,757.8
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............. $ 7,457.1 $4,128.9 $1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ======== ========= ========= =========
46
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- -------- ------------ ------------ -----
(successor)
Year Ended December 31, 2003
Finance income ......................... $ 89.0 $ 785.3 $195.0 $2,660.2 $ -- $3,729.5
Interest expense ....................... (52.7) 303.8 6.6 1,061.6 -- 1,319.3
------- ------- ------ -------- ------- --------
Net finance income ..................... 141.7 481.5 188.4 1,598.6 -- 2,410.2
Depreciation on operating lease
equipment ............................ -- 371.6 68.5 612.9 -- 1,053.0
------- ------- ------ -------- ------- --------
Net finance margin ..................... 141.7 109.9 119.9 985.7 -- 1,357.2
Provision for credit losses ............ 36.7 53.1 14.6 282.9 -- 387.3
------- ------- ------ -------- ------- --------
Net finance margin, after provision for
credit losses ........................ 105.0 56.8 105.3 702.8 -- 969.9
Equity in net income of subsidiaries ... 481.3 -- -- -- (481.3) --
Other revenue .......................... 60.4 124.8 95.7 666.7 -- 947.6
Loss on venture capital investments .... -- -- -- (88.3) -- (88.3)
------- ------- ------ -------- ------- --------
Operating margin ....................... 646.7 181.6 201.0 1,281.2 (481.3) 1,829.2
Operating expenses ..................... 57.4 168.9 90.3 625.7 -- 942.3
Gain on redemption of debt ............. -- -- -- 50.4 -- 50.4
------- ------- ------ -------- ------- --------
Income (loss) before provision for
income taxes ......................... 589.3 12.7 110.7 705.9 (481.3) 937.3
Provision for income taxes ............. 22.4 5.0 43.2 294.4 -- 365.0
Dividends on preferred capital securities,
after tax ............................ -- -- -- (5.4) -- (5.4)
------- ------- ------ -------- ------- --------
Net income ............................. $ 566.9 $ 7.7 $ 67.5 $ 406.1 $(481.3) $ 566.9
======= ======= ====== ======== ======= ========
CIT
CIT Capita Holdings Other
(successor) Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Finance income ......................... $ 32.9 $ 224.5 $ 50.6 $ 663.7 $ -- $ 971.7
Interest expense ....................... 23.9 73.9 (1.1) 243.3 -- 340.0
------- ------- ------ -------- ------- --------
Net finance income ..................... 9.0 150.6 51.7 420.4 -- 631.7
Depreciation on operating lease equipment -- 105.0 21.6 150.7 -- 277.3
------- ------- ------ -------- ------- --------
Net finance margin ..................... 9.0 45.6 30.1 269.7 -- 354.4
Provision for credit losses ............ 18.8 8.9 2.4 103.3 -- 133.4
------- ------- ------ -------- ------- --------
Net finance margin, after provision for
credit losses ........................ (9.8) 36.7 27.7 166.4 -- 221.0
Equity in net income of subsidiaries ... 144.1 -- -- -- (144.1) --
Other revenue .......................... 4.1 46.1 23.5 189.8 -- 263.5
Loss on venture capital investments .... -- -- -- (6.4) -- (6.4)
------- ------- ------ -------- ------- --------
Operating margin ....................... 138.4 82.8 51.2 349.8 (144.1) 478.1
Operating expenses ..................... 16.4 35.1 24.7 165.9 -- 242.1
------- ------- ------ -------- ------- --------
Income before provision for income taxes 122.0 47.7 26.5 183.9 (144.1) 236.0
Provision (benefit) for income taxes ... (19.3) 18.6 14.2 78.5 -- 92.0
Dividends on preferred capital
securities, after tax ................ -- -- -- (2.7) -- (2.7)
------- ------- ------ -------- ------- --------
Net income ............................. $ 141.3 $ 29.1 $ 12.3 $ 102.7 $(144.1) $ 141.3
======= ======= ====== ======== ======= ========
47
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------------- ---------- ----------- -------- ------------ ------------ ------
(successor)
Year Ended September 30, 2002
Finance income ........................ $ 200.4 $1,050.1 $233.2 $2,859.1 $ -- $ 4,342.8
Interest expense ...................... (80.3) 401.3 4.8 1,113.5 -- 1,439.3
--------- -------- ------ -------- ------- ---------
Net finance income .................... 280.7 648.8 228.4 1,745.6 -- 2,903.5
Depreciation on operating lease
equipment ........................... -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ -------- ------- ---------
Net finance margin .................... 280.7 145.8 122.9 1,113.1 -- 1,662.5
Provision for credit losses ........... 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ -------- ------- ---------
Net finance margin, after provision for
credit losses ....................... (27.6) (52.1) 98.0 855.9 -- 874.2
Equity in net income of subsidiaries .. 130.9 -- -- -- (130.9) --
Other revenue ......................... 20.7 124.0 93.0 734.9 -- 972.6
Loss on venture capital investments ... -- -- -- (40.3) -- (40.3)
--------- -------- ------ -------- ------- ---------
Operating margin ...................... 124.0 71.9 191.0 1,550.5 (130.9) 1,806.5
Operating expenses .................... 6,588.0 188.7 65.9 1,278.1 -- 8,120.7
--------- -------- ------ -------- ------- ---------
(Loss) income before provision for
income taxes ........................ (6,464.0) (116.8) 125.1 272.4 (130.9) (6,314.2)
Provision (benefit) for income taxes .. 234.7 (45.6) 48.8 136.1 -- 374.0
Dividends on preferred capital
securities, after tax ............... -- -- -- (10.5) -- (10.5)
--------- -------- ------ -------- ------- ---------
Net (loss) income ..................... $(6,698.7) $ (71.2) $ 76.3 $ 125.8 $(130.9) $(6,698.7)
========= ======== ====== ======== ======= =========
(combined)
Nine Months Ended September 30, 2001
Finance income ........................ $226.4 $998.0 $219.1 $2,531.8 $ -- $3,975.3
Interest expense ...................... 141.3 305.4 23.1 1,150.0 -- 1,619.8
------ ------ ------ -------- ------- --------
Net finance income .................... 85.1 692.6 196.0 1,381.8 -- 2,355.5
Depreciation on operating lease
equipment ........................... -- 460.5 103.4 472.8 -- 1,036.7
------ ------ ------ -------- ------- --------
Net finance margin .................... 85.1 232.1 92.6 909.0 -- 1,318.8
Provision for credit losses ........... 54.7 88.9 15.1 173.8 -- 332.5
------ ------ ------ -------- ------- --------
Net finance margin, after provision for
credit losses ....................... 30.4 143.2 77.5 735.2 -- 986.3
Equity in net income of subsidiaries .. 461.5 -- -- -- (461.5) --
Other revenue ......................... (80.6) 67.6 68.1 511.5 -- 566.6
Gain on venture capital investments ... -- -- -- 6.0 -- 6.0
------ ------ ------ -------- ------- --------
Operating margin ...................... 411.3 210.8 145.6 1,252.7 (461.5) 1,558.9
Operating expenses .................... 216.9 160.0 78.4 589.6 -- 1,044.9
------ ------ ------ -------- ------- --------
Income before provision for
income taxes ........................ 194.4 50.8 67.2 663.1 (461.5) 514.0
Provision (benefit) for income taxes .. (68.9) 19.3 25.5 266.3 -- 242.2
Dividends on preferred capital
securities, after tax ............... -- -- -- (8.5) -- (8.5)
------ ------ ------ -------- ------- --------
Net income ............................ $263.3 $ 31.5 $ 41.7 $ 388.3 $(461.5) $ 263.3
====== ====== ====== ======== ======= ========
48
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- --- ------------------------- -----
(successor)
Year Ended December 31, 2003
Cash Flows From Operating Activities:
Net cash flows provided by
operations ........................ $ 224.4 $ 629.7 $ 386.6 $ 946.4 $ -- $ 2,187.1
---------- -------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease in financing and
leasing assets .................... (982.4) (338.2) (416.4) (2,172.7) -- (3,909.7)
Decrease in inter-company loans
and investments ................... (1,534.9) -- -- -- 1,534.9 --
Other ............................... -- -- -- (77.8) -- (77.8)
---------- -------- ---------- ---------- ---------- ----------
Net cash flows (used for)
investing activities .............. (2,517.3) (338.2) (416.4) (2,250.5) 1,534.9 (3,987.5)
---------- -------- ---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ..... 2,461.9 (812.2) (709.1) 902.3 -- 1,842.9
Inter-company financing ............. -- 700.2 672.7 162.0 (1,534.9) --
Cash dividends paid ................. -- -- -- (101.8) -- (101.8)
Other ............................... -- -- -- (3.6) -- (3.6)
---------- -------- ---------- ---------- ---------- ----------
Net cash flows provided by
(used for) financing activities ... 2,461.9 (112.0) (36.4) 958.9 (1,534.9) 1,737.5
---------- -------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents ................ 169.0 179.5 (66.2) (345.2) -- (62.9)
Cash and cash equivalents,
beginning of period ............... 1,310.9 231.1 293.7 200.9 -- 2,036.6
---------- -------- ---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period ..................... $ 1,479.9 $ 410.6 $ 227.5 $ (144.3) $ -- $ 1,973.7
========== ======== ========== ========== ========== ==========
49
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
------------------------------ ---------- ----------- -------- ------------ ------------ ----------
(successor)
Three Months Ended December 31, 2002
Cash Flows From Operating Activities:
Net cash flows (used for)
provided by operations ............... $ (2,191.1) $ 115.1 $ 51.5 $ 2,636.9 $ -- $ 612.4
---------- ---------- -------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net increase (decrease) in financing
and leasing assets ................... 212.8 (1,062.8) (43.6) 882.8 -- (10.8)
Increase in intercompany loans
and investments ...................... 2,217.4 -- -- -- (2,217.4) --
Other .................................. -- -- -- (4.3) -- (4.3)
---------- ---------- -------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................. 2,430.2 (1,062.8) (43.6) 878.5 (2,217.4) (15.1)
---------- ---------- -------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net decrease in debt ................... (666.0) (42.3) (30.8) (70.6) -- (809.7)
Intercompany financing ................. -- 995.3 (13.7) (3,199.0) 2,217.4 --
Cash dividends paid .................... -- -- -- (25.4) -- (25.4)
---------- ---------- -------- ---------- ---------- ----------
Net cash flows (used for) provided by
financing activities ................. (666.0) 953.0 (44.5) (3,295.0) 2,217.4 (835.1)
---------- ---------- -------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ..................... (426.9) 5.3 (36.6) 220.4 -- (237.8)
Cash and cash equivalents,
beginning of period .................. 1,737.8 225.8 330.3 (19.5) -- 2,274.4
---------- ---------- -------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,310.9 $ 231.1 $ 293.7 $ 200.9 $ -- $ 2,036.6
========== ========== ======== ========== ========== ==========
50
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------------------- --- ------------ ------------ -----
(successor)
Year Ended September 30, 2002
Cash Flows From Operating Activities:
Net cash flows provided by
(used for) operations ............... $ 334.7 $ (298.1) $ (688.2) $ 2,047.5 $ -- $ 1,395.9
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Investing Activities:
Net increase in financing
and leasing assets .................. 662.0 211.9 721.3 779.0 -- 2,374.2
Increase in intercompany loans and
investments ......................... 1,008.3 -- -- -- (1,008.3) --
Other .................................. -- -- -- (52.5) -- (52.5)
---------- ---------- -------- ---------- -------- ----------
Net cash flows provided by
investing activities ................ 1,670.3 211.9 721.3 726.5 (1,008.3) 2,321.7
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ (1,885.3) (1,021.2) 175.3 (698.1) -- (3,429.3)
Intercompany financing ................. -- 1,226.2 117.7 (2,352.2) 1,008.3 --
Capital contributions from
former parent ....................... 923.5 -- -- -- -- 923.5
Cash dividends paid .................... -- -- -- -- -- --
Proceeds from issuance of
common stock ........................ 254.6 -- -- -- -- 254.6
---------- ---------- -------- ---------- -------- ----------
Net cash flows (used for) provided by
financing activities ................ (707.2) 205.0 293.0 (3,050.3) 1,008.3 (2,251.2)
---------- ---------- -------- ---------- -------- ----------
Net increase (decrease) in cash and
cash equivalents .................... 1,297.8 118.8 326.1 (276.3) -- 1,466.4
Cash and cash equivalents,
beginning of period ................. 440.0 107.0 4.2 256.8 -- 808.0
---------- ---------- -------- ---------- -------- ----------
Cash and cash equivalents, end of period $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
========== ========== ======== ========== ======== ==========
51
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------------------- --- ------------ ------------ -----
(combined)
Nine Months Ended September 30, 2001
Cash Flows From Operating Activities:
Net cash flows provided by (used for)
operations .......................... $ 17.4 $ 275.1 $ 128.4 $ 608.4 $ -- $ 1,029.3
---------- ---------- -------- -------- ---------- ----------
Cash Flows From Investing Activities:
Net increase (decrease) in financing and
leasing assets ...................... 335.0 440.4 (36.7) 275.5 -- 1,014.2
Decrease in intercompany loans and
investments ......................... (2,822.6) -- -- -- 2,822.6 --
Other .................................. -- -- -- (21.2) -- (21.2)
---------- ---------- -------- -------- ---------- ----------
Net cash flows provided by (used for)
investing activities ................ (2,487.6) 440.4 (36.7) 254.3 2,822.6 993.0
---------- ---------- -------- -------- ---------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ 1,114.7 (2,872.5) (247.4) (741.4) -- (2,746.6)
Intercompany financing ................. -- 2,134.7 240.6 447.3 (2,822.6) --
Capital contributions from
former parent ....................... 675.0 -- -- 70.5 -- 745.5
Cash dividends paid .................... -- -- -- (52.9) -- (52.9)
Other .................................. -- -- -- 27.6 -- 27.6
---------- ---------- -------- -------- ---------- ----------
Net cash flows (used for) provided by
financing activities ................ 1,789.7 (737.8) (6.8) (248.9) (2,822.6) (2,026.4)
---------- ---------- -------- -------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents .................... (680.5) (22.3) 84.9 613.8 -- (4.1)
Cash and cash equivalents, beginning
of period ........................... 1,120.5 129.3 (80.7) (357.0) -- 812.1
---------- ---------- -------- -------- ---------- ----------
Cash and cash equivalents, end of period $ 440.0 $ 107.0 $ 4.2 $ 256.8 $ -- $ 808.0
========== ========== ======== ======== ========== ==========
52
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 28 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below ($ in millions, except
per share data).
Year Ended December 31, 2003
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ------------ ------------ ---------
Net finance margin ......................... $313.7 $339.2 $342.3 $362.0
Provision for credit losses ................ 103.0 100.6 82.9 100.8
Other revenue .............................. 239.9 229.7 232.0 246.0
Loss on venture capital investments ........ (4.4) (12.1) (11.3) (60.5)
Salaries and general operating expenses .... 233.6 227.2 237.5 244.0
Gain on debt call .......................... -- -- -- 50.4
Provision for income taxes ................. 82.9 89.3 94.6 98.2
Dividends on preferred capital
securities, after tax .................... 2.7 2.7 -- --
Minority interest after tax ................ -- 0.1 0.2 (0.3)
Net income (loss) .......................... $127.0 $136.9 $147.8 $155.2
Net income (loss) per diluted share (1) .... $ 0.60 $ 0.65 $0.69 $ 0.72
Year Ended September 30, 2002
------------------------------------------
Three Months
Ended
December 31, First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
------------ ------- ------- ------- --------
Net finance margin ................................ $354.4 $487.5 $ 448.2 $ 356.0 $370.8
Provision for credit losses ....................... 133.4 112.9 195.0 357.7 122.7
Other revenue ..................................... 263.5 242.5 237.4 247.5 245.2
(Loss) gain on venture capital investments ........ (6.4) 2.6 (5.3) (1.4) (36.2)
Salaries and general operating expenses ........... 242.1 238.7 234.2 237.9 235.6
Interest expense -- TCH ........................... -- 76.3 305.0 281.3 --
Goodwill impairment ............................... -- -- 4,512.7 1,999.0 --
Provision for income taxes ........................ 92.0 118.2 50.4 121.3 84.1
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax .... 2.7 2.4 2.7 2.7 2.7
Net income (loss) ................................. $141.3 $184.1 $(4,619.7) $(2,397.8) $134.7
Net income (loss) per diluted share (1) ........... $ 0.67 $ 0.87 $ (21.84) $ (11.33) $ 0.64
53
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nine Months Ended September 30, 2001
----------------------------------------
First Second Third
Quarter Quarter(2) Quarter
------- ---------- -------
(predecessor) (combined) (successor)
Net finance margin ............................................ $404.7 $429.4 $484.7
Provision for credit losses ................................... 68.3 166.7 97.5
Other revenue ................................................. 206.7 120.0 239.9
Gain (loss) on venture capital investments .................... 4.9 1.8 (0.7)
Salaries and general operating expenses ....................... 263.5 267.9 263.1
Goodwill amortization ......................................... 22.5 29.7 45.4
Interest expense -- TCH ....................................... -- 25.0 73.8
Acquisition-related costs ..................................... -- 54.0 --
Provision for income taxes .................................... 99.0 30.5 112.7
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ....................... 2.9 2.8 2.8
Net income (loss) ............................................. $160.1 $(25.4) $128.6
Net income (loss) per diluted share(1) ........................ $ 0.75 $(0.12) $ 0.61
- --------------------------------------------------------------------------------
(1) Per share calculations assume that common shares outstanding as a result of
the July 2002 IPO (211.7 million) were outstanding for all periods
preceding the quarter ended September 30, 2002.
(2) The second quarter of 2001 includes predecessor operations through June 1,
2001 and successor operations for June 2 through June 30, 2001.
54