Exhibit 99.4
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
CIT Group Inc.:
We have completed an integrated audit of CIT Group Inc.'s December 31, 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its December 31, 2003, December
31, 2002 and September 30, 2002 consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of CIT Group Inc. and
its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years ended December 31, 2004 and 2003,
the three months ended December 31, 2002 and the fiscal year ended September 30,
2002 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 of financial statements
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.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting (not presented herein) appearing
under Item 9A of CIT Group Inc.'s 2004 Annual Report on Form 10-K, that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2004, because of the effect of the Company not maintaining
effective controls over the reconciliations of the differences between the tax
basis and book basis of each component of the Company's balance sheet with the
deferred tax asset and liability accounts, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit of internal control over financial reporting 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 effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
1
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2004, the Company did not maintain
effective controls over the reconciliations of the differences between the tax
basis and book basis of each component of the Company's balance sheet with the
deferred tax asset and liability accounts. The control deficiency did not result
in any adjustments to the 2004 annual or interim consolidated financial
statements. However, this control deficiency results in more than a remote
likelihood that a material misstatement to the deferred tax asset and liability
accounts, and income tax provision will not be prevented or detected in the
annual or interim financial statements. Accordingly, management has determined
that this condition constitutes a material weakness. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the December 31, 2004 consolidated financial statements, and our
opinion regarding the effectiveness of the Company's internal control over
financial reporting does not affect our opinion on those consolidated financial
statements.
In our opinion, management's assessment that CIT Group Inc. did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, CIT Group Inc. has not
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control - Integrated
Framework issued by the COSO.
PricewaterhouseCoopers LLP
New York, New York
March 4, 2005, except as to the
effects of changes in reportable
segments as described in Note 21
which is as of July 20, 2005.
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
December 31, December 31,
2004 2003
------------ -------------
ASSETS
Financing and leasing assets:
Finance receivables ........................................... $35,048.2 $31,300.2
Reserve for credit losses ....................................... (617.2) (643.7)
--------- ---------
Net finance receivables ...................................... 34,431.0 30,656.5
Operating lease equipment, net ............................... 8,290.9 7,615.5
Finance receivables held for sale ............................ 1,640.8 918.3
Cash and cash equivalents ....................................... 2,210.2 1,973.7
Retained interests in securitizations
and other investments ......................................... 1,228.2 1,380.8
Goodwill and intangible assets, net ............................. 596.5 487.7
Other assets .................................................... 2,713.7 3,310.3
--------- ---------
Total Assets .................................................... $51,111.3 $46,342.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ............................................. $ 4,210.9 $ 4,173.9
Variable-rate senior notes ................................... 11,545.0 9,408.4
Fixed-rate senior notes ...................................... 21,715.1 19,830.8
Preferred capital securities ................................. 253.8 255.5
--------- ---------
Total debt ...................................................... 37,724.8 33,668.6
Credit balances of factoring clients ............................ 3,847.3 3,894.6
Accrued liabilities and payables ................................ 3,443.7 3,346.4
--------- ---------
Total Liabilities ............................................... 45,015.8 40,909.6
--------- ---------
Commitments and Contingencies (Note 17)
Minority interest ............................................... 40.4 39.0
Stockholders' Equity:
Preferred stock: $0.01 par value, 100,000,000
authorized, none issued .................................... -- --
Common stock: $0.01 par value,
600,000,000 authorized,
Issued: 212,112,203 and 211,848,997 ........................ 2.1 2.1
Outstanding: 210,440,170 and 211,805,468
Paid-in capital, net of deferred compensation
of $39.3 and $30.6 ......................................... 10,674.3 10,677.0
Accumulated deficit .......................................... (4,499.1) (5,141.8)
Accumulated other comprehensive loss ......................... (58.4) (141.6)
Less: Treasury stock, 1,672,033 and 43,529 shares, at cost ...... (63.8) (1.5)
--------- ---------
Total Stockholders' Equity ...................................... 6,055.1 5,394.2
--------- ---------
Total Liabilities and Stockholders' Equity ...................... $51,111.3 $46,342.8
========= =========
See Notes to Consolidated Financial Statements.
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Years Ended Three Months
December 31, Ended Years Ended
------------------------- December 31, September 30,
2004 2003 2002 2002
---------- ---------- ---------- ----------
Finance income ........................... $ 3,785.7 $ 3,729.5 $ 971.7 $ 4,342.8
Interest expense ......................... 1,260.1 1,348.7 349.5 1,464.7
---------- ---------- ---------- ----------
Net finance income ....................... 2,525.6 2,380.8 622.2 2,878.1
Depreciation on operating lease equipment 956.0 1,053.0 277.3 1,241.0
---------- ---------- ---------- ----------
Net finance margin ....................... 1,569.6 1,327.8 344.9 1,637.1
Provision for credit losses .............. 214.2 387.3 133.4 788.3
---------- ---------- ---------- ----------
Net finance margin after provision
for credit losses ....................... 1,355.4 940.5 211.5 848.8
Other revenue ............................ 890.6 947.6 263.5 972.6
Net loss on venture capital investments .. (3.5) (88.3) (6.4) (40.3)
---------- ---------- ---------- ----------
Operating margin ......................... 2,242.5 1,799.8 468.6 1,781.1
---------- ---------- ---------- ----------
Salaries and general operating expenses .. 1,046.4 912.9 232.6 921.0
Goodwill impairment ...................... -- -- -- 6,511.7
Interest expense -- TCH .................. -- -- -- 662.6
---------- ---------- ---------- ----------
Operating expenses ....................... 1,046.4 912.9 232.6 8,095.3
---------- ---------- ---------- ----------
Gain on redemption of debt ............... 41.8 50.4 -- --
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes ............................ 1,237.9 937.3 236.0 (6,314.2)
Provision for income taxes ............... (483.2) (365.0) (92.0) (374.0)
Minority interest, after tax ............. (1.1) -- -- --
Dividends on preferred capital securities,
after tax ................................ -- (5.4) (2.7) (10.5)
---------- ---------- ---------- ----------
Net income (loss) ........................ $ 753.6 $ 566.9 $ 141.3 $ (6,698.7)
========== ========== ========== ==========
Per share data
Basic earnings (loss) per share .......... $ 3.57 $ 2.68 $ 0.67 $ (31.66)
Diluted earnings (loss) per share ........ $ 3.50 $ 2.66 $ 0.67 $ (31.66)
Number of shares -- basic (thousands) .... 211,017 211,681 211,573 211,573
Number of shares -- diluted (thousands) .. 215,054 213,143 211,826 211,695
Dividends per common share ............... $ 0.52 $ 0.48 $ 0.12 $ --
See Notes to Consolidated Financial Statements.
4
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated
Accumulated Other Total
Common Paid-in Contributed Treasury Earnings/ Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income/(Loss) Equity
------ --------- ----------- -------- ----------- ------------- -------------
September 30, 2001 ....................... $ -- $ -- $ 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 ....................... 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 gain 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 ........................ 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 gain 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 .......... (7.3) 27.4 20.1
Employee stock purchase plan
participation .......................... (0.7) (0.7)
---- --------- ---------- ------- --------- ------- ---------
December 31, 2003 ........................ 2.1 10,677.0 -- (1.5) (5,141.8) (141.6) 5,394.2
Net income ............................... 753.6 753.6
Foreign currency translation adjustments . 68.6 68.6
Change in fair values of derivatives
qualifying as cash flow hedges ......... 14.2 14.2
Unrealized gain on equity and
securitization investments, net ........ 2.3 2.3
Minimum pension liability adjustment ..... (1.9) (1.9)
---------
Total comprehensive income ............... 836.8
---------
Cash dividends ........................... (110.9) (110.9)
Restricted common stock grants ........... 23.5 23.5
Treasury stock purchased, at cost ........ (174.8) (174.8)
Exercise of stock option awards .......... (25.6) 111.6 86.0
Employee stock purchase plan
participation .......................... (0.6) 0.9 0.3
---- --------- ---------- ------- --------- ------- ---------
December 31, 2004 ........................ $2.1 $10,674.3 $ -- $ (63.8) $(4,499.1) $ (58.4) $ 6,055.1
==== ========= ========== ======= ========= ======= =========
See Notes to Consolidated Financial Statements.
5
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Years Ended Three Months
December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---------- ---------- ------------ -------------
Cash Flows From Operations
Net income (loss) ...................................... $ 753.6 $ 566.9 $ 141.3 $ (6,698.7)
Adjustments to reconcile net income (loss)
to net cash flows from operations:
Depreciation and amortization .......................... 998.8 1,086.6 287.5 1,286.5
Provision for deferred federal income taxes ............ 321.0 265.1 71.9 276.9
Provision for credit losses ............................ 214.2 387.3 133.4 788.3
Gains on equipment, receivable and investment sales, net (208.8) (164.7) (51.8) (203.1)
Gain on debt redemption ................................ (41.8) (50.4) -- --
(Increase) decrease in finance receivables
held for sale ....................................... (394.5) 295.1 (193.9) (261.6)
(Increase) decrease in other assets .................... (282.2) (174.2) 26.7 (626.7)
Increase in accrued liabilities and payables ........... 328.9 279.2 55.4 57.0
Goodwill impairment .................................... -- -- -- 6,511.7
Other .................................................. (71.5) (8.7) (52.0) 4.0
---------- ---------- ---------- ----------
Net cash flows provided by operations .................. 1,617.7 2,482.2 418.5 1,134.3
---------- ---------- ---------- ----------
Cash Flows From Investing Activities
Loans extended ......................................... (57,062.0) (53,157.8) (12,873.8) (48,300.6)
Collections on loans ................................... 48,944.1 45,123.9 12,089.7 42,584.2
Proceeds from asset and receivable sales ............... 8,491.4 7,419.0 1,279.3 11,254.0
Purchase of finance receivable portfolios .............. (3,180.0) (1,097.5) (254.7) (372.7)
Purchases of assets to be leased ....................... (1,489.2) (2,096.3) (449.1) (1,877.2)
Acquisitions, net of cash acquired ..................... (726.8) -- -- --
Goodwill and intangibles assets acquired ............... (122.1) (92.6) -- --
Net decrease (increase) in short-term
factoring receivables ............................... 48.3 (396.1) 391.7 (651.9)
Other .................................................. 41.6 14.8 (4.3) (52.5)
---------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................................. (5,054.7) (4,282.6) 178.8 2,583.3
---------- ---------- ---------- ----------
Cash Flows From Financing Activities
Proceeds from the issuance of variable and
fixed-rate notes .................................... 13,005.6 13,034.6 2,463.2 13,093.4
Repayments of variable and fixed-rate notes ............ (8,824.1) (10,265.6) (3,558.3) (12,148.8)
Cash dividends paid .................................... (110.9) (101.8) (25.4) --
Net repayments of non-recourse leveraged
lease debt .......................................... (367.2) (125.4) (35.0) (187.7)
Net increase (decrease) in commercial paper ............ 37.0 (800.7) 320.4 (4,186.2)
Capital contribution from former parent ................ -- -- -- 923.5
Proceeds from issuance of common stock ................. -- -- -- 254.6
Other .................................................. (66.9) (3.6) -- --
---------- ---------- ---------- ----------
Net cash flows provided by (used for)
financing activities ................................... 3,673.5 1,737.5 (835.1) (2,251.2)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ... 236.5 (62.9) (237.8) 1,466.4
Cash and cash equivalents, beginning of period ......... 1,973.7 2,036.6 2,274.4 808.0
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period ............... $ 2,210.2 $ 1,973.7 $ 2,036.6 $ 2,274.4
========== ========== ========== ==========
Supplementary Cash Flow Disclosure
Interest paid .......................................... $ 1,241.5 $ 1,517.6 $ 418.5 $ 1,713.9
Federal, foreign, state and local income taxes paid,
(received) net ...................................... $ 115.0 $ 80.6 $ 44.2 $ (43.9)
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 growing
economic sectors, offering vendor, equipment, commercial, factoring, home
mortgage, small business, educational lending 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. Accordingly, 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
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
receivables other than leveraged leases is recognized on an accrual basis
commencing in the month of origination. 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 of finance
receivables, (5) gains from and fees related to securitizations including
accretion related to retained interests (net of impairment) and (6) 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 reserve for credit losses is intended to provide for losses inherent
in the portfolio and 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, non-performing assets and impaired loans. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the reserve for credit losses.
The reserve for credit losses is determined based on three key components:
(1) specific reserves for collateral dependent loans that are impaired, based
upon the value of underlying collateral or projected cash flows, (2) reserves
for estimated losses inherent in the portfolio based upon the value of
underlying collateral or projected cash flows and (3) reserves for economic
environment and other factors. In management's judgment, the 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
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 and are
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) home lending
and other homogeneous pools of 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 occurs when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Loan
impairment is measured 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 certain 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
SFAS No. 141 "Business Combinations" requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method. The purchase method of accounting requires that the cost of an acquired
entity be allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The difference between
the fair values and the purchase price is recorded to goodwill. Also under SFAS
141, identified intangible assets acquired in a business combination must be
separately valued and recognized on the balance sheet if they meet certain
requirements.
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.
Intangible assets consist primarily of customer relationships acquired in
2004 and 2003 acquisitions, which have amortizable lives up to 20 years, and
computer software and related transaction processes, which are being amortized
over a 5-year life. An evaluation of the remaining useful lives and the
amortization methodology of the intangible assets is performed periodically to
determine if any change is warranted.
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 portfolios 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.
Securitization Sales
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, estimated cash flows underlying retained
interests are periodically updated based upon current information and events
that management believes a market participant would use in determining the
current fair value of the retained interest. An 'other-than temporary'
impairment is recorded and included in net income to write down the retained
interest to estimated fair value if the analysis indicates that an adverse
change in estimated cash flows has occurred. Unrealized gains are not credited
to current earnings, but are reflected in stockholders' equity as part of other
comprehensive income.
Servicing assets or liabilities are established when the fees for
servicing securitized assets are more or less than adequate compensation to CIT
for servicing the assets. Servicing assets or liabilities are recognized over
the servicing period and are periodically evaluated for impairment. CIT
securitization transactions generally do not result in servicing assets or
liabilities, as typically the contractual fees are adequate compensation in
relation to the associated servicing costs.
Derivative Financial Instruments
CIT uses interest rate swaps, bond forwards, 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.
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 derivative transactions with a positive fair value, reduced by
the effects of master netting agreements. 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 is not considered significant.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is generally
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.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than the functional currency are
included in net income.
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. The
determination of the tax effect of such unremitted earnings is not practicable.
Income tax reserves reflect open tax return positions, tax assessments received,
tax law changes and third party indemnifications, and are included in current
taxes payable, which is reflected in accrued liabilities and payables.
Accounting for Costs Associated with Exit or Disposal Activities
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a
liability for costs associated with exit or disposal activities, other than in a
business combination, be recognized when the liability is incurred. Previous
generally accepted accounting principles provided for the recognition of such
costs at the date of management's commitment to an exit plan. In addition, SFAS
146 requires that the liability be measured at fair value and be adjusted for
changes in estimated cash flows. This statement did not have a material impact
on the Company's consolidated financial statements.
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.
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
Years Ended Three Months
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Net income (loss) as reported....................... $753.6 $566.9 $141.3 $(6,698.7)
Stock-based compensation expense -- fair value
method, after tax................................ (20.6) (23.0) (5.7) (5.7)
------ ------ ------ ---------
Pro forma net income (loss)......................... $733.0 $543.9 $135.6 $(6,704.4)
====== ====== ====== =========
Basic earnings (loss) per share as reported......... $ 3.57 $ 2.68 $ 0.67 $ (31.66)
Basic earnings (loss) per share pro forma........... $ 3.47 $ 2.57 $ 0.64 $ (31.69)
Diluted earnings (loss) per share as reported....... $ 3.50 $ 2.66 $ 0.67 $ (31.66)
Diluted earnings (loss) per share pro forma......... $ 3.41 $ 2.55 $ 0.64 $ (31.69)
Compensation expense related to restricted stock awards is recognized over
the respective vesting periods and totalled (net of tax) $14.3 million, $5.5
million, $0.6 million and $3.2 million for the years ended December 31, 2004 and
2003, the three months ended December 31, 2002 and the year ended September 30,
2002, respectively.
Accounting Pronouncements
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
Payment" ("FAS 123R"). FAS 123R requires the recognition of compensation expense
for all stock-based compensation plans as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. The current
accounting for employee stock options is most impacted by this new standard, as
costs associated with restricted stock awards are already recognized in net
income and amounts associated with employee stock purchase plans are not
significant. Similar to the proforma amounts disclosed historically, the
compensation cost relating to options will be based upon the grant-date fair
value of the award and will be recognized over the vesting period. FAS 123R
allows for both prospective and retrospective adoption. The financial statement
impact of adopting FAS 123R is not expected to differ materially from historical
proforma disclosures. Management is evaluating the transition alternatives, all
of which require compensation expense to be included in net income in 2005, and
valuation methodologies allowed under the new standard.
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"). Given
the lack of clarification of certain provisions and the timing of the Act, FSP
109-2 allows for time beyond the year ended December 31, 2004 (the period of
enactment) to evaluate the effect of the Act on plans for reinvestment or
repatriation of foreign earnings for purposes of applying income tax accounting
under SFAS No. 109.
In March 2004, the SEC issued Staff Accounting Bulletin 105, "Application
of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 requires that
certain mortgage loan commitments issued after March 31, 2004 are accounted for
as derivatives until the loan is made or they expire unexercised. The adoption
of SAB 105 did not have a material financial statement impact.
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"). For the third
quarter of 2004, the Company accounted for the effects of the Medicare
Prescription Drug and Modernization Act of 2003 by recognizing the impact of the
Medicare prescription drug subsidy prospectively from July 1, 2004. The subsidy
reduced the July 1, 2004 Accumulated Post Retirement Benefit Obligation and 2004
annual related expense by $3.5 million and $0.3 million, respectively.
In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3, which is
effective for fiscal years beginning after December 15, 2004, requires acquired
loans to be carried at fair value and prohibits the establishment of acquisition
credit loss reserves related to business combinations or portfolio acquisitions
that have evidence of credit deterioration since origination. At our recent
level and type of acquisitions, the adoption of SOP 03-3 is not expected to have
a material financial statement impact.
In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue
Recognition" ("SAB 104"), which revises or rescinds portions of related
interpretive guidance in order to be consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The adoption of
SAB 104 as of January 1, 2004 did not have a material financial statement impact
on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Prior period restatement is not permitted. On November 7, 2003, certain
measurement and classification provisions of SFAS 150, relating to certain
mandatorily redeemable non-controlling interests, were deferred indefinitely.
The adoption of these delayed provisions, which relate primarily to minority
interests associated with finite-lived entities, is not expected to have a
material financial statement impact on the Company.
Note 2 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables, as well as finance receivables previously securitized and
still managed by CIT ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Loans.......................................... $27,566.2 $25,137.1
Leases......................................... 7,482.0 6,163.1
--------- ---------
Finance receivables......................... $35,048.2 $31,300.2
========= =========
Finance receivables securitized and
managed by CIT.............................. $ 8,309.7 $ 9,651.7
========= =========
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Finance receivables include the following ($ in billions)
December 31, December 31,
2004 2003
------------ ------------
Unearned income............................... $ (3.2) $ (3.3)
Equipment residual values..................... $ 2.4 $ 2.4
Leveraged leases.............................. $ 1.2 $ 1.1
Leveraged leases exclude the portion funded by third party non-recourse
debt payable of $2.9 billion at December 31, 2004, and $3.3 billion at December
31, 2003.
The following table sets forth the contractual maturities of finance
receivables due in the respective fiscal period. ($ in millions).
December 31, 2004 December 31, 2003
----------------- -----------------
Due Within Year:
1.............................. $11,799.5 33.7% $11,698.9 37.4%
2.............................. 4,827.0 13.8% 4,503.7 14.4%
3.............................. 3,720.8 10.6% 3,441.2 11.0%
4.............................. 2,465.3 7.0% 2,197.9 7.0%
5.............................. 2,066.8 5.9% 2,095.9 6.7%
Thereafter........................ 10,168.8 29.0% 7,362.6 23.5%
--------- ---------
Total............................. $35,048.2 100.0% $31,300.2 100.0%
========= =========
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth certain information regarding total non-performing assets ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Non-accrual finance receivables.................. $ 458.4 $ 566.5
Assets received in satisfaction of loans......... 81.2 110.0
------- -------
Total non-performing assets...................... $ 539.6 $ 676.5
------- -------
Percentage of finance receivables................ 1.54% 2.16%
======= =======
The following table contains information on loans evaluated for impairment
and the reserve for credit losses associated with loans considered impaired.
After being classified as impaired, there is no finance income recognized on
these loans because the definition of an impaired loan is based upon non-accrual
status ($ in millions).
At or for the At or for the
Years Ended Three Months At or for the
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- -------------- --------------
Finance receivables evaluated for impairment........ $400.9 $516.5 $959.9 $1,001.2
Finance receivables considered impaired............. $235.4 $279.8 $522.3 $ 449.8
Associated reserve for credit losses(1)............. $ 60.4 $120.7 $156.9 $ 197.4
Finance receivables evaluated for impairment
with no reserve for credit losses required....... $165.5 $236.7 $437.6 $ 551.4
Average monthly investment in finance
receivables considered for impairment(2)......... $445.4 $690.5 $980.6 $ 818.9
- --------------------------------------------------------------------------------
(1) Impaired finance receivables are those loans whose estimated fair value,
based upon underlying collateral or estimated cash flows, is less than the
current recorded value. The allowance is the difference between these two
amounts and is included in the reserve for credit losses.
(2) Includes telecommunications related accounts totaling $224.3 million,
$316.0 million, $327.3 million and $185.5 million at December 31, 2004 and
2003, December 31, 2002 and September 30, 2002, respectively.
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
At or for the At or for the
Years Ended Three Months At or for the
December 31, Ended Year Ended
---------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- -------------- -------------
Balance, beginning of period........................ $ 643.7 $ 760.8 $ 777.8 $ 492.9
------- ------- ------- -------
Provision for credit losses......................... 270.0 408.8 133.4 453.3
Provision for credit losses -- specific
reserving actions(1)............................. (55.8) (21.5) -- 335.0
Reserves relating to acquisitions,
dispositions and other(2)........................ 60.5 17.5 4.1 (11.1)
------- ------- ------- -------
Additions to the reserve for credit losses....... 274.7 404.8 137.5 777.2
------- ------- ------- -------
Charged-off -- finance receivables................... (340.3) (424.9) (157.7) (508.2)
Charged-off -- telecommunications.................... (40.1) (47.0) (15.5) (30.9)
Charged-off -- Argentine............................. -- (101.0) -- --
Recoveries on finance receivables
previously charged-off........................... 79.2 51.0 18.7 46.8
------- ------- ------- -------
Net credit losses................................ (301.2) (521.9) (154.5) (492.3)
------- ------- ------- -------
Balance, end of period.............................. $ 617.2 $ 643.7 $ 760.8 $ 777.8
======= ======= ======= =======
Reserve for credit losses as a percentage
of finance receivables........................... 1.76% 2.06% 2.75% 2.73%
- --------------------------------------------------------------------------------
(1) The 2002 amount consists of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2003 amount reflects a reduction of the Argentine reserve
after substantial work-out efforts were completed. This amount was offset
by an increase to the provision for credit losses -- finance receivables.
The 2004 amount includes a $43.3 million reduction to the
telecommunications specific reserve and a $12.5 million reduction of the
Argentine reserve following the sale of the remaining assets in this
portfolio. The Argentine reduction was offset by an increase to the
provision for credit losses -- finance receivables.
(2) The higher 2004 balance reflects increased portfolio purchase and business
acquisition activity.
Note 4 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of $1.9 billion and $1.5 billion) of operating lease
assets, by equipment type, at December 31, 2004 and 2003 ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Commercial aircraft (including regional
aircraft)...................................... $4,461.0 $4,141.1
Railcars and locomotives......................... 2,212.8 1,987.3
Information technology........................... 430.4 229.3
Office equipment................................. 274.2 235.0
Communications................................... 237.8 320.6
Business aircraft................................ 189.1 242.5
Other............................................ 485.6 459.7
-------- --------
Total......................................... $8,290.9 $7,615.5
======== ========
Off-lease equipment.............................. $ 118.3 $ 265.9
======== ========
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental income on operating leases, which is included in finance income,
totaled $1.4 billion for the year ended December 31, 2004, $1.5 billion for the
year ended December 31, 2003, $0.4 billion for the three months ended December
31, 2002, and $1.7 billion for the year ended September 30, 2002. The following
table presents future minimum lease rentals on non-cancelable operating leases
at December 31, 2004. Excluded from this table are variable rentals calculated
on the level of asset usage, re-leasing rentals, and expected sales proceeds
from remarketing operating lease equipment at lease expiration, all of which are
components of operating lease profitability ($ in millions).
Years Ended December 31, Amount
- ------------------------ ------
2005 .............................................................. $1,099.9
2006 .............................................................. 742.7
2007 .............................................................. 445.3
2008 .............................................................. 301.9
2009 .............................................................. 205.2
Thereafter 273.2
--------
Total .......................................................... $3,068.2
========
Note 5 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets ($ in millions):
December 31, 2004 December 31, 2003
------------------- ------------------
Geographic Amount Percent Amount Percent
------ ------- ------ -------
North America:
West........................................................... $ 8,595.3 19.0% $ 7,485.5 18.7%
Northeast...................................................... 8,463.4 18.7% 8,319.8 20.8%
Midwest........................................................ 6,907.0 15.3% 5,996.2 14.9%
Southeast...................................................... 6,283.3 14.0% 5,558.6 13.9%
Southwest...................................................... 4,848.3 10.7% 4,423.1 11.0%
Canada......................................................... 2,483.4 5.5% 2,055.5 5.1%
--------- ----- --------- -----
Total North America............................................ 37,580.7 83.2% 33,838.7 84.4%
Other foreign.................................................. 7,580.2 16.8% 6,245.2 15.6%
--------- ----- --------- -----
Total....................................................... $45,160.9 100.0% $40,083.9 100.0%
========= ===== ========= =====
Industry
Manufacturing(1)............................................... $ 6,932.0 15.4% $ 7,340.6 18.3%
Retail(2)...................................................... 5,859.4 13.0% 5,630.9 14.0%
Commercial airlines (including regional airlines).............. 5,512.4 12.2% 5,039.3 12.6%
Consumer based lending -- home lending.......................... 5,069.8 11.2% 2,663.1 6.6%
Transportation(3).............................................. 2,969.6 6.6% 2,934.9 7.3%
Service industries............................................. 2,854.5 6.3% 2,608.3 6.5%
Consumer based lending -- non-real estate(4).................... 2,480.1 5.5% 1,862.1 4.7%
Wholesaling.................................................... 1,727.5 3.8% 1,374.7 3.4%
Construction equipment......................................... 1,603.1 3.5% 1,571.2 3.9%
Communications(5).............................................. 1,292.1 2.9% 1,386.5 3.5%
Automotive Services............................................ 1,196.3 2.6% 1,152.3 2.9%
Other (no industry greater than 3.0%)(6)....................... 7,664.1 17.0% 6,520.0 16.3%
--------- ----- --------- -----
Total....................................................... $45,160.9 100.0% $40,083.9 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of apparel (2.7%), followed by food and kindred
products, textiles, transportation equipment, chemical and allied
products, rubber and plastics, industrial machinery and equipment, and
other industries.
(2) Includes retailers of apparel (5.6%) and general merchandise (4.0%).
(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 $335.2 million and $556.3 million of equipment financed for the
telecommunications industry at December 31, 2004 and 2003, respectively,
but excludes telecommunications equipment financed for other industries.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $1.1 billion, or 2.5% of total
financing and leasing assets at December 31, 2004. This amount includes
approximately $805.1 million in project financing and $259.9 million in
rail cars on lease.
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6 -- Retained Interests in Securitizations and Other Investments
Retained interests in securitizations and other investments designated as
available for sale are shown in the following table ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Retained interests in commercial loans:
Retained subordinated securities....................................... $ 446.2 $ 558.8
Interest-only strips................................................... 292.4 367.1
Cash reserve accounts.................................................. 323.4 260.3
-------- --------
Total retained interests in commercial loans........................... 1,062.0 1,186.2
-------- --------
Retained interests in consumer loans:
Retained subordinated securities....................................... 76.6 64.5
Interest-only strips................................................... 17.0 58.6
Cash reserve accounts.................................................. -- --
-------- --------
Total retained interests in consumer loans............................. 93.6 123.1
-------- --------
Total retained interests in securitizations............................... 1,155.6 1,309.3
Aerospace equipment trust certificates and other(2)....................... 72.6 71.5
-------- --------
Total.................................................................. $1,228.2 $1,380.8
======== ========
- --------------------------------------------------------------------------------
(1) Comprised of amounts related to home lending receivables securitized.
(2) At December 31, 2004 other includes a $4.7 million investment in common
stock received as part of a loan work-out of an aerospace account.
The carrying value of the retained interests in securitized assets is
reviewed quarterly for valuation impairment. The following table summarizes the
net accretion recognized in pretax earnings, including the stated impairment
charges, and unrealized after-tax gains, reflected as a part of accumulated
other comprehensive loss ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------- -------------
Net accretion in pre-tax earnings................... $ 44.2 $ 81.5 $ 33.2 $ 97.1
Impairment charges, included in net accretion....... $ 62.4 $ 66.6 $ 10.6 $ 49.9
Unrealized after tax gains.......................... $ 8.4 $ 7.7 $ 20.5 $ 25.8
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 2004 (there were no consumer
transactions during 2004) were as follows:
Commercial Equipment
--------------------------
Specialty Equipment
Finance Finance
--------- ---------
Weighted average prepayment speed................... 38.58% 12.04%
Weighted average expected credit losses............. 0.41% 0.78%
Weighted average discount rate...................... 7.18% 9.00%
Weighted average life (in years).................... 1.22 1.94
17
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at December 31, 2004 were as
follows:
Commercial Equipment
--------------------- Manufactured Recreational
Specialty Equipment Housing and Vehicle and
Finance Finance Home Lending Boat
------- ------- ------------ ------------
Weighted average prepayment speed.................... 27.27% 11.82% 26.55% 20.25%
Weighted average expected credit losses.............. 1.19% 1.28% 1.55% 1.69%
Weighted average discount rate....................... 7.85% 9.49% 13.08% 14.48%
Weighted average life (in years)..................... 0.98 1.38 3.07 2.68
The impact of adverse changes to the key assumptions on the fair value of
retained interests as of December 31, 2004 is shown in the following tables ($
in millions).
Manufactured Recreational
Commercial Housing and Vehicle and
Equipment Home Lending Boat
---------- ----------- -----------
Prepayment speed:
10 percent adverse change .......... $ (10.6) $ (4.3) $ 0.1
20 percent adverse change .......... (20.2) (8.0) 0.2
Expected credit losses:
10 percent adverse change .......... (8.3) (5.4) (0.9)
20 percent adverse change .......... (16.4) (9.9) (1.7)
Weighted average discount rate:
10 percent adverse change .......... (8.1) (2.1) (0.3)
20 percent adverse change .......... (15.9) (4.1) (0.7)
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.
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 Home Equity
Securitizations During: Securitizations During:
----------------------- -----------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Actual and projected losses at:
December 31, 2004 ............................ 1.25% 1.52% 1.77% 2.78% 3.24%
December 31, 2003 ............................ 1.74% 2.04% 3.07% 2.72%
December 31, 2002 ............................ 1.96% 2.65%
September 30, 2002 ........................... 1.92% 2.68%
18
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Year Ended
December 31, December 31,
2004 2003
------------ ------------
Retained Interests
- ------------------
Retained interest at beginning of period........... $1,309.3 $1,355.9
New sales.......................................... 499.5 640.9
Distributions from trusts.......................... (682.5) (728.6)
Change in fair value............................... 1.2 (21.1)
Other, including net accretion, and
clean-up calls................................... 28.1 62.2
-------- --------
Retained interest at end of period................. $1,155.6 $1,309.3
======== ========
Cash Flows During the Periods
- -----------------------------
Proceeds from new securitizations.................. $3,870.4 $4,589.5
Other cash flows received on retained interests.... 719.0 688.2
Servicing fees received............................ 80.3 80.2
Reimbursable servicing advances, net............... (6.0) 7.3
Repurchases of delinquent or foreclosed assets
and ineligible contracts........................ (16.1) (63.0)
Purchases of contracts through clean-up calls...... (164.5) (439.8)
Guarantee draws.................................... (3.2) (2.1)
-------- --------
Total, net...................................... $4,479.9 $4,860.3
======== ========
The following table presents net charge-offs and accounts past due 60 days
or more, on both an owned portfolio basis and managed receivable basis. Net
charge-off percentages are on average owned finance receivables or managed
receivables, while the past due percentages are on ending finance receivable or
managed receivable balances. Managed receivables include finance receivables
plus finance receivables previously securitized and still managed by CIT ($ in
millions).
At or for the At or for the At or for the At or for the
Year Ended Year Ended Three Months Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ----------------- ------------------
Net Charge-offs of
Finance Receivables
- -------------------
Commercial........ $ 260.2 0.88% $ 494.7 1.79% $ 148.4 2.32% $ 467.9 1.68%
Consumer.......... 41.0 1.11% 27.2 1.53% 6.1 2.46% 24.4 1.36%
------- -------- -------- --------
Total........... $ 301.2 0.91% $ 521.9 1.77% $ 154.5 2.32% $ 492.3 1.67%
======= ======== ======== ========
Net Charge-offs of
Managed Receivables
- -------------------
Commercial........ $ 349.2 0.96% $ 639.5 1.80% $ 199.4 2.30% $ 749.9 2.05%
Consumer.......... 60.7 1.17% 40.6 1.02% 6.8 1.03% 30.5 0.83%
------- -------- -------- --------
Total........... $ 409.9 0.99% $ 680.1 1.72% $ 206.2 2.21% $ 780.4 1.94%
======= ======== ======== ========
Finance Receivables
Past Due 60 Days
or More
- -------------------
Commercial........ $ 491.6 1.64% $ 587.6 2.05% $ 925.5 3.47% $ 996.7 3.62%
Consumer.......... 116.4 2.27% 88.7 3.33% 75.8 7.87% 73.3 7.85%
------- -------- -------- --------
Total........... $ 608.0 1.73% $ 676.3 2.16% $1,001.3 3.63% $1,070.0 3.76%
======= ======== ======== ========
Managed Receivables
Past Due 60 Days
or More
- -------------------
Commercial........ $ 650.6 1.69% $ 824.4 2.22% $1,242.8 3.47% $1,392.6 3.74%
Consumer.......... 227.8 3.45% 197.6 4.22% 152.8 4.36% 146.0 4.26%
------- -------- -------- --------
Total........... $ 878.4 1.95% $1,022.0 2.44% $1,395.6 3.55% $1,538.6 3.78%
======= ======== ======== ========
19
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 -- Other Assets
Other assets consisted of the following ($ in millions):
December 31, December 31,
2004 2003
------------ ------------
Other Assets
- ------------
Accrued interest and receivables from derivative counterparties........... $ 390.0 $ 869.9
Investments in and receivables from non-consolidated subsidiaries......... 719.5 603.2
Deposits on commercial aerospace flight equipment......................... 333.1 283.2
Private fund and direct equity investments................................ 181.0 249.9
Prepaid expenses.......................................................... 105.3 154.7
Repossessed assets and off-lease equipment................................ 98.9 122.2
Furniture and fixtures, miscellaneous receivables and other assets........ 885.9 1,027.2
-------- --------
$2,713.7 $3,310.3
======== ========
Note 8 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
December 31, December 31,
2004 2003
------------ ------------
Commercial paper -- outstanding.................. $ 4,210.9 $ 4,173.9
Weighted average interest rate................... 2.55% 1.19%
Weighted average number of days to maturity...... 45 days 50 days
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Commercial paper -- average
borrowings.......................... $4,831.3 $4,648.2 $4,758.7 $4,564.7
Maximum amount outstanding............. $5,326.1 $4,999.1 $4,994.1 $10,713.5
Weighted average interest rate......... 1.68% 1.25% 1.75% 2.25%
The consolidated weighted average interest rates on variable-rate senior
notes at December 31, 2004 and December 31, 2003 were 2.63% and 1.87%,
respectively. Fixed-rate senior debt outstanding at December 31, 2004 matures at
various dates through 2014. The consolidated weighted-average interest rates on
fixed-rate senior debt at December 31, 2004 and December 31, 2003 was 5.53% and
6.12%, respectively. Foreign currency-denominated debt (stated in U.S. Dollars)
totaled $5,017.5 million at December 31, 2004, of which $4,335.4 million was
fixed-rate and $682.1 million was variable-rate. Foreign currency-denominated
debt (stated in U.S. Dollars) totaled $1,601.4 million at December 31, 2003, all
of which was fixed-rate.
The following tables present calendar year contractual maturities and the
high and low interest rates for total variable-rate and fixed-rate debt ($ in
millions).
Commercial Variable-rate December 31, December 31,
Variable-Rate Term Debt Paper Senior Notes 2004 Total 2003
- ----------------------- ---------- ------------- ------------ ------------
Due in 2004............................ $ -- $ -- $ -- $ 8,980.3
Due in 2005 (rates ranging from
1.78% to 3.63%)..................... 4,210.9 3,355.4 7,566.3 3,333.3
Due in 2006 (rates ranging from
2.17% to 3.12%)..................... -- 3,946.3 3,946.3 985.3
Due in 2007 (rates ranging from
2.49% to 3.12%)..................... -- 3,169.0 3,169.0 37.5
Due in 2008 (rates ranging from
2.78% to 3.12%)..................... -- 50.9 50.9 39.8
Due in 2009 (rates ranging from
2.62% to 3.12%)..................... -- 836.0 836.0 --
Due after 2009 (rates ranging from
2.78% to 5.39%)..................... -- 187.4 187.4 206.1
-------- --------- --------- ---------
Total............................... $4,210.9 $11,545.0 $15,755.9 $13,582.3
======== ========= ========= =========
20
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, December 31,
Fixed-Rate Term Debt 2004 2003
- ------------------- ------------ ------------
Due in 2004.......................................... $ -- $ 3,930.2
Due in 2005 (rates ranging from 1.85% to 8.26%)...... 4,589.4 4,328.6
Due in 2006 (rates ranging from 1.70% to 7.75%)...... 2,723.6 2,639.4
Due in 2007 (rates ranging from 2.35% to 7.75%)...... 3,907.6 3,498.9
Due in 2008 (rates ranging from 2.70% to 7.75%)...... 1,959.0 1,920.7
Due in 2009 (rates ranging from 3.35% to 7.75%)...... 1,378.3 309.4
Due after 2009 (rates ranging from 4.25% to 7.75%)... 7,157.2 3,203.6
--------- ---------
Total............................................. $21,715.1 $19,830.8
========= =========
At December 31, 2004, $12.7 billion of unissued debt securities remained
under a shelf registration statement. The following table represents information
on unsecured committed lines of credit at December 31, 2004 that can be drawn
upon to support commercial paper borrowings ($ in millions).
Expiration Total Drawn Available
- ---------- ----- ----- ---------
April 13, 2005.......................... $2,100.0 $ -- $2,100.0
October 14, 2008(1)..................... 2,100.0 308.9 1,791.1
April 14, 2009.......................... 2,100.0 -- 2,100.0
-------- ------ --------
Total credit lines...................... $6,300.0 $308.9 $5,991.1
======== ====== ========
- --------------------------------------------------------------------------------
(1) 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.
The credit line agreements contain clauses that permit extensions beyond
the expiration dates upon written consent from the participating lenders. In
addition to the above lines, CIT has undrawn, unsecured committed lines of
credit of $156 million, which supports the Australia commercial paper program.
Certain foreign operations utilize local financial institutions to fund
operations. At December 31, 2004, local credit facilities totaled $91.7 million,
of which $62.5 million was undrawn and available.
In January 2004 and December 2003, CIT called at par a total of $1.25
billion in term debt securities. These notes were listed on the New York Stock
Exchange under the ticker symbols CIC and CIP and were commonly known as PINEs
("Public Income Notes"). The securities' coupon rates of 8.25% and 8.125% were
marked down to a market interest rate yield of approximately 7.5% in CIT's
financial statements through purchase accounting. In light of the high coupon
rates, we called the securities for redemption pursuant to the terms outlined in
the prospectuses. 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 by the Trust are guaranteed by CIT to the extent
that the Trust has funds available for distribution. The Capital Securities were
valued at $260.0 million on June 1, 2001, the date of acquisition by Tyco, in
new basis accounting and the current balance reflects accretion of the premium.
21
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9 -- Derivative Financial Instruments
As part of managing exposure to interest rate, foreign currency, and, in
limited instances, credit risk, CIT, as an end-user, enters into various
derivative transactions, all of which are transacted in over-the-counter markets
with other financial institutions. Derivatives are only utilized to hedge
exposures, and not for speculative purposes. To ensure both appropriate use as a
hedge and to achieve hedge accounting treatment, whenever possible,
substantially all derivatives entered into are designated according to a hedge
objective against a specific or forecasted liability or, in limited instances,
assets. The notional amounts, rates, indices, and maturities of our derivatives
closely match the related terms of the underlying hedged items.
CIT utilizes interest rate swaps to exchange variable-rate interest
underlying forecasted issuances of commercial paper, specific variable-rate debt
instruments, and, in limited instances, variable-rate assets for fixed-rate
amounts. These interest rate swaps are designated as cash flow hedges and
changes in fair value of these swaps, to the extent they are effective as a
hedge, are recorded in other comprehensive income. Ineffective amounts are
recorded in interest expense.
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows are presented in the
following table ($ in millions).
Fair Value Total
Adjustments of Income Unrealized
Derivatives Tax Effects Loss
-------------- ----------- ----------
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
Changes in values of derivatives qualifying as cash flow hedges... (23.3) 9.1 (14.2)
------- ------ ------
Balance at December 31, 2004 -- unrealized loss.................... $ 41.3 $(14.2) $ 27.1
======= ====== ======
The unrealized loss as of December 31, 2004, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, followed by lower market interest rates.
Assuming no change in interest rates, approximately $6.6 million, net of tax, of
Accumulated Other Comprehensive Loss is expected to be reclassified to earnings
over the next twelve months as contractual cash payments are made. The
Accumulated Other Comprehensive Loss (along with the corresponding swap
liability) will be adjusted as market interest rates change over the remaining
life of the swaps.
The ineffective amounts, due to changes in the fair value of cash flow
hedges, are recorded as either an increase or decrease to interest expense as
presented in the following table ($ in millions).
Increase/Decrease
Ineffectiveness to Interest Expense
--------------- -------------------
For the year ended December 31, 2004.................... $1.4 Decrease
For the year ended December 31, 2003.................... $0.2 Increase
For the three months ended December 31, 2002............ $0.4 Decrease
For the year ended September 30, 2002................... $1.4 Increase
CIT also utilizes interest rate swaps to convert fixed-rate interest on
specific debt instruments to variable-rate amounts. These interest rate swaps
are designated as fair value hedges and changes in fair value of these swaps are
effectively recorded as an adjustment to the carrying value of the hedged item,
as the offsetting changes in fair value of the swaps and the hedged items are
recorded in earnings.
22
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position ($ in
millions):
December 31,
----------------
2004 2003
---- ----
Floating to fixed-rate swaps -- Effectively converts the interest rate on an
cash flow hedges............................ $ 3,533.6 $2,615.0 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........................... 7,642.6 6,758.2 equivalent amount of fixed-rate notes and
--------- -------- selected assets to a variable rate.
Total interest rate swaps..................... $11,176.2 $9,373.2
========= ========
In addition to the swaps in the table above, in conjunction with
securitizations, at December 31, 2004, CIT has $2.7 billion in notional amount
of interest rate swaps outstanding with the related trusts to protect the trusts
against interest rate risk. CIT entered into offsetting swap transactions with
third parties totaling $2.7 billion in notional amount at December 31, 2004 to
insulate the related interest rate risk.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid on U.S.
dollar interest rate swaps at December 31, 2004 ($ 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
- ------------ ------ ---- ---- ------ ---- ----
2005.......................... $1,408.8 2.38% 3.01% $ 11.0 7.85% 3.18%
2006.......................... 392.7 2.34% 3.80% 340.8 3.15% 3.11%
2007.......................... 295.4 2.30% 4.00% 1,112.7 5.62% 4.39%
2008.......................... 362.7 3.21% 6.29% 497.9 4.81% 3.84%
2009.......................... 154.6 2.43% 5.63% 1,300.0 4.47% 3.15%
2010 -- Thereafter............. 669.2 2.65% 5.90% 2,228.1 6.83% 3.96%
-------- --------
Total....................... $3,283.4 2.52% 4.27% $5,490.5 5.62% 3.79%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid, of foreign
currency interest rate swaps at December 31, 2004 ($ in million).
Floating to Fixed-rate Fixed to Floating-rate
------------------------- -------------------------
Notional Receive Pay Notional Receive Pay Maturity
Foreign Currency Amount Rate Rate Amount Rate Rate Range
- ---------------- ------ ---- ---- ------ ---- ---- -----
Euro............................... $ -- -- -- $ 866.3 4.25% 2.58% 2011
British Sterling................... 17.8 5.00% 5.43% 867.1 5.50% 5.42% 2014-2024
Canadian Dollar.................... 87.1 2.63% 6.34% 418.7 3.35% 1.80% 2005-2009
Australian Dollar.................. 145.3 5.41% 5.49% -- 2006-2009
------ --------
$250.2 $2,152.1
====== ========
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
CIT utilizes foreign currency exchange forward contracts and
cross-currency swaps to hedge currency risk underlying foreign currency loans to
subsidiaries and the net investments in foreign operations. These contracts are
designated as foreign currency cash flow hedges or net investment hedges and
changes in fair value of these contracts are recorded in other comprehensive
income along with the transaction gains and losses on the underlying hedged
items. CIT utilizes cross currency swaps to hedge currency risk underlying
foreign currency debt and selected foreign currency assets. These swaps are
designated as foreign currency cash flow hedges or
23
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
foreign currency fair value hedges and changes in fair value of these contracts
are recorded in other comprehensive income (for cash flow hedges), or
effectively as a basis adjustment (including the impact of the offsetting
adjustment to the carrying value of the hedged item) to the hedged item (for
fair value hedges) along with the transaction gains and losses on the underlying
hedged items.
At December 31, 2004, CIT was party to foreign currency exchange forward
contracts and cross-currency swaps. The following table presents the maturity
and notional principal amounts at December 31, 2004 ($ in millions).
Maturity
Years Ending Foreign Currency Cross-Currency
December 31, Exchange Forwards Swaps
- ------------ ----------------- --------------
2005...................................... $1,832.3 $ 864.1
2006...................................... 760.1 56.6
2007...................................... 219.7 61.1
2008...................................... 7.0 234.8
2009...................................... -- 649.8
2010 -- Thereafter........................ -- 1,018.4
-------- --------
Total.................................. $2,819.1 $2,884.8
======== ========
During 2004, CIT entered into credit default swaps, with a combined
notional value of $98.0 million and terms of 5 years, to economically hedge
certain CIT credit exposures. These swaps do not meet the requirements for hedge
accounting treatment and therefore are recorded at fair value, with both
realized and unrealized gains or losses recorded in other revenue in the
consolidated statement of income. The cumulative fair value adjustment as of
December 31, 2004 amounted to a $5.4 million pretax loss.
CIT also utilizes Treasury locks (bond forwards), which have a notional
amount of $49.1 million at December 31, 2004 and mature in the first quarter of
2005, to hedge interest rate risk associated with planned debt issuances and
certain other forecasted transactions. These derivatives are designated as cash
flow hedges of a forecasted transaction, with changes in fair value of these
contracts recorded in other comprehensive income. Gains and losses recorded in
other comprehensive income are reclassified to earnings in the same period that
the forecasted transaction impacts earnings.
Note 10 -- Accumulated Other Comprehensive Loss
The following table details the components of accumulated other
comprehensive loss, net of tax ($ in millions):
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Changes in fair values of derivatives qualifying
as cash flow hedges............................ $(27.1) $(41.3) $(118.3) $(120.5)
Foreign currency translation adjustments.......... (37.2) (105.8) (75.6) (75.8)
Minimum pension liability adjustments............. (2.7) (0.8) (20.5) (21.0)
Unrealized gain on equity and securitization
investments.................................... 8.6 6.3 13.7 21.0
------ ------- ------- -------
Total accumulated other comprehensive loss........ $(58.4) $(141.6) $(200.7) $(196.3)
====== ======= ======= =======
Note 11 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 17.0 million, 17.4 million, 15.4 million and 15.6 million shares
for the years ended December 31, 2004 and 2003, three months ended December 31,
2002 and year ended September 30, 2002.
24
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented ($ in millions, except per share amounts, which are
in whole dollars, shares in thousands).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year Ended December 31, 2004
Basic EPS:........................................... $ 753.6 211,017 $ 3.57
Income available to common stockholders
Effect of Dilutive Securities:
Restricted shares................................. -- 764
Stock options..................................... -- 3,273
--------- -------
Diluted EPS.......................................... $ 753.6 215,054 $ 3.50
========= =======
Year Ended December 31, 2003
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
========= =======
Three Months Ended December 31, 2002
Basic EPS:
Income available to common stockholders........... $141.3 211,573 $ 0.67
Effect of Dilutive Securities:
Restricted shares................................. -- 253
Stock options..................................... -- --
--------- -------
Diluted EPS.......................................... $ 141.3 211,826 $ 0.67
========= =======
Year Ended September 30, 2002
Basic EPS:
Loss attributable to common stockholders.......... $(6,698.7) 211,573 $ (31.66)
Effect of Dilutive Securities:
Restricted shares................................. -- 122
Stock options..................................... -- --
--------- -------
Diluted EPS.......................................... $(6,698.7) 211,695 $ (31.66)
========= =======
Note 12 -- Common Stock
The following table summarizes changes in common stock outstanding for the
respective periods:
Issued Less Treasury Outstanding
------ ------------- -----------
Balance at December 31, 2003...................... 211,848,997 (43,529) 211,805,468
Treasury shares purchased......................... -- (4,625,154) (4,625,154)
Stock options exercised........................... -- 2,970,754 2,970,754
Employee stock purchase plan participation........ -- 25,896 25,896
Restricted shares issued.......................... 263,206 -- 263,206
----------- ---------- -----------
Balance at December 31, 2004...................... 212,112,203 (1,672,033) 210,440,170
=========== ========== ===========
25
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Fees and other income................................. $502.9 $586.2 $169.2 $644.5
Factoring commissions................................. 227.0 189.8 55.1 165.5
Gains on sale of leasing equipment.................... 101.6 70.7 8.7 13.6
Gains on securitizations.............................. 59.1 100.9 30.5 149.0
------ ------ ------ ------
Total other revenue................................. $890.6 $947.6 $263.5 $972.6
====== ====== ====== ======
Note 14 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Salaries and employee benefits....................... $ 612.2 $529.6 $126.8 $517.4
Other operating expenses -- CIT....................... 434.2 383.3 105.8 380.6
Other operating expenses -- TCH....................... -- -- -- 23.0
-------- ------ ------ ------
Total.............................................. $1,046.4 $912.9 $232.6 $921.0
======== ====== ====== ======
Note 15 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows:
Percentage of Pretax Income
---------------------------------------------------------------
Year Ended Year Ended Three Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Federal income tax rate....................... 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes, net of
federal income tax benefit.................. 3.2 3.7 2.6 (0.3)
Foreign income taxes.......................... 1.4 1.0 1.6 (0.4)
Goodwill impairment........................... -- -- -- (36.1)
Interest expense -- TCH........................ -- -- -- (4.2)
Other......................................... (0.6) (0.7) (0.2) 0.1
---- ---- ---- ----
Effective tax rate............................ 39.0% 39.0% 39.0% (5.9)%
==== ==== ==== ====
The provision for income taxes is comprised of the following ($ in millions):
Year Ended Year Ended Three Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Current federal income tax provision.......... $ 1.5 $ -- $ -- $ --
Deferred federal income tax provision......... 321.0 265.1 71.9 276.9
------ ------ ----- ------
Total federal income taxes.................... 322.5 265.1 71.9 276.9
State and local income taxes.................. 69.1 53.5 9.4 30.4
Foreign income taxes.......................... 91.6 46.4 10.7 66.7
------ ------ ----- ------
Total provision for income taxes............ $483.2 $365.0 $92.0 $374.0
====== ====== ===== ======
26
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities are presented below
($ in millions):
December 31, December 31,
2004 2003
------------ ------------
Assets:
Net operating loss carryforwards................... $ 852.1 $ 834.1
Provision for credit losses........................ 190.5 202.4
Alternative minimum tax credits.................... 142.0 142.0
Purchase price adjustments......................... 15.0 67.9
Goodwill........................................... 45.5 65.6
Other comprehensive income items................... 9.8 47.6
Accrued liabilities and reserves................... 22.0 43.8
Other.............................................. 51.8 14.1
--------- --------
Total deferred tax assets........................ 1,328.7 1,417.5
--------- --------
Liabilities:
Leasing transactions (including securitizations)... (2,159.0) (1,944.7)
--------- --------
Net deferred tax (liability)....................... $ (830.3) $ (527.2)
========= ========
At December 31, 2004, CIT had U.S. federal net operating losses of
approximately $2.0 billion, 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 2005. Federal and state operating losses may be subject to
annual use limitations under section 382 of the Internal Revenue Code of 1986,
as amended, and other limitations under certain state laws. Management believes
that CIT will have sufficient taxable income in future years and can avail
itself of tax planning strategies in order to fully utilize these federal
losses. Accordingly, CIT does not believe a valuation allowance is required with
respect to these federal net operating losses. As of December 31, 2004, based on
management's assessment as to realizability, the net deferred tax liability
includes a valuation allowance of approximately $7.4 million relating to state
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 the 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.
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 76% of the total benefit obligation at December 31, 2004. 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
27
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest credit was 5.11%, 5.01% and 5.76% for the plan years ended December 31,
2004, 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. For most eligible retirees, the healthcare
benefit is contributory; 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, 2004, 2003, and 2002.
28
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 Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period............... $273.0 $225.2 $ 214.4 $184.4
Service cost............................................ 17.7 15.6 4.0 12.6
Interest cost........................................... 15.6 14.4 3.5 13.0
Actuarial loss.......................................... 18.0 23.9 6.2 15.6
Benefits paid........................................... (5.1) (4.6) (1.1) (4.2)
Plan settlements and curtailments....................... (6.2) (4.5) (2.3) (7.6)
Currency translation adjustment......................... 1.5 2.2 0.5 0.6
Other................................................... -- 0.8 -- --
------ ------ ------- ------
Benefit obligation at end of period..................... $314.5 $273.0 $ 225.2 $214.4
====== ====== ======= ======
Change in Plan Assets
Fair value of plan assets at beginning of period........ $212.8 $123.1 $ 119.6 $126.5
Actual return on plan assets............................ 25.5 28.7 6.1 (12.7)
Employer contributions.................................. 23.0 69.4 0.6 16.9
Plan settlements........................................ (6.2) (4.5) (2.3) (7.1)
Benefits paid........................................... (5.1) (4.6) (1.1) (4.2)
Currency translation adjustment......................... 0.6 0.7 0.2 0.2
------ ------ ------- ------
Fair value of plan assets at end of period.............. $250.6 212.8 $ 123.1 $119.6
====== ====== ======= ======
Reconciliation of Funded Status
Funded status........................................... $(63.9) $(60.2) $(102.1) $(94.8)
Unrecognized net actuarial loss......................... 63.9 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.................................... $ 51.3 $ 45.2 $ -- $ --
Accrued benefit liability............................... (55.1) (48.9) (79.2) (75.0)
Intangible asset........................................ -- -- -- --
Accumulated other comprehensive income.................. 3.8 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........................................... 5.70% 5.96% 6.45% 6.68%
Rate of compensation increase........................... 4.25% 4.26% 4.24% 4.22%
Weighted-average Assumptions Used to Determine
Net Periodic Pension Cost for Periods
Discount rate........................................... 5.96% 6.45% 6.68% 7.40%
Rate of compensation increase........................... 4.26% 4.24% 4.22% 4.70%
Expected long-term return on plan assets................ 7.95% 7.92% 7.90% 9.93%
Components of Net Periodic Benefit Cost
Service cost............................................ $ 17.7 $ 15.6 $ 4.0 $ 12.6
Interest cost........................................... 15.6 14.4 3.5 13.0
Expected return on plan assets.......................... (16.2) (9.4) (2.3) (11.9)
Amortization of net loss................................ 2.8 3.5 0.8 0.3
Amortization of prior service cost...................... -- -- -- --
------ ------ ------- ------
Total net periodic expense.............................. $ 19.9 $ 24.1 $ 6.0 $ 14.0
====== ====== ======= ======
29
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 $271.2 million, $232.4 million, and $193.0 million at December 31, 2004,
2003, and, 2002, respectively. Plans with accumulated benefit obligations in
excess of plan assets relate primarily to non-qualified U.S. plans and certain
international plans. The following table presents additional data relating to
these plans ($ in millions).
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Information for Pension Plans with an Accumulated
Benefit Obligation in Excess of Plan Assets
Projected benefit obligation............................ $ 74.2 $ 61.2 $225.2 $214.4
Accumulated benefit obligation.......................... 59.0 47.4 193.0 184.6
Fair value of plan assets............................... 9.9 7.1 123.1 119.6
Additional Information
(Decrease) increase in Minimum Liability Included in
Other Comprehensive Income........................... $ 2.5 $(32.3) $ (1.3) $ 34.9
Expected Future Cashflows
Expected Company Contributions in the following
fiscal year.......................................... $ 4.0
Expected Benefit Payments
1st Year following the disclosure date............... $ 22.7
2nd Year following the disclosure date............... $ 13.5
3rd Year following the disclosure date............... $ 18.7
4th Year following the disclosure date............... $ 14.0
5th Year following the disclosure date............... $ 16.6
Years 6 thru 10 following the disclosure date........ $106.6
Pension Plan Weighted-average Asset Allocations
Equity securities....................................... 59.7% 67.6% 61.1% 58.2%
Debt securities......................................... 36.0% 32.1% 38.6% 41.7%
Real estate............................................. -- -- -- --
Other................................................... 4.3% 0.3% 0.3% 0.1%
----- ----- ----- -----
Total pension assets.................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Of the 4.3% identified as other, approximately 3.5%, or $8.75 million, was
temporarily being held in cash for investment in equity securities on the first
business day of the following year.
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. 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 both the Employee Benefits Plans Committee of CIT and the
Plans' external investment consultants 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
Financial Officer, General Counsel, and other senior executives.
There were no equity securities of CIT or its subsidiaries included in the
pension plan assets at December 31, 2004, 2003 and 2002, respectively. CIT
expects to contribute $4.0 million to its pension plans and $4.0 million to its
other postretirement benefit plans in 2005.
30
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth data relating to postretirement plans ($ in
millions).
Postretirement Benefits
-------------------------------------------------------
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period............... $ 58.0 $ 48.1 $ 46.7 $ 39.5
Service cost............................................ 1.9 1.5 0.3 1.2
Interest cost........................................... 3.2 3.0 0.8 2.9
Actuarial loss.......................................... .7 9.6 0.8 5.3
Net benefits paid....................................... (3.9) (4.2) (0.5) (2.2)
Plan amendments......................................... -- -- -- --
------ ------ ------ ------
Benefit obligation at end of period..................... $ 59.9 $ 58.0 $ 48.1 $ 46.7
====== ====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period........ $ -- $ -- $ -- $ --
Net benefits paid....................................... (3.9) (4.2) (0.5) (2.2)
Employer contributions.................................. 3.9 4.2 0.5 2.2
------ ------ ------ ------
Fair value of plan assets at end of period.............. $ -- $ -- $ -- $ --
====== ====== ====== ======
Reconciliation of Funded Status
Funded status........................................... $(59.9) $(58.0) $(48.1) $(46.7)
Unrecognized net actuarial loss......................... 15.6 15.5 6.0 5.2
------ ------ ------ ------
Accrued cost............................................ $(44.3) $(42.5) $(42.1) $(41.5)
====== ====== ====== ======
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost.................................... $ -- $ -- $ -- $ --
Accrued benefit liability............................... (44.3) (42.5) (42.1) (41.5)
Intangible asset........................................ -- -- -- --
Accumulated other comprehensive income.................. -- -- -- --
------ ------ ------ ------
Net amount recognized................................... $(44.3) $(42.5) $(42.1) $(41.5)
====== ====== ====== ======
Weighted-average Assumptions Used to Determine
Benefit Obligations at Period End
Discount rate........................................... 5.50% 6.00% 6.50% 6.75%
Rate of compensation increase........................... 4.25% 4.25% 4.25% 4.25%
Weighted-average Assumptions Used to Determine Net
Periodic Benefit Cost for periods
Discount rate........................................... 6.00% 6.50% 6.75% 7.50%
Rate of compensation increase........................... 4.25% 4.25% 4.25% 4.50%
Components of Net Periodic Benefit Cost
Service cost............................................ $ 1.9 $ 1.5 $ 0.3 $ 1.2
Interest cost........................................... 3.2 3.0 0.8 2.9
Amortization of prior service cost...................... -- -- -- --
Amortization of net loss................................ 0.6 0.1 -- 0.1
------ ------ ------ ------
Total net periodic expense.............................. $ 5.7 $ 4.6 $ 1.1 $ 4.2
====== ====== ====== ======
Assumed Health Care Trend Rates at Period End
Healthcare cost trend rate assumed for next year
Pre-65............................................... 12.00% 12.00% 10.00% 11.00%
Post-65.............................................. 10.00% 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% 5.00%
Year that the rate reaches the ultimate trend rate...... 2018 2018 2008 2008
31
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Effect of One-percentage Point Increase on:
Period end postretirement benefit obligation............ $ 2.8 $ 2.7 $ 2.3 $ 2.2
Total of service and interest
cost components......................................... $ 0.2 $ 0.1 $ -- $ 0.1
Effect of One-percentage Point Decrease on:
Period end postretirement benefit obligation............ $(2.7) $(2.6) $(2.2) $(2.1)
Total of service and interest cost components........... $(0.2) $(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 106-2, "Accounting and Disclosure
Requirements related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003", CIT prospectively recognized the effects of the
subsidy in the third quarter 2004. In total, at the time of recognition, July 1,
2004, it was estimated that future subsidies would reduce the Company's
accumulated postretirement benefit obligation by approximately $3.5 million. As
a result, the 2004 net periodic postretirement benefit expense was reduced by
$0.3 million. Projected benefit payments and the effects of the Medicare Rx
subsidy recognition are as follows:
Medicare
Projected Benefit Payments Gross Rx Subsidy Net
- ------------------------ ------ ---------- ------
2005.......................................... $ 4.0 $ -- $ 4.0
2006.......................................... $ 4.2 $0.3 $ 3.9
2007.......................................... $ 4.5 $0.4 $ 4.1
2008.......................................... $ 4.7 $0.4 $ 4.3
2009.......................................... $ 4.8 $0.4 $ 4.4
2010 - 2014................................... $24.2 $1.8 $22.4
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 85%
of CIT's total Savings Incentive Plan expense for the year ended December 31,
2004. CIT's expense is based on specific percentages of employee contributions
and plan administrative costs and aggregated $19.9 million, $16.9 million and
$4.0 million and for the years ended December 31, 2004 and 2003 and the three
months ended December 31, 2002.
Corporate Annual Bonus Plan
The CIT Group Inc. Annual Bonus Plan and Discretionary Bonus Plan together
make-up CIT's annual cash 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 $74.4
million for the year ended December 31, 2004, were paid in February 2005. For
the year ended December 31, 2003, $59.0 million were awarded. A bonus of $20.1
million for the six months performance period from July 1, 2002 through December
31, 2002 was paid in February 2003.
32
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Options granted to employees
in 2004 have a vesting schedule of one third per year for three years, have a
10-year term from the date of grant and were issued with strike prices equal to
the fair market value of the common stock on the date of grant. Restricted stock
granted to employees in 2004 has two or three-year cliff vesting. A new
Performance Share program was rolled out in 2004. Performance Share grants have
a three-year performance-based vesting.
Data for the stock option plans is summarized as follows:
Year Ended December 31, 2004 Year Ended December 31, 2003
---------------------------- ----------------------------
Weighted Weighted
Average Price Average Price
Options Per Option Options Per Option
----------- ------------- ---------- --------------
Outstanding at beginning of period................ 18,766,824 $30.48 15,335,255 $33.13
January Grant..................................... 1,895,632 $39.22 4,240,644 $21.05
July Grant........................................ 1,802,050 $37.60 648,485 $27.74
Granted - Other................................... 673,624 $35.12 485,625 $27.27
Exercised......................................... (2,970,754) $23.52 (870,357) $23.02
Forfeited......................................... (303,469) $36.67 (1,072,828) $34.25
---------- ------ ---------- ------
Outstanding at end of period...................... 19,863,907 $33.07 18,766,824 $30.48
========== ====== ========== ======
Options exercisable at end of period.............. 8,201,726 $39.34 6,730,863 $43.18
========== ====== ========== ======
In 2004, 3,697,682 options were granted to employees as part of the
long-term incentive process. In addition, 673,624 CIT options were granted to
new hires as well as for retention purposes. 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
leaves of absence.
The weighted average fair value of new options granted was $7.51 and $5.30
for the years ended December 31, 2004 and 2003. 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
- --------------- ----------------- -------------- ---------------- -------------------
2004
January, 2004....................... 3-5 Years 1.22% 21.5% - 23.4% 2.20% - 3.02%
February, 2004...................... 3-5 Years 1.33% 21.5% - 23.4% 2.16% - 2.98%
February, 2004 -- Director Grant.... 10 Years 1.33% 22.4% 4.02%
April, 2004......................... 5 Years 1.48% 23.3% 3.52%
May, 2004........................... 5 Years 1.51% 23.3% 3.96%
May, 2004 -- Director Grant......... 10 Years 1.51% 22.4% 4.83%
July, 2004.......................... 3-5 Years 1.38% 20.5% - 23.0% 3.10% - 3.72%
September, 2004..................... 3-5 Years 1.41% 20.5% - 23.0% 2.83% - 3.38%
October, 2004....................... 3-5 Years 1.42% 18.4% - 22.6% 2.78% - 3.26%
33
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
- --------------- ----------------- -------------- ---------------- -------------------
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%
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 2004 and 2003.
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
2004
$18.14 - $27.21 10,503,846 7.7 $ 22.35 4,076,055 $ 22.62
$27.22 - $40.83 6,608,016 8.7 $ 36.20 1,373,626 $ 34.66
$40.84 - $61.26 858,846 4.9 $ 51.24 858,846 $ 51.24
$61.27 - $91.91 1,758,648 3.3 $ 68.89 1,758,648 $ 68.89
$91.92 - $137.87 132,961 3.1 $131.01 132,961 $131.01
$137.88 - $206.82 1,590 3.4 $160.99 1,590 $160.99
---------- ---------
19,863,907 8,201,726
========== =========
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
---------- ---------
18,766,824 6,730,863
========== =========
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 87,551 shares were purchased under the plan in 2004 and 88,323 shares were
purchased under the plan in 2003.
Restricted Stock
A new Performance Shares program was launched in February 2004 under the
Long-Term Compensation Plan, and 693,328 performance shares were awarded. These
shares have a three-year performance-based vesting period. The performance
targets are based upon a combination of consolidated return on tangible equity
measurements and compounded annual EPS growth rates.
During 2004, 59,163 restricted shares were awarded to employees under the
Long-Term Equity Compensation Plan. These shares were awarded at the fair market
value on the date of the grant and have a two or three-year cliff-vest period.
In addition, 10,481 shares were granted to independent members of the Board of
Directors, who elected
34
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to receive shares in lieu of cash compensation for their retainer. In
2003, CIT issued 1,229,450 restricted shares to employees and 6,488 shares were
granted to independent members of the Board of Directors. The restricted shares
issued to directors in lieu of cash compensation vest on the first anniversary
of the grant.
For the year ended December 31, 2004 and 2003, three months ended December
31, 2002 and year ended September 30, 2002, $23.5 million, $8.8 million, $1.2
million and $5.2 million, respectively, of expenses are included in salaries and
general operating expenses related to restricted stock.
Note 17 -- Commitments and Contingencies
The accompanying table summarizes the contractual amounts of
credit-related commitments and purchase and funding commitments. ($ in
millions).
December 31, 2004
-------------------------------------
Due to Expire December 31,
---------------------- 2003
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
Credit Related Commitments
Financing and leasing assets.............................. $1,467.5 $6,960.8 $8,428.3 $5,934.3
Letters of credit and acceptances:
Standby letters of credit................................. 611.0 7.3 618.3 508.7
Other letters of credit................................... 588.3 -- 588.3 694.0
Acceptances............................................... 16.4 -- 16.4 9.3
Guarantees................................................ 120.9 12.2 133.1 133.2
Purchase and Funding Commitments
Aerospace purchase commitments............................ 906.0 1,262.0 2,168.0 2,934.0
Other manufacturer purchase commitments................... 397.0 -- 397.0 197.2
Sale-leaseback payments................................... 31.0 464.4 495.4 486.4
Venture capital fund commitments.......................... 0.5 79.3 79.8 124.2
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including commitments to provide
financing and leasing capital, letters of credit and guarantees. Standby letters
of credit obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. In the event that the customer is unable to pay
according to the contractual terms, then the receivables would be purchased. As
of December 31, 2004, there were no outstanding liabilities relating to these
credit-related commitments or guarantees, as amounts are generally billed and
collected on a monthly basis.
CIT has entered into aerospace commitments to purchase commercial aircraft
from both Airbus Industrie and The Boeing Company. The commitment amounts
detailed in the table are based on appraised values, actual amounts will vary
based upon market factors at the time of delivery. The remaining units to be
purchased are 43, with 18 to be completed in 2005. Lease commitments are in
place for fourteen of the eighteen units to be delivered in 2005. The order
amount excludes CIT's options to purchase additional aircraft.
35
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Outstanding commitments to purchase equipment to be leased to customers,
other than the aircraft detailed above, relates primarily to rail equipment.
Additionally, CIT is party to railcar sale-leaseback transactions under which it
is obligated to pay a remaining total of $495.4 million, approximately $31
million per year through 2010 and declining thereafter through 2024, which is
more than offset by CIT's re-lease of the assets, contingent on its ability to
maintain railcar usage. In conjunction with this sale-leaseback transaction, CIT
has guaranteed all obligations of the related consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
25 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies.
Note 18 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at December 31, 2004 ($ in
millions).
Years Ended December 31, Amount
- ------------------------ ------
2005........................................................... $ 46.7
2006........................................................... 38.5
2007........................................................... 30.5
2008........................................................... 25.5
2009........................................................... 5.0
Thereafter..................................................... 3.6
------
Total.......................................................... $149.8
======
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 $32.1 million due in the future under noncancellable
subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
Three
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Premises............... $31.8 $34.0 $ 9.2 $38.4
Equipment.............. 8.4 9.3 2.1 8.4
Less sublease income... (9.1) (9.4) (1.8) (9.0)
----- ----- ----- -----
Total.................. $31.1 $33.9 $ 9.5 $37.8
===== ===== ===== =====
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.
36
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.
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments are set forth below ($ in millions).
December 31, 2004 December 31, 2003
Asset/(Liability) Asset/(Liability)
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
Finance receivables-loans(1).............................. $27,080.8 $27,186.5 $24,620.1 $24,711.3
Finance receivables-held for sale......................... 1,640.8 1,640.8 918.3 918.3
Retained interest in securitizations and
other investments(2)................................... 1,228.2 1,228.2 1,380.8 1,380.8
Other assets(3)........................................... 1,133.5 1,133.5 1,287.8 1,287.8
Commercial paper(4)....................................... (4,210.9) (4,210.9) (4,173.9) (4,173.9)
Variable-rate senior notes (including accrued
interest payable)(5)................................... (11,576.2) (11,635.3) (9,428.9) (9,440.5)
Fixed-rate senior notes (including accrued
interest payable)(5)................................... (22,037.2) (22,659.1) (20,123.7) (21,060.9)
Preferred capital securities (including accrued
interest payable)(6)................................... (261.3) (280.3) (263.0) (286.4)
Credit balances of factoring clients and other
liabilities(7) 6,025.1 6,025.1 (6,318.7) (6,318.7)
Derivative financial instruments(8):
Interest rate swaps, net............................... (17.2) (17.2) (36.1) (36.1)
Cross-currency swaps, net.............................. 369.9 369.9 254.3 254.3
Foreign exchange forwards, net......................... (161.8) (161.8) (216.0) (216.0)
Credit default swaps, net.............................. 5.4 5.4 -- --
Treasury locks......................................... 0.2 0.2 -- --
- --------------------------------------------------------------------------------
(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 3.90% to 8.65% for December 31, 2004 and
4.63% to 7.36% for December 31, 2003. 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
$7.4 billion at December 31, 2004 and $6.0 billion at December 31, 2003.
(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 $1.6 billion at December 31, 2004 and $2.0 billion at
December 31, 2003.
(4) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(5) The difference between the carrying value of fixed-rate senior notes,
variable rate senior notes and preferred capital securities and the
corresponding balances reflected in the consolidated balance sheets is
accrued interest payable. 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 2.74% to 6.03% at December 31, 2004 and 1.54% to
6.32% at December 31, 2003.
(6) 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.
(7) 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 $0.9
billion and $0.6 billion December 31, 2004 and 2003, respectively.
(8) CIT enters into derivative financial instruments for hedging economic
exposures 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's 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. In 2004, CIT and Dell agreed to extend the current agreement
beyond October 2005 and to modify certain contractual terms of the relationship.
The new agreements provide Dell with the option to purchase CIT's 30% interest
in DFS in February 2008 based on a formula tied to DFS profitability, within a
range of $100 million to $345 million. CIT has the right to purchase a minimum
percentage of DFS's finance receivables on a declining scale through January
2010.
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 and losses generated by DFS as determined
under GAAP are allocated 70% to Dell and 30% to CIT. The DFS board of directors
voting representation is equally weighted between designees of CIT and Dell,
with one independent director. DFS is not consolidated in CIT's financial
statements and is accounted for under the equity method. At December 31, 2004
and 2003, financing and leasing assets related to the DFS program (included in
the CIT Consolidated Balance Sheet) were $2.0 billion and $1.4 billion, and
securitized assets included in managed assets were $2.5 billion at both periods.
In addition to the owned and securitized assets acquired from DFS, CIT's
investment in and loans to the joint venture were approximately $267 million and
$205 million at December 31, 2004 and 2003.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. The
agreement with Snap-on extends until January 2006. 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. At both December
31, 2004 and 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
investment in and loans to the joint venture were approximately $16 million and
$17 million at both December 31, 2004 and 2003. Both the Snap-on and the Dell
joint venture arrangements were acquired in a 1999 acquisition.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based
lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint
venture, and share income and losses equally. This entity is not consolidated in
CIT's financial statements and is accounted for under the equity method. As of
December 31, 2004 and 2003, CIT's investment in and loans to the joint venture
were $191 million and $119 million.
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, 2004
and 2003, other assets included $19 million and $21 million of investments in
non-consolidated entities relating to such transactions that are accounted for
under the equity or cost methods.
Certain shareholders of CIT provide investment management services in the
normal course of business in conjunction with CIT's employee benefit plans.
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.
38
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment reporting was modified in two ways in 2004. First, in order to
better align with the market place and improve efficiency, the former Structured
Finance segment was merged with Capital Finance, and at the same time the
telecommunications and media portfolio was moved to the Business Credit unit of
Commercial Finance. Secondly, the Specialty Finance -- consumer unit, consisting
primarily of home lending and other loans to consumers, was broken out as a
separate segment. All prior periods have been conformed to these changes and
this updated presentation is consistent with the reporting to management during
2004.
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.
During the quarter ended June 30, 2005, the Company initiated further
steps to align its business with its customers, to increase productivity and to
improve efficiencies, and the segment reporting was modified accordingly. As
part of the realignment, Commercial Services (part of the former Commercial
Finance segment) is now a stand-alone segment. The other unit, that formerly was
included with the Commercial Finance segment, is now reported in the Corporate
Finance segment, which includes: capital markets & management advisory services,
communications, media & entertainment, as well as energy & infrastructure assets
transferred from Capital Finance and healthcare assets transferred from
Equipment Finance. The segment data included in the table has been conformed to
this presentation (except for the healthcare asset transfer) and is consistent
with management reporting.
Types of Products and Services
CIT has six reportable segments: Specialty Finance -- commercial,
Specialty Finance -- consumer, Commercial Services, Corporate Finance, Equipment
Finance and Capital Finance. These segments, other than Commercial Services,
offer secured lending and leasing products to companies across a variety of
industries, including aerospace, construction, rail, machine tool, business
aircraft, technology, manufacturing and transportation 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 Commercial Services segment offers secured lending and
receivables collection. The Specialty Finance -- consumer segment offers home
lending 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.
Total segment returns were improved in 2004 in comparison to 2003 and
included rebounds in Capital Finance and Equipment Finance from disappointing
2003 results. Corporate and Other for 2004 included the reduction to the
specific telecommunications reserve for credit losses and the first quarter gain
on the call of debt.
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 $3.9 million after
tax. For all periods shown, Corporate and Other includes the results of the
venture capital business.
39
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated managed assets. The selected financial information
by business segment presented below is based upon a fixed leverage ratio across
business units and the allocation of most corporate expenses. ($ in millions)
Specialty Specialty Corporate
Finance - Finance - Commercial Corporate Equipment Capital Total and
Commercial Consumer Services Finance Finance Finance Segments Other Consolidated
---------- --------- ---------- --------- --------- ------- -------- --------- ------------
At or for the year ended
December 31, 2004
Operating margin .......... $ 792.4 $ 147.6 $ 378.0 $ 367.0 $ 219.4 $ 182.5 $ 2,086.9 $ 121.7 $ 2,208.6
Income taxes .............. 158.9 31.8 103.8 102.3 49.5 35.2 481.5 1.7 483.2
Net income (loss) ......... 268.3 48.9 166.0 158.1 77.7 76.4 795.4 (41.8) 753.6
Total financing and
leasing assets .......... 11,172.8 5,374.5 6,204.1 6,738.0 6,924.4 8,747.1 45,160.9 -- 45,160.9
Total managed assets ...... 15,338.3 6,603.2 6,204.1 6,738.0 9,839.9 8,747.1 53,470.6 -- 53,470.6
At or for the year ended
December 31, 2003
Operating margin .......... $ 721.9 $ 120.6 $ 308.9 $ 328.9 $ 148.0 $ 130.7 $ 1,759.0 $ 16.1 $ 1,775.1
Income taxes .............. 146.8 20.0 81.5 94.7 24.6 27.0 394.6 (29.6) 365.0
Net income (loss) ......... 225.3 35.6 127.6 147.7 38.5 42.3 617.0 (50.1) 566.9
Total financing and
leasing assets .......... 9,504.1 2,814.3 6,325.8 6,314.1 6,957.7 8,167.9 40,083.9 -- 40,083.9
Total managed assets ...... 14,062.0 4,681.9 6,325.8 6,314.1 10,183.9 8,167.9 49,735.6 -- 49,735.6
At or for the three months
ended December 31, 2002
Operating margin .......... $ 189.3 $ 27.5 $ 84.0 $ 86.5 $ 64.7 $ 54.4 $ 506.4 $ (42.9) $ 463.5
Income taxes .............. 41.5 5.6 22.9 24.6 8.7 16.4 119.7 (27.7) 92.0
Net income (loss) ......... 64.9 8.8 35.9 38.5 13.4 25.7 187.2 (45.9) 141.3
Total financing and
leasing assets .......... 9,024.1 1,292.7 4,392.5 5,860.7 8,145.2 7,159.5 35,874.7 -- 35,874.7
Total managed assets ...... 13,356.7 3,506.3 4,392.5 5,860.7 12,081.4 7,159.5 46,357.1 -- 46,357.1
At or for the year ended
September 30, 2002
Operating margin .......... $ 754.0 $ 178.1 $ 277.8 $ 303.3 $ 378.7 $ 193.8 $ 2,085.7 $ (322.3) $ 1,763.4
Income taxes .............. 166.4 48.0 70.0 85.3 74.3 56.2 500.2 (126.2) 374.0
Net income (loss) ......... 271.6 78.2 114.2 139.2 121.1 91.6 815.9 (7,514.6) (6,698.7)
Total financing and
leasing assets .......... 8,805.2 1,314.2 5,040.4 5,951.9 8,398.8 6,877.1 36,387.6 -- 36,387.6
Total managed assets ...... 13,539.9 3,430.1 5,040.4 5,951.9 12,782.9 6,877.1 47,622.3 -- 47,622.3
Finance income and other revenues derived from United States based
financing and leasing assets were $3,864.4 million, $3,695.2 million, $977.1
million, and $4,284.8 million for the years ended December 31, 2004 and 2003,
the three months ended December 31, 2002, and the year ended September 30, 2002,
respectively. Finance income and other revenues derived from foreign based
financing and leasing assets, were $850.2 million, $944.0 million, $251.7
million, and $990.3 million for the years ended December 31, 2004 and 2003, the
three months ended December 31, 2002, and the year ended September 30, 2002,
respectively.
Note 22 -- Legal Proceedings
Putative Securities Class Action
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its former Chief Executive
Officer and its Chief Financial Officer. The lawsuit contained allegations that
the registration statement and prospectus prepared and filed in connection with
CIT's 2002 initial public offering ("IPO") were materially false and misleading,
principally with respect to the adequacy of CIT's telecommunications-related
loan loss reserves at the time. The lawsuit purported to have been brought on
behalf of all those who purchased CIT common stock in or traceable to the IPO,
and sought, among other relief, unspecified damages or rescission for those
alleged class members who still hold CIT stock and unspecified damages for other
alleged class members.
40
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 25, 2003, by order of the United States District Court, the
lawsuit was consolidated with five other substantially similar suits, all of
which had been filed after April 10, 2003 and one of which named as defendants
some of the underwriters in the IPO and certain former directors of CIT.
Glickenhaus & Co., a privately held investment firm, was named lead plaintiff in
the consolidated action. On September 16, 2003, an amended and consolidated
complaint was filed. That complaint contained substantially the same allegations
as the original complaints. In addition to the foregoing, two similar suits (the
"Derivative Suits") were brought by certain shareholders on behalf of CIT
against CIT and some of its present and former directors under Delaware
corporate law.
On December 28, 2004, the United States District Court entered an order
granting CIT's motion to dismiss the consolidated case. The plaintiff's time to
appeal that order expired on January 28, 2005 with no notice of appeal having
been filed. The cases against all parties, including the Derivative Suits, have
been dismissed.
NorVergence Related Litigation
On September 9, 2004, Exquisite Caterers v. Popular Leasing et al.
("Exquisite Caterers"), a putative national class action, was filed against 13
financial institutions, including CIT, who had acquired equipment leases
("NorVergence Leases") from NorVergence, Inc., a reseller of telecommunications
and Internet services to businesses. The Exquisite Caterers lawsuit is now
pending in the Superior Court of New Jersey, Monmouth County. Exquisite Caterers
based its complaint on allegations that NorVergence misrepresented the
capabilities of the equipment leased to its customers and overcharged for the
equipment. The complaint asserts that the NorVergence Leases are unenforceable
and seeks rescission, punitive damages, treble damages and attorneys' fees. In
addition, putative class action suits in Florida, Illinois, New York, and Texas
and several individual suits, all based upon the same core allegations and
seeking the same relief, have been filed by NorVergence customers against CIT
and other financial institutions.
On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation for
NorVergence under Chapter 7 of the Bankruptcy Code. Thereafter, the Attorneys
General of Florida, New Jersey, New York, Illinois, Massachusetts and Texas
commenced investigations of NorVergence and the financial institutions,
including CIT, which purchased NorVergence Leases. CIT entered into settlement
negotiations with those Attorney Generals and with Attorneys General from
several other states, including Pennsylvania and Massachusetts. In December
2004, CIT reached separate settlements with the New York and the New Jersey
Attorneys General. Under those settlements, lessees in those states will have an
opportunity to resolve all claims by and against CIT by paying a percentage of
the remaining balance on their lease. Negotiations with other Attorneys General
are continuing. CIT has also been asked by the Federal Trade Commission to
produce documents for transactions related to NorVergence. In addition, on
February 15, 2005, CIT was served with a subpoena seeking the production of
documents in a grand jury proceeding being conducted by the U.S. Attorney for
the Southern District of New York in connection with an investigation of
transactions related to NorVergence. CIT is in the process of complying with
these information requests.
Other Litigation
In addition, there are various legal proceedings against CIT, which have
arisen in the ordinary course of business. While the outcomes of the above
mentioned and ordinary course legal proceedings and the related activities are
not certain, based on present assessments, management does not believe that they
will have a material adverse effect on the financial condition of CIT.
Note 23 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $596.5 million and $487.7 million
at December 31, 2004 and 2003, respectively. The Company periodically reviews
and evaluates its goodwill and other intangible assets for potential impairment.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets"
41
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
("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 $1.999 billion for the
quarters ended March 31, 2002 and June 30, 2002, respectively. Management
performed a goodwill impairment analysis as of October 1, 2004, which indicated
that the fair value of goodwill was in excess of the carrying value. Therefore,
additional impairment charges were not necessary.
The following table summarizes goodwill balances by segment ($ in
millions):
Specialty
Finance -- Commercial
commercial Finance Total
---------- ------- -----
Balance at December 31, 2002............ $14.0 $370.4 $384.4
Severance reduction..................... (1.3) -- (1.3)
----- ------ ------
Balance at December 31, 2003............ 12.7 370.4 383.1
Acquisitions ........................... 49.6 -- 49.6
----- ------ ------
Balance at December 31, 2004............ $62.3 $370.4 $432.7
===== ====== ======
The increase in Specialty Finance goodwill during 2004 was largely due to
the Western European vendor finance and leasing business acquisition. The
downward revision to severance liabilities during 2003 was related to Specialty
Finance restructuring activities and was recorded as a reduction to goodwill, as
the severance liability was established in conjunction with Tyco acquisition
purchase accounting adjustments.
Other intangible assets, net are comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
and are included in Goodwill and Intangible Assets on the Consolidated Balance
Sheets. The following table summarizes intangible assets balances, net by
segment ($ in millions):
Specialty
Finance -- Commercial
commercial Finance Total
---------- ------- -----
Balance at December 31, 2002........... $ -- $ 16.5 $ 16.5
Additions.............................. -- 93.0 93.0
Amortization........................... -- (4.9) (4.9)
----- ------ ------
Balance at December 31, 2003........... -- 104.6 104.6
Additions.............................. 72.1 0.4 72.5
Amortization........................... (4.1) (9.2) (13.3)
----- ------ ------
Balance at December 31, 2004........... $68.0 $ 95.8 $163.8
===== ====== ======
The increase in other intangible assets during the 2004 was due primarily
to customer relationships acquired in the Western European vendor finance and
leasing business acquisition and in a purchase of a technology leasing business.
The increase during 2003 was due to customer relationships acquired in the
purchase of two factoring businesses.
Other intangible assets are being amortized over their corresponding
respective lives ranging from five to twenty years in relation to revenue
streams where applicable. Accumulated amortization totaled $23.7 million and
$10.4 million at December 31, 2004 and 2003, respectively. The projected
amortization for the years ended December 31, 2005 through December 31, 2009 is:
$20.8 million for 2005; $19.7 million for 2006; and $16.4 million for 2007, and
$16.3 million each for 2008 and 2009.
42
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 24 -- Severance and Facility Restructuring Reserves
The following table summarizes previously established purchase accounting
liabilities (pre-tax) related to severance of employees and closing facilities,
as well as 2004 restructuring activities ($ in millions):
Severance Facilities
---------------------- ----------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance December 31, 2003................... 43 $ 2.3 12 $ 7.2 $ 9.5
2004 additions.............................. 175 15.2 6 4.5 19.7
2004 utilization............................ (89) (5.3) (3) (6.0) (11.3)
--- ----- -- ----- ------
Balance December 31, 2004................... 129 $12.2 15 $ 5.7 $ 17.9
=== ===== == ===== ======
The reserves as of December 31, 2003 relate largely to the restructuring
of the European operations and include amounts payable within the next year to
individuals who chose to receive payments on a periodic basis and shortfalls in
sublease transactions, which will be utilized over the remaining lease terms,
generally 5 years.
The additions to restructuring reserves in 2004 relate to two initiatives:
(1) the second quarter combination of the former Structured Finance with Capital
Finance and a back office restructuring in Commercial Finance ($4.1 million) and
(2) the third quarter acquisition of a Western European vendor finance and
leasing business ($15.6 million). Costs related to the Capital Finance
combination were included in current period earnings, while restructuring
liabilities related to the vendor finance and leasing business acquisition were
established under purchase accounting in conjunction with fair value adjustments
to purchased assets and liabilities.
43
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented financial statements or other
information for these subsidiaries on a stand-alone basis. ($ in millions).
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------- ----------- -------- ------------ ------------ -----
December 31, 2004
ASSETS
Net finance receivables ............ $ 1,121.1 $ 3,129.8 $ 1,682.7 $ 28,497.4 $ -- $ 34,431.0
Operating lease equipment, net ..... -- 517.9 130.8 7,642.2 -- 8,290.9
Finance receivables held for sale .. -- 122.4 72.0 1,446.4 -- 1,640.8
Cash and cash equivalents .......... 1,311.4 670.8 127.5 100.5 -- 2,210.2
Other assets ....................... 9.536.8 (278.9) 316.2 1,019.4 (6,055.1) 4,538.4
----------- ---------- ---------- ----------- ---------- -----------
Total Assets ..................... $ 11,969.3 $ 4,162.0 $ 2,329.2 $ 38,705.9 $ (6,055.1) $ 51,111.3
=========== ========== ========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 34,699.1 $ 487.8 $ 1,383.8 $ 1,154.1 $ -- $ 37,724.8
Credit balances of factoring clients -- -- -- 3,847.3 -- 3,847.3
Accrued liabilities and payables ... (28,784.9) 3,184.5 (591.3) 29,635.4 -- 3,443.7
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities ............... 5,914.2 3,672.3 792.5 34,636.8 -- 45,015.8
Minority interest .................. -- -- -- 40.4 -- 40.4
Total Stockholders' Equity ......... 6,055.1 489.7 1,536.7 4,028.7 (6,055.1) 6,055.1
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities and
Stockholders' Equity ............. $ 11,969.3 $ 4,162.0 $ 2,329.2 $ 38,705.9 $ (6,055.1) $ 51,111.3
=========== ========== ========== =========== ========== ===========
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 ....................... 8,973.6 198.0 174.1 1,227.3 (5,394.2) 5,178.8
----------- ---------- ---------- ----------- ---------- -----------
Total Assets ..................... $ 12,034.8 $ 5,024.3 $ 1,920.6 $ 32,757.3 $ (5,394.2) $ 46,342.8
=========== ========== ========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 30,551.8 $ 1,003.5 $ 1,206.1 $ 907.2 $ -- $ 33,668.6
Credit balances of factoring clients -- -- -- 3,894.6 -- 3,894.6
Accrued liabilities and payables ... (23,911.2) 3,429.8 (631.8) 24,459.6 -- 3,346.4
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities ................ 6,640.6 4,433.3 574.3 29,261.4 -- 40,909.6
Minority interest .................. -- -- -- 39.0 -- 39.0
Total Stockholders' Equity ......... 5,394.2 591.0 1,346.3 3,456.9 (5,394.2) 5,394.2
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities and
Stockholders' Equity ............. $ 12,034.8 $ 5,024.3 $ 1,920.6 $ 32,757.3 $ (5,394.2) $ 46,342.8
=========== ========== ========== =========== ========== ===========
44
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
-------------------- ---------- ----------- -------- ------------ ------------ -----
Year Ended December 31, 2004
Finance income ..................... $ 38.3 $ 703.0 $ 187.5 $2,856.9 $ -- $3,785.7
Interest expense ................... (150.3) 582.2 10.9 817.3 -- 1,260.1
-------- -------- ------- -------- ------- --------
Net finance income ................. 188.6 120.8 176.6 2,039.6 -- 2,525.6
Depreciation on operating
lease equipment .................. -- 305.7 43.8 606.5 -- 956.0
-------- -------- ------- -------- ------- --------
Net finance margin ................. 188.6 (184.9) 132.8 1,433.1 -- 1,569.6
Provision for credit losses ........ 27.5 46.5 12.0 128.2 -- 214.2
-------- -------- ------- -------- ------- --------
Net finance margin, after provision
for credit losses ................ 161.1 (231.4) 120.8 1,304.9 -- 1,355.4
Equity in net income of subsidiaries 691.7 -- -- -- (691.7) --
Other revenue ...................... 107.4 68.2 86.9 628.1 -- 890.6
Loss on venture capital investments -- -- -- (3.5) -- (3.5)
-------- -------- ------- -------- ------- --------
Operating margin ................... 960.2 (163.2) 207.7 1,929.5 (691.7) 2,242.5
Operating expenses ................. 167.1 71.7 67.7 739.9 -- 1,046.4
Gain on redemption of debt ......... -- -- 41.8 -- 41.8
-------- -------- ------- -------- ------- --------
Income (loss) before provision for
income taxes ..................... 793.1 (234.9) 140.0 1,231.4 (691.7) 1,237.9
Provision for income taxes ......... (39.5) 91.1 (54.6) (480.2) -- (483.2)
Minority interest, after tax ....... -- -- -- (1.1) -- (1.1)
-------- -------- ------- -------- ------- --------
Net income (loss)................... $ 753.6 $ (143.8) $ 85.4 $ 750.1 $(691.7) $ 753.6
======== ======== ======= ======== ======= ========
Year Ended December 31, 2003
Finance income ..................... $ 89.0 $ 785.3 $ 195.0 $2,660.2 $ -- $3,729.5
Interest expense ................... (23.3) 303.8 6.6 1,061.6 -- 1,348.7
-------- -------- ------- -------- ------- --------
Net finance income ................. 112.3 481.5 188.4 1,598.6 -- 2,380.8
Depreciation on operating
lease equipment .................. -- 371.6 68.5 612.9 -- 1,053.0
-------- -------- ------- -------- ------- --------
Net finance margin ................. 112.3 109.9 119.9 985.7 -- 1,327.8
Provision for credit losses ........ 36.7 53.1 14.6 282.9 -- 387.3
-------- -------- ------- -------- ------- --------
Net finance margin, after provision
for credit losses ................ 75.6 56.8 105.3 702.8 -- 940.5
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 ................... 617.3 181.6 201.0 1,281.2 (481.3) 1,799.8
Operating expenses ................. 28.0 168.9 90.3 625.7 -- 912.9
Gain on redemption of debt ......... -- -- -- 50.4 -- 50.4
-------- -------- ------- -------- ------- --------
Income 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
======== ======== ======= ======== ======= ========
45
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
-------------------- ---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Finance income ..................... $ 32.9 $ 224.5 $ 50.6 $ 663.7 $ -- $ 971.7
Interest expense ................... 33.4 73.9 (1.1) 243.3 -- 349.5
--------- -------- ------ --------- -------- ---------
Net finance income ................. (0.5) 150.6 51.7 420.4 -- 622.2
Depreciation on operating
lease equipment .................. -- 105.0 21.6 150.7 -- 277.3
--------- -------- ------ --------- -------- ---------
Net finance margin ................. (0.5) 45.6 30.1 269.7 -- 344.9
Provision for credit losses ........ 18.8 8.9 2.4 103.3 -- 133.4
--------- -------- ------ --------- -------- ---------
Net finance margin, after provision
for credit losses ................ (19.3) 36.7 27.7 166.4 -- 211.5
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 ................... 128.9 82.8 51.2 349.8 (144.1) 468.6
Operating expenses ................. 6.9 35.1 24.7 165.9 -- 232.6
--------- -------- ------ --------- -------- ---------
Income before provision for
income taxes ..................... 122.0 47.7 26.5 183.9 (144.1) 236.0
Provision 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
========= ======== ====== ========= ======== =========
Year Ended September 30, 2002
Finance income ..................... $ 200.4 $1,050.1 $233.2 $ 2,859.1 $ -- $ 4,342.8
Interest expense ................... (54.9) 401.3 4.8 1,113.5 -- 1,464.7
--------- -------- ------ --------- -------- ---------
Net finance income ................. 255.3 648.8 228.4 1,745.6 -- 2,878.1
Depreciation on operating
lease equipment .................. -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ --------- -------- ---------
Net finance margin ................. 255.3 145.8 122.9 1,113.1 -- 1,637.1
Provision for credit losses ........ 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ --------- -------- ---------
Net finance margin, after provision
for credit losses ................ (53.0) (52.1) 98.0 855.9 -- 848.8
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 ................... 98.6 71.9 191.0 1,550.5 (130.9) 1,781.1
Operating expenses ................. 6,562.6 188.7 65.9 1,278.1 -- 8,095.3
--------- -------- ------ --------- -------- ---------
Gain on redemption of debt .........
Income (loss) before provision for
income taxes ..................... (6,464.0) (116.8) 125.1 272.4 (130.9) (6,314.2)
Provision 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 income (loss) .................. $(6,698.7) $ (71.2) $ 76.3 $ 125.8 $ (130.9) $(6,698.7)
========= ======== ====== ========= ======== =========
46
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
----------------------- ---------- ----------- --- ------------ ------------ -----
Year Ended December 31, 2004
Cash Flows From Operating Activities:
Net cash flows provided
by (used for) operations ............. $ (1,110.9) $ 1,012.5 $ 116.1 $ 1,600.0 $ -- $ 1,617.7
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease (increase) in financing and
leasing assets ....................... 433.0 366.0 (389.4) (5,505.9) -- (5,096.3)
Decrease in inter-company loans
and investments ...................... (3,527.0) -- -- -- 3,527.0 --
Other .................................. 41.6 -- 41.6
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................. (3,094.0) 366.0 (389.4) (5,464.3) 3,527.0 (5,054.7)
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ........ 4,147.3 (515.7) 177.7 42.0 -- 3,851.3
Inter-company financing ................ -- (602.6) (4.4) 4,134.0 (3,527.0) --
Cash dividends paid .................... (110.9) -- -- (110.9)
Other .................................. (66.9) -- (66.9)
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows provided by
(used for) financing activities ...... 4,036.4 (1,118.3) 173.3 4,109.1 (3,527.0) 3,673.5
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents ..................... (168.5) 260.2 (100.0) 244.8 -- 236.5
Cash and cash equivalents,
beginning of period .................. 1,479.9 410.6 227.5 (144.3) -- 1,973.7
---------- ---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,311.4 $ 670.8 $ 127.5 $ 100.5 $ -- $ 2,210.2
========== ========== ========== ========== ========== ==========
Year Ended December 31, 2003
Cash Flows From Operating Activities:
Net cash flows provided
by operations ........................ $ 224.4 $ 629.7 $ 386.6 $ 1,241.5 $ -- $ 2,482.2
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net increase in financing and
leasing assets ....................... (982.4) (338.2) (416.4) (2,560.4) -- (4,297.4)
Decrease in inter-company loans
and investments ...................... (1,534.9) -- -- -- 1,534.9 --
Other .................................. -- -- -- 14.8 -- 14.8
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows (used for)
investing activities ................. (2,517.3) (338.2) (416.4) (2,545.6) 1,534.9 (4,282.6)
---------- ---------- ---------- ---------- ---------- ----------
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
========== ========== ========== ========== ========== ==========
47
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
----------------------- ---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Cash Flows From Operating Activities:
Net cash flows provided
by operations ........................ $ (2,191.1) $ 115.1 $ 51.5 $ 2,443.0 $ -- $ 418.5
---------- ---------- --------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease (increase) in financing and
leasing assets ....................... 212.8 (1,062.8) (43.6) 1,076.7 -- 183.1
Decrease in inter-company 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) 1,072.4 (2,217.4) 178.8
---------- ---------- --------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ (666.0) (42.3) (30.8) (70.6) -- (809.7)
Inter-company 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
========== ========== ========= ========== ========== ==========
Year Ended September 30, 2002
Cash Flows From Operating Activities:
Net cash flows provided by
(used for) operations ................ $ 334.7 $ (298.1) $ (688.2) $ 1,785.9 $ -- $ 1,134.3
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Investing Activities:
Net decrease in financing
and leasing assets ................... 662.0 211.9 721.3 1,040.6 -- 2,635.8
Decrease in intercompany loans and
investments .......................... 1,008.3 -- -- -- (1,008.3) --
Other .................................. -- -- -- (52.5) -- (52.5)
---------- ---------- -------- ---------- -------- ----------
Net cash flows provided by
investing activities ................. 1,670.3 211.9 721.3 988.1 (1,008.3) 2,583.3
---------- ---------- -------- ---------- -------- ----------
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
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, $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
end of period ........................ ========== ========== ========= ========== ========== ==========
48
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 26 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below ($ in millions,
except per share data).
Year Ended December 31, 2004
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net finance margin............................................. $370.4 $378.9 $402.0 $418.3
Provision for credit losses.................................... 85.6 65.7 60.2 2.7
Other revenue.................................................. 230.4 233.5 212.5 214.2
Net gain (loss) on venture capital investments................. 0.7 3.0 4.2 (11.4)
Salaries and general operating expenses........................ 247.3 260.3 256.7 282.1
Net gain on debt call.......................................... 41.8 -- -- --
Provision for income taxes..................................... (121.1) (112.8) (117.7) (131.6)
Minority interest after tax.................................... -- -- (0.2) (0.9)
Net income..................................................... $189.3 $176.6 $183.9 $203.8
Net income per diluted share................................... $ 0.88 $ 0.82 $ 0.86 $ 0.95
Year Ended December 31, 2003
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net finance margin............................................. $305.7 $332.5 $335.1 $354.5
Provision for credit losses.................................... 103.0 100.6 82.9 100.8
Other revenue.................................................. 239.9 229.7 232.0 246.0
Net loss on venture capital investments........................ (4.4) (12.1) (11.3) (60.5)
Salaries and general operating expenses........................ 225.6 220.5 230.3 236.5
Net 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..................................................... $127.0 $136.9 $147.8 $155.2
Net income per diluted share................................... $ 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................................... $344.9 $483.9 $ 442.5 $ 348.1 $362.6
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
Net (loss) gain on venture capital investment........ (6.4) 2.6 (5.3) (1.4) (36.2)
Salaries and general operating expenses.............. 232.6 235.1 228.5 230.0 227.4
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)
Dividends on preferred capital
securities, 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.................. $ 0.67 $ 0.87 $ (21.84) $ (11.33) $ 0.64
49
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 27 -- Subsequent Event
On February 14, 2005, CIT announced the successful completion of its cash
tender offer for all outstanding shares of common stock of the Education Lending
Group, Inc. (Nasdaq: EDLG). Approximately 98% percent of the outstanding shares
of EDLG were tendered to CIT's offer of $19.05 cash per share. Under applicable
law, the merger is not subject to the approval of the remaining stockholders of
EDLG. All necessary regulatory approvals for the transaction were obtained. On
February 17, 2005, EDLG merged with a wholly owned subsidiary of CIT, and the
remaining EDLG shareholders received the right to payment of $19.05 per share.
Effective upon this merger, EDLG became a wholly owned subsidiary of CIT Group
Inc.
50