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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
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|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from October 1, 2002 to December 31, 2002
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Commission File Number: 001-31369
CIT Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1 CIT Drive, Livingston, New Jersey 07039
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (973) 740-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $0.01 per share .............. New York Stock Exchange
5 7/8% Notes due October 15, 2008 .................... New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of voting common stock held by non-affiliates
of the registrant, based on the most recent New York Stock Exchange Composite
Transaction closing price of Common Stock ($17.10 per share, 211,445,378 shares
of common stock outstanding), which occurred on February 14, 2003, was
$3,615,715,964. For purposes of this computation, all officers and directors of
the registrant are deemed to be affiliates. Such determination shall not be
deemed an admission that such officers and directors are, in fact, affiliates of
the registrant. At February 14, 2003, 211,573,200 shares of CIT's common stock,
par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List here under the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part 1, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Portions of the registrant's definitive proxy statement relating to the
2003 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof to the extent described herein. See pages 98 to 102 for the exhibit
index.
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TABLE OF CONTENTS
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Form 10-K
Item No. Name of Item Page
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Part I
Item 1. Business ....................................................... 1
Item 2. Properties ..................................................... 6
Item 3. Legal Proceedings .............................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ............ 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 8
Item 6. Selected Financial Data ........................................ 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and ...................... 11
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk .................................................. 11
Item 8. Financial Statements and Supplementary Data .................... 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 96
Part III
Item 10. Directors and Executive Officers of the Registrant ............. 97
Item 11. Executive Compensation ......................................... 97
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ................... 97
Item 13. Certain Relationships and Related Transactions ................. 97
Item 14. Controls and Procedures ........................................ 97
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................. 98
Signatures ............................................................... 103
Certifications ........................................................... 104
Where You Can Find More Information ...................................... 106
i
PART I
Item 1. Business
Overview
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global commercial and consumer finance company that was founded in
1908. We are a source of financing and leasing capital for companies in a wide
variety of industries, including many of today's leading industries and emerging
businesses, offering vendor, equipment, commercial, factoring, consumer, and
structured financing capabilities.
On July 8, 2002, our former parent, Tyco International Ltd. ("Tyco"),
completed a sale of 100% of CIT's outstanding common stock in an initial public
offering. Immediately prior to the offering, a restructuring was effectuated
whereby our predecessor, CIT Group Inc., a Nevada corporation, was merged with
and into its parent Tyco Capital Holding, Inc. ("TCH"), a Nevada corporation,
and that combined entity was further merged with and into CIT Group Inc. (Del),
a Delaware corporation. In connection with the reorganization, CIT Group Inc.
(Del) was renamed CIT Group Inc. As a result of the reorganization, CIT is the
successor to CIT Group Inc. (Nevada)'s business, operations and obligations.
On June 1, 2001, The CIT Group, Inc., a predecessor of CIT, was acquired
by TCH, a wholly-owned subsidiary of Tyco, in a purchase business combination
recorded under the "push-down" method of accounting, resulting in a new basis of
accounting for the "successor" periods beginning June 2, 2001. Information
relating to all "predecessor" periods prior to the acquisition is presented
using CIT's historical basis of accounting.
Following the acquisition by Tyco, we changed our fiscal year end from
December 31 to September 30 to conform to Tyco's. On November 5, 2002, our board
of directors approved returning to a calendar year end for financial reporting.
As a result, the quarter ended December 31, 2002 constitutes a transitional
fiscal period.
We have a broad array of "franchise" businesses that focus on specific
industries, asset types and markets, which are balanced by client, industry and
geographic diversification. Managed assets were $46.4 billion, owned financing
and leasing assets were $35.9 billion and stockholders' equity was $4.9 billion
at December 31, 2002.
We provide a wide range of financing and leasing products to small,
midsize and larger companies across a wide variety of industries, including
manufacturing, retailing, transportation, aerospace, construction, technology,
communication, and various service-related industries. The secured lending,
leasing and factoring products of our operations include direct loans and
leases, operating leases, leveraged and single investor leases, secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing, debtor-in-possession and turnaround
financing, and acquisition and expansion financing. Consumer lending is
conducted in our Specialty Finance segment and consists primarily of home equity
lending to consumers originated largely through a network of brokers and
correspondents.
Transactions are generated through direct calling efforts with borrowers,
lessees, equipment end-users, vendors, manufacturers and distributors and
through referral sources and other intermediaries. In addition, our strategic
business units jointly structure certain transactions and refer transactions to
other CIT units to best meet our customers' overall financing needs. We also buy
and sell participations in and syndications of finance receivables and/or lines
of credit. From time to time, in the normal course of business, we purchase
finance receivables on a wholesale basis to supplement our originated finance
receivables and sell select finance receivables and equipment under operating
leases for risk and other balance sheet management purposes, or to improve
profitability.
Business Segments
We conduct our operations through strategic business units that market
products and services to satisfy the financing needs of specific customers,
industries, vendors/manufacturers, and markets. Our four business segments are
as follows:
o Equipment Financing and Leasing
o Specialty Finance
o Commercial Finance
o Structured Finance
1
Equipment Financing and Leasing Segment
Our Equipment Financing and Leasing Segment had total financing and
leasing assets of $14.2 billion at December 31, 2002, representing 39.6% of
total financing and leasing assets. Total Equipment Financing and Leasing
managed assets were $18.1 billion or 39.1% of total managed assets. We conduct
our Equipment Financing and Leasing operations through two strategic business
units:
o Equipment Financing offers secured equipment financing and leasing
and focuses on the broad distribution of its products through
manufacturers, dealers/distributors, intermediaries and direct
calling efforts primarily in manufacturing, construction, food
services/stores, transportation and other industries.
o Capital Finance offers secured equipment financing and leasing by
directly marketing customized transactions of commercial aircraft
and rail cars and locomotives.
Equipment Financing and Capital Finance personnel have extensive
experience in managing equipment over its full life cycle, including purchasing
new equipment, maintaining equipment, estimating residual values and
re-marketing via re-leasing or selling equipment. Equipment Financing's and
Capital Finance's equipment and industry expertise enables them to effectively
manage equipment risk. For example, Capital Finance can reacquire commercial
aircraft, if necessary, obtain any required maintenance and repairs for such
aircraft, and re-certify such aircraft with appropriate authorities. We manage
the equipment, the residual value and the risk of equipment remaining idle for
extended periods of time and, where appropriate, we locate alternative equipment
users or purchasers.
Equipment Financing
Equipment Financing had total financing and leasing assets of $8.1 billion
at December 31, 2002, representing 22.7% of our total financing and leasing
assets. On a managed asset basis, Equipment Financing represents $12.1 billion
or 26.1% of total managed assets. Equipment Financing offers secured equipment
financing and leasing products, including loans, leases, wholesale and retail
financing for distributors and manufacturers, loans guaranteed by the U.S. Small
Business Administration, operating leases, sale and leaseback arrangements,
portfolio acquisitions, revolving lines of credit and in-house syndication
capabilities.
Equipment Financing is a diversified, middle-market, secured equipment
lender with a global presence and strong North American marketing coverage. At
December 31, 2002, its portfolio included significant financing and leasing
assets to customers in a number of different industries, with manufacturing
being the largest as a percentage of financing and leasing assets, followed by
construction and transportation, including business aircraft.
Products are originated through direct calling on customers and through
relationships with manufacturers, dealers, distributors and intermediaries that
have leading or significant marketing positions in their respective industries.
This provides Equipment Financing with efficient access to equipment end-users
in many industries across a variety of equipment types.
Capital Finance
Capital Finance had financing and leasing assets of $6.1 billion at
December 31, 2002, which represented 16.9% of our total financing and leasing
assets and 13.1% of managed assets. Capital Finance specializes in providing
customized leasing and secured financing primarily to end-users of commercial
aircraft and railcars, including operating leases, single investor leases,
equity portions of leveraged leases, and sale and leaseback arrangements, as
well as loans secured by equipment. Typical customers are major domestic and
international airlines, North American railroad companies and middle-market to
larger-sized companies. New business is generated through direct calling efforts
supplemented with transactions introduced by intermediaries and other referral
sources. Capital Finance utilizes special purpose entities (SPE's) to record
certain structured leasing transactions, primarily aerospace leveraged leases.
These SPE's are consolidated in CIT's financial statements.
Capital Finance has provided financing to commercial airlines for over
thirty years, and the commercial aerospace portfolio includes most of the
leading U.S. and foreign commercial airlines. As of December 31, 2002, the
commercial aerospace financing and leasing asset balance was $4.1 billion,
consisting of 78 accounts and 194 aircraft with an average age of approximately
6.9 years, and all comply with Stage III noise regulations.
2
Capital Finance has developed strong direct relationships with most major
airlines and major aircraft and aircraft engine manufacturers. This provides
Capital Finance with access to technical information, which enhances customer
service, and provides opportunities to finance new business. See
"Concentrations" section of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of our
aerospace portfolio.
Capital Finance has over 25 years of experience in financing the rail
industry, contributing to its knowledge of asset values, industry trends,
product structuring and customer needs. Capital Finance has a dedicated rail
equipment group, maintains relationships with several leading railcar
manufacturers and has a significant direct calling effort on railroads and rail
shippers in the United States. The Capital Finance rail portfolio includes
leases to all of the U.S. and Canadian Class I railroads (which are railroads
with annual revenues of at least $250 million) and numerous shippers. The
operating lease fleet includes primarily covered hopper cars used to ship grain
and agricultural products, plastic pellets and cement; gondola cars for coal,
steel coil and mill service; open hopper cars for coal and aggregates; center
beam flat cars for lumber; and boxcars for paper and auto parts. The owned
operating lease rail car fleet is relatively young, with approximately 80%
(based upon net investment) built in 1994 or later. The Capital Finance rail
owned and serviced fleet totals in excess of 47,000 railcars and approximately
500 locomotives.
Specialty Finance Segment
At December 31, 2002, the Specialty Finance Segment financing and leasing
assets totaled $10.3 billion, representing 28.8% of total financing and leasing
assets. Specialty Finance managed assets were $16.9 billion, representing 36.4%
of total managed assets. These assets include small ticket commercial financing
and leasing assets, vendor programs and consumer home equity loans. Also
included in the owned financing and leasing assets are previously announced
liquidating portfolios, which include manufactured housing, recreational
vehicles, recreational marine and wholesale inventory finance.
Specialty Finance forms relationships with industry-leading equipment
vendors, including manufacturers, dealers and distributors, to deliver
customized asset-based sales and financing solutions in a wide array of vendor
programs. These alliances allow our vendor partners to better utilize core
competencies, reduce capital needs and drive incremental sales volume. As a part
of these programs, we offer (i) credit financing to the manufacturer's customers
for the purchase or lease of the manufacturer's products, and (ii) enhanced
sales tools to manufacturers and vendors, such as asset management services,
efficient loan processing and real-time credit adjudication. Higher-level
partnership programs provide integration with the vendor's business planning
process and product offering systems to improve execution and reduce cycle
times. Specialty Finance has significant vendor programs in information
technology and telecommunications equipment and serves many other industries
through its global network.
These vendor alliances feature traditional vendor finance programs, joint
ventures, profit sharing and other transaction structures with large,
sales-oriented corporate vendor partners. In the case of joint ventures,
Specialty Finance and the vendor combine financing activities through a distinct
legal entity that is jointly owned. Generally, Specialty Finance accounts for
these arrangements on an equity basis, with profits and losses distributed
according to the joint venture agreement, and purchases qualified finance
receivables originated by the joint venture. Specialty Finance also utilizes
"virtual joint ventures," whereby the assets are originated on Specialty
Finance's balance sheet, while profits and losses are shared with the vendor.
These types of strategic alliances are a key source of business for Specialty
Finance. New vendor alliance business is also generated through intermediaries
and other referral sources, as well as through direct end-user relationships.
The Specialty Finance small-ticket commercial loan business is engaged
mainly in the leasing of office products, computers, point-of-sale equipment
and other technology products in the United States and Canada. Products are
originated through direct calling on customers and through relationships with
manufacturers, dealers, distributors and other intermediaries.
Home equity products include both fixed and variable-rate closed-end loans
and variable-rate lines of credit. This unit primarily originates, purchases and
services loans secured by first or second liens on detached, single-family,
residential properties. Customers borrow for the purpose of consolidating debts,
refinancing an existing mortgage, funding home improvements, paying education
expenses and, to a lesser extent, purchasing a home, among other reasons.
Specialty Finance primarily originates loans through brokers and correspondents
with
3
a high proportion of home equity applications processed electronically over the
internet via BrokerEdge(SM) using proprietary systems. Through experienced
lending professionals and automation, Specialty Finance provides rapid
turnaround time from application to loan funding, which is critical to broker
relationships.
Specialty Finance sells individual loans and portfolios of loans to banks,
thrifts and other originators of consumer loans to maximize the value of its
origination network and to improve overall profitability. Contract servicing for
securitization trusts and other third parties is provided through a centralized
consumer Asset Service Center. Commercial assets are serviced via several
centers in the United States, Canada and internationally. Our Asset Service
Center centrally services and collects substantially all of our consumer
receivables, including loans originated or purchased by our Specialty Finance
segment, as well as loans originated or purchased and subsequently securitized
with servicing retained. The servicing portfolio also includes loans owned by
third parties that are serviced by our Specialty Finance segment for a fee on a
"contract" basis. These third-party portfolios totaled $2.2 billion at December
31, 2002.
Commercial Finance Segment
At December 31, 2002, the financing and leasing assets of our Commercial
Finance Segment totaled $8.0 billion, representing 22.4% of total financing and
leasing assets and 17.3% of managed assets. We conduct our Commercial Finance
operations through two strategic business units, both of which focus on accounts
receivable and inventories as the primary source of security for their lending
transactions.
o Commercial Services provides factoring and receivable/collection
management products and secured financing to companies in apparel,
textile, furniture, home furnishings and other industries.
o Business Credit provides secured financing, including term and
revolving loans based on asset values, as well as cash flow and
enterprise value structures to a full range of borrowers from small
to larger-sized companies.
Commercial Services
Commercial Services had total financing and leasing assets of $4.4 billion
at December 31, 2002, which represented 12.2% of our total financing and leasing
assets and 9.5% of managed assets. Commercial Services offers a full range of
domestic and international customized credit protection, lending and outsourcing
services that include working capital and term loans, factoring, receivable
management outsourcing, bulk purchases of accounts receivable, import and export
financing and letter of credit programs.
Financing is provided to clients through the purchase of accounts
receivable owed to clients by their customers, as well as by guaranteeing
amounts due under letters of credit issued to the clients' suppliers, which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable is traditionally known as "factoring" and results in the payment by
the client of a factoring fee which is commensurate with the underlying degree
of credit risk and recourse, and which is generally a percentage of the factored
receivables or sales volume. When Commercial Services "factors" (i.e.,
purchases) a customer invoice from a client, it records the customer receivable
as an asset and also establishes a liability for the funds due to the client
("credit balances of factoring clients"). Commercial Services also may advance
funds to its clients prior to collection of receivables, typically in an amount
up to 80% of eligible accounts receivable (as defined for that transaction),
charging interest on such advances (in addition to any factoring fees) and
satisfying such advances from receivables collections. The operating systems of
the clients and Commercial Services are integrated in order to facilitate the
factoring relationship.
Clients use Commercial Services' products and services for various
purposes, including improving cash flow, mitigating or reducing the risk of
charge-offs, increasing sales and improving management information. Further,
with the TotalSource(SM) product, clients can outsource bookkeeping, collection
and other receivable processing activities. These services are attractive to
industries outside the typical factoring markets, providing growth
opportunities.
Commercial Services generates business regionally from a variety of
sources, including direct calling efforts and referrals from existing clients
and other referral sources. Accounts receivable, operations and other
administrative functions are centralized.
4
Business Credit
Financing and leasing assets of Business Credit totaled $3.6 billion at
December 31, 2002 and represented 10.2% of our total financing and leasing
assets and 7.9% of managed assets. Business Credit offers loan structures
ranging from asset-based revolving and term loans secured by accounts
receivable, inventories and fixed assets to loans based on earnings performance
and enterprise valuations to mid through larger-sized companies. Clients use
such loans primarily for working capital, growth, acquisitions,
debtor-in-possession financing and debt restructurings. Business Credit sells
and purchases participation interests in such loans to and from other lenders.
Through its variable rate, senior revolving and term products, Business
Credit meets its customer financing needs that are unfulfilled by other sources
of senior debt. Business Credit primarily structures financings on a secured
basis and, through its Corporate Finance unit, extends loans based upon the
sustainability of a customer's operating cash flow and ongoing enterprise
valuations. Revolving and term loans are made on a variable interest-rate basis
based upon published indices such as LIBOR or the prime rate of interest.
Business is originated regionally via solicitation activities focused upon
various types of intermediaries and referral sources. Business Credit has
increased its focus upon acquisition financings to compliment its debt
restructuring activities. Business Credit maintains long term relationships with
selected banks, finance companies, and other lenders to both source and
diversify senior debt exposures.
Structured Finance Segment
Structured Finance had financing and leasing assets of $3.3 billion,
comprising 9.2% of our total financing and leasing assets and 7.2% of managed
assets at December 31, 2002. Structured Finance operates internationally through
operations in the United States, Canada and Europe. Structured Finance provides
specialized investment banking services to the international corporate finance
and institutional finance markets by providing asset-based financing for large
ticket asset acquisitions and project financing and related advisory services to
equipment manufacturers, corporate clients, regional airlines, governments and
public sector agencies. Communications (including telecommunication and media),
transportation, and the power and utilities sectors are among the industries
that Structured Finance serves.
Structured Finance also serves as an origination conduit to its lending
partners by seeking out and creating investment opportunities. Structured
Finance has established relationships with insurance companies and institutional
investors and can arrange financing opportunities that meet asset class, yield,
duration and credit quality requirements. Accordingly, syndication capability
and fee generation are key characteristics of Structured Finance's business.
Structured Finance utilizes special purpose entities (SPE's) to record certain
structured leasing transactions, including leveraged leases. These SPE's are
generally consolidated in CIT's financial statements.
The segment has direct and private fund venture capital equity investments
totaling $335.4 million at December 31, 2002. In 2001, we ceased making new
venture capital investments beyond existing commitments, which totaled
approximately $164.9 million at December 31, 2002. In December 2002, we retained
a private equity firm, consisting of former CIT employees, to manage the
existing portfolio.
Other Segment and Concentration Data
The percentage of total segment operating margin for the three months
ended December 31, 2002 by segment is as follows: Equipment Financing and
Leasing -- 23%, Specialty Finance -- 42%, Commercial Finance -- 29%, and
Structured Finance -- 6%. For the three months ended December 31, 2002, 80% of
our revenues were derived from U.S. financing and leasing activities and 20%
were derived from international financing and leasing activities
Further segment data, including certain income related balances, is
disclosed in Item 8. Financial Statements and Supplementary Data, Note 25.
See Item 8. Financial Statements and Supplementary Data, Note 8 and the
"Concentrations" section of Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures about Market Risk, for a discussion on industry
concentration.
5
Competition
Our markets are highly competitive and are characterized by competitive
factors that vary based upon product and geographic region. Competitors include
captive and independent finance companies, commercial banks and thrift
institutions, industrial banks, leasing companies, manufacturers and vendors
with global reach. Substantial financial services operations with global reach
have been formed by bank holding, leasing, finance and insurance companies that
compete with us. On a local level, community banks and smaller independent
finance and mortgage companies are a competitive force. Some competitors have
substantial local market positions. Many of our competitors are large companies
that have substantial capital, technological and marketing resources. Some of
these competitors are larger than we are and may have access to capital at a
lower cost than we do, particularly following the recent disruption to our
funding base. Competition had been enhanced by a strong economy and growing
marketplace liquidity prior to 2001, although, during 2002 and 2001, the economy
has slowed and marketplace liquidity has tightened. The markets for most of our
products are characterized by a large number of competitors, although the number
of competitors has fallen in recent years as a consequence of continued
consolidation in the industry.
We compete primarily on the basis of pricing, terms and structure. From
time to time, our competitors seek to compete aggressively on the basis of these
factors and we may lose market share to the extent we are unwilling to match
competitor pricing and terms in order to maintain interest margins and/or credit
standards.
Other primary competitive factors include industry experience, client
service and relationships. In addition, demand for our products with respect to
certain industries will be affected by demand for such industry's services and
products and by industry regulations.
Regulation
Our operations are subject, in certain instances, to supervision and
regulation by state, federal and various foreign governmental authorities and
may be subject to various laws and judicial and administrative decisions
imposing various requirements and restrictions, which, among other things, (i)
regulate credit granting activities, including establishing licensing
requirements, if any, in applicable jurisdictions, (ii) establish maximum
interest rates, finance charges and other charges, (iii) regulate customers'
insurance coverages, (iv) require disclosures to customers, (v) govern secured
transactions, (vi) set collection, foreclosure, repossession and claims handling
procedures and other trade practices, (vii) prohibit discrimination in the
extension of credit and administration of loans, (viii) regulate the use and
reporting of information related to a borrower's credit experience and other
data collection. In addition, (i) CIT Bank, a Utah industrial loan corporation
wholly owned by CIT, is subject to regulation and examination by the Federal
Deposit Insurance Corporation and the Utah Department of Financial Institutions,
(ii) CIT Small Business Lending Corporation, a Delaware corporation, is licensed
by and subject to regulation and examination by the U.S. Small Business
Administration, (iii) The Equipment Insurance Company, a Vermont corporation,
and Highlands Insurance Company Limited, a Barbados company, are each licensed
to enter into insurance contracts and are regulated by the Department of
Insurance in Vermont and Barbados, respectively, (iv) various banking
corporations in France, Italy, Belgium and Sweden, are each subject to
regulation and examination by banking regulators in its home country, and (v)
various broker-dealer entities in Canada, the United Kingdom, and the United
States are each subject to regulation and examination by securities regulators
in its home country.
Employees
CIT employed approximately 5,835 people at December 31, 2002, of which
approximately 4,405 were employed in the United States and 1,430 were outside
the United States.
Item 2. Properties
CIT conducts its operations in the United States, Canada, Europe, Latin
America, Australia and the Asia-Pacific region. CIT occupies approximately 2.5
million square feet of office space, substantially all of which is leased. Such
office space is suitable and adequate for our needs and we utilize, or plan to
utilize, substantially all
6
of our leased office space. We are currently in negotiations to purchase our
Livingston facility during 2003 at a price that results in expense levels that
are comparable to the current lease expenses.
Item 3. Legal Proceedings
We are a defendant in various lawsuits arising in the ordinary course of
our business. We aggressively manage our litigation and evaluate appropriate
responses to our lawsuits in light of a number of factors, including the
potential impact of the actions on the conduct of our operations. In the opinion
of management, none of the pending matters is expected to have a material
adverse effect on our financial condition, results of operations or liquidity.
However, there can be no assurance that an adverse decision in one or more of
such lawsuits will not have a material adverse effect.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of security holders during the
three months ended, December 31, 2002.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York Stock Exchange. During the
period July 2, 2002 (the first day of trading subsequent to our initial public
offering) ("IPO") through September 30, 2002 the high and low last reported
sales price for our common stock was $23.80 and $17.98, respectively. During the
three months ended December 31, 2002, the respective high and low prices were
$22.49 and $13.95.
Following our initial public offering in November 1997 and prior to the
acquisition by Tyco International Ltd. ("Tyco"), we paid a quarterly dividend of
$0.10 per share (based upon shares outstanding prior to the Tyco acquisition),
except for the first quarter of 1998. During Tyco's ownership from June 2001
until July 2002, there were no cash dividends on our common stock. Following our
July 2002 IPO, our policy has been to pay a dividend while retaining a strong
capital base. On October 28, 2002, our board of directors declared the first
such quarterly dividend of $0.12 per share, which was paid on November 27, 2002
to shareholders of record on November 15, 2002. The board of directors declared
another quarterly dividend of $0.12 per share on January 21, 2003, payable on
February 28, 2003 to shareholders of record on February 15, 2003. The
declaration and payment of future dividends are subject to the discretion of our
board of directors. Any determination as to the payment of dividends, including
the level of dividends, will depend on, among other things, general economic and
business conditions, our strategic and operational plans, our financial results
and condition, contractual, legal and regulatory restrictions on the payment of
dividends by us, and such other factors as the board of directors may consider
to be relevant.
As of February 5, 2003, there were 27,891 beneficial owners of CIT common
stock.
All equity compensation plans were approved by our sole shareholder prior
to our 2002 IPO, and are summarized in the following table.
Number of securities
remaining available for
Number of securities future issuance under
to be issued Weighted-average equity compensation plans
upon exercise of exercise price of (excluding securities
outstanding options outstanding options reflected in column (a))
-------------------- ------------------- -------------------------
(a) (b) (c)
Equity compensation plans
approved by security
holders ....................... 15,335,255 $33.13 10,139,698
We had no equity compensation plans that were not approved by
shareholders. For further information on such plans, including the weighted
average exercise price, see Item 8. Financial Statements and Supplementary Data,
Note 19.
Item 6. Selected Financial Data
On June 1, 2001, The CIT Group, Inc. ("CIT") was acquired by a
wholly-owned subsidiary of 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. Information relating to
all "predecessor" periods prior to the acquisition is presented using CIT's
historical basis of accounting. Following the Tyco acquisition, CIT adopted
Tyco's fiscal year ending September 30. To assist in the comparability of our
financial results and discussions, results of operations for the nine months
ended September 30, 2001 include results for five months of the predecessor and
four months of the successor and are designated as "combined".
On July 8, 2002, our former parent, Tyco, completed a sale of 100% of
CIT's outstanding common stock in the 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 of the reorganization, the historical financial
statements of TCH are included in the historical consolidated CIT financial
statements. Prior to the IPO of CIT on July 8, 2002, the activity of TCH
consisted primarily of interest expense to an affiliate of Tyco, and the TCH
accumulated net deficit was relieved via a capital contribution from Tyco. There
was no TCH activity subsequent to June 30, 2002. The results for both the
periods ended September 30, 2002 and September 30, 2001 include activity of TCH.
Therefore, certain previously reported CIT data may differ from the data
presented below, due primarily to the inter-company debt and related interest
expense of TCH.
8
On November 5, 2002, the CIT board of directors approved returning to a
calendar year end from a September 30 fiscal year end. As a result, the three
months ended December 31, 2002 constitutes a transitional fiscal period.
The following tables set forth selected consolidated financial information
regarding our results of operations and balance sheets. The data presented below
should be read in conjunction with Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures about Market Risk and Item 8. Financial Statements and
Supplementary Data.
At or for At or for At or for
the Three the Twelve the Nine At or for the Years Ended
Months Ended Months Ended Months Ended December 31,
December 31, September 30, September 30, -----------------------------------------
2002 2002 2001 2000 1999 1998
----------- ----------- ---------- ------------- ------------- -------------
($ in millions, except per share data) (successor) (successor) (combined) (predecessor) (predecessor) (predecessor)
- --------------------------------------
Results of Operations
Net finance margin ........................... $ 354.4 $ 1,662.5 $ 1,318.8 $ 1,469.4 $ 917.4 $ 804.8
Provision for credit losses .................. 133.4 788.3 332.5 255.2 110.3 99.4
Operating margin ............................. 478.1 1,806.5 1,558.9 2,126.2 1,157.9 960.8
Salaries and general operating
expenses ................................. 242.1 946.4 794.5 1,035.2 516.0 407.7
Goodwill impairment .......................... -- 6,511.7 -- -- -- --
Goodwill amortization ........................ -- -- 97.6 86.3 25.7 10.1
Acquisition related costs .................... -- -- 54.0 -- -- --
Interest expense -- TCH ...................... -- 662.6 98.8 -- -- --
Net income (loss) ............................ 141.3 (6,698.7) 263.3 611.6 389.4 338.8
Net income (loss) per share(1) --
basic and diluted ........................ 0.67 (31.66) 1.24 2.89 1.84 1.60
Dividends per share(1) ....................... 0.12 -- 0.25 0.50 0.31 0.23
Balance Sheet Data
Total finance receivables .................... $27,621.3 $28,459.0 $31,879.4 $33,497.5 $31,007.1 $19,856.0
Reserve for credit losses .................... 760.8 777.8 492.9 468.5 446.9 263.7
Operating lease equipment, net ............... 6,704.6 6,567.4 6,402.8 7,190.6 6,125.9 2,774.1
Goodwill, net ................................ 384.4 384.4 6,547.5 1,964.6 1,850.5 216.5
Total assets ................................. 41,932.4 42,710.5 51,349.3 48,689.8 45,081.1 24,303.1
Commercial paper ............................. 4,974.6 4,654.2 8,869.2 9,063.5 8,974.0 6,144.1
Variable-rate bank credit facilities ......... 2,118.0 4,037.4 -- -- -- --
Variable-rate senior notes ................... 4,906.9 5,379.0 9,614.6 11,130.5 7,147.2 4,275.0
Fixed-rate senior notes ...................... 19,681.8 18,385.4 17,113.9 17,571.1 19,052.3 8,032.3
Subordinated fixed-rate notes ................ -- -- 100.0 200.0 200.0 200.0
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
debentures of the Company ................ 257.2 257.7 260.0 250.0 250.0 250.0
Stockholders' equity ......................... 4,870.7 4,757.8 5,947.6 6,007.2 5,554.4 2,701.6
Selected Data and Ratios
Profitability
Net finance margin as a percentage of
average earning assets ("AEA")(2) ........ 4.34% 4.64% 4.34% 3.61% 3.59% 3.93%
Ratio of earnings to fixed charges(4) ........ 1.67x (9) 1.30x 1.39x 1.45x 1.49x
Salaries and general operating
expenses (excluding goodwill
amortization) as a percentage of
average managed assets
("AMA")(5) ............................... 2.18% 2.01% 2.09% 2.01% 1.75% 1.78%
Efficiency ratio(6) .......................... 39.6% 36.5% 42.0% 43.8% 41.3% 39.2%
9
At or for At or for At or for
the Three the Twelve the Nine At or for the Years Ended
Months Ended Months Ended Months Ended December 31,
December 31, September 30, September 30, -------------------------------------------
2002 2002 2001 2000 1999 1998
---------- ----------- ---------- ------------- ------------- -------------
($ in millions) (successor) (successor) (combined) (predecessor) (predecessor) (predecessor)
- ---------------
Credit Quality
60+ days contractual delinquency as a
percentage of finance receivables ........ 3.63% 3.76% 3.46% 2.98% 2.71% 1.75%
Non-accrual loans as a percentage
of finance receivables ................... 3.43% 3.43% 2.67% 2.10% 1.65% 1.06%
Net credit losses as a percentage of
average finance receivables .............. 2.32% 1.67% 1.20% 0.71% 0.42% 0.42%
Reserve for credit losses as a
percentage of finance
receivables .............................. 2.75% 2.73% 1.55% 1.40% 1.44% 1.33%
Leverage
Total debt (net of overnight deposits) to
tangible stockholders' equity(3)(7) ...... 6.22x 6.54x 8.20x 8.78x 8.75x 6.82x
Tangible stockholders' equity(3) to
managed assets(8) ........................ 10.4% 9.9% 8.6% 7.8% 7.7% 10.4%
Other
Total managed assets(8) ...................... $46,357.1 $47,622.3 $50,877.1 $54,900.9 $51,433.3 $26,216.3
Employees .................................... 5,835 5,850 6,785 7,355 8,255 3,230
- --------------------------------------------------------------------------------
(1) Net income (loss) and dividend per share calculations for the periods
preceding September 30, 2002 assume that common shares outstanding as a
result of the July 2002 IPO (basic and diluted of 211.6 million and 211.7
million) were outstanding during such historical periods.
(2) "AEA" means average earning assets, which is the average of finance
receivables, operating lease equipment, finance receivables held for sale
and certain investments, less credit balances of factoring clients.
(3) Tangible stockholders' equity excludes goodwill and other intangible
assets and excludes TCH results.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, minority interest in
subsidiary trust holding solely debentures of the Company and one-third of
rent expense, which is deemed representative of an interest factor.
(5) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us.
(6) Efficiency ratio is the ratio of salaries and general operating expenses
to operating margin, excluding the provision for credit losses.
(7) Total debt excludes, and tangible stockholders' equity includes,
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company.
(8) "Managed assets" means assets previously securitized and still managed by
us and include (i) financing and leasing assets, (ii) certain investments
and (iii) off-balance sheet finance receivables.
(9) Earnings were insufficient to cover fixed charges by $6,331.1 million for
the twelve months ended September 30, 2002. Earnings for the twelve months
ended September 30, 2002 included a non-cash goodwill impairment charge of
$6,511.7 million in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." The ratio of earnings to fixed charges included fixed
charges of $1,471.8 million and a loss before provision for income taxes
of $6,331.1 million resulting in a total loss provision for income taxes
and fixed charges of $(4,859.3) million.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
and
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Overview
The accompanying Consolidated Financial Statements include the
consolidated accounts of CIT Group Inc., a Delaware corporation ("we," "CIT" or
the "Company"), formerly known as CIT Group Inc., a Nevada corporation, and
previously The CIT Group, Inc. On July 8, 2002, our former parent, Tyco
International Ltd. ("Tyco"), completed a sale of 100% of CIT's outstanding
common stock in an initial public offering ("IPO"). Immediately prior to the
offering, our predecessor, CIT Group Inc., a Nevada corporation, was merged with
and into its parent Tyco Capital Holding, Inc. ("TCH"), a Nevada corporation and
that combined entity was further merged with and into CIT Group Inc. (Del), a
Delaware corporation. In connection with the reorganization, CIT Group Inc.
(Del) was renamed CIT Group Inc. As a result of the reorganization, CIT is the
successor to CIT Group Inc. (Nevada)'s business, operations and obligations.
Accordingly, the financial results of TCH are included in the consolidated CIT
financial statements.
Prior to the IPO of CIT on July 8, 2002, the activity of TCH consisted
primarily of interest expense to an affiliate of Tyco, and the TCH accumulated
net deficit was relieved via a capital contribution from Tyco. The activity of
TCH consisted primarily of interest expense to an affiliate of Tyco during the
period from June 1, 2001 to June 30, 2002. TCH had no operations subsequent to
June 30, 2002. Although the audited financial statements and notes thereto
include the activity of TCH in conformity with accounting principles generally
accepted in the U.S., management believes that it is most meaningful to discuss
our financial results excluding TCH, due to its temporary status as a Tyco
acquisition company with respect to CIT. Therefore, throughout this section, in
order to provide comparability with current quarter and prospective results,
prior period comparisons exclude the results of TCH. Consolidating balance
sheets and income statements for CIT, TCH and CIT consolidated are displayed in
Item 8. Financial Statements and Supplementary Data, Note 2.
On June 1, 2001, The CIT Group, Inc. ("CIT") was acquired by Tyco,
resulting in a new basis of accounting for the "successor" period beginning June
2, 2001. Information relating to all "predecessor" periods prior to the
acquisition is presented using CIT's historical basis of accounting. To assist
in the comparability of our financial results and discussions, results of
operations for the nine months ended September 30, 2001 include results for five
months of the predecessor and four months of the successor and are designated as
"combined".
Following the acquisition by Tyco, we changed our fiscal year end from
December 31 to September 30, to conform to Tyco's fiscal year end. On November
5, 2002, the CIT Board of Directors approved the return to a calendar year end
effective December 31, 2002. As a result, the quarter ended December 31, 2002
constitutes a transitional fiscal period. To assist in the comparability and the
analysis of results for the three-month transition period ended December 31,
2002, results for the quarter ended December 31, 2001 are shown in addition to
results for the year ended September 30, 2002, the nine-month period ended
September 30, 2001 and the year ended December 31, 2000.
Key Business Initiatives and Trends
In late 2000, we initiated our plan to sell or liquidate approximately
$4.5 billion of lower return non-strategic assets. This followed the integration
of the 1999 acquisition of Newcourt Credit Group, which significantly increased
the company's size, broadened our asset and product base and established our
substantial international reach. Further, management set forth its plan to
strengthen its capital ratios.
In mid-2001, the initiative to sell or liquidate targeted lower return
non-strategic assets and improve leverage was broadened and accelerated because
the June 2001 acquisition by Tyco provided additional capital and support in
this regard. Management also initiated further business line consolidation and
operating expense cost reductions both in the corporate staff areas and in the
business units. In early to mid-2001, the e-commerce and telecommunications
industry downturns in the economy became evident. In light of this downturn, we
recognized impairment charges against earnings prior to the Tyco acquisition,
including equity interests related to e-commerce and telecommunications.
The targeted non-strategic business lines and products were sold or placed
in liquidation status to maximize value to the company, and we ceased
originating new business in these areas. Severance and other costs associated
11
with these initiatives were identified in plans that were approved by senior
management. These costs plus any adjustments to reduce the carrying values of
the targeted assets to fair value were provided for primarily through purchase
accounting (Tyco's acquisition of CIT, with the purchase accounting adjustments
"pushed--down" to CIT financials). In support of these initiatives, Tyco
provided nearly $900 million of additional capital to CIT from June through
December of 2001. We also decided to cease making new venture capital
investments and to run-off our existing portfolio.
The balance of each of these non-strategic/liquidating portfolios are
presented in the following table ($ in millions):
Balance Outstanding at Balance Outstanding at
Portfolio December 31, 2002(1) September 30, 2002(1)
--------- ---------------------- ----------------------
Manufactured housing ............................. $ 624 $ 628
Recreational vehicle ............................. 34 38
Recreational marine .............................. 123 133
Wholesale inventory finance ...................... 18 22
Franchise finance ................................ 322 390
Owner-operator trucking .......................... 218 249
------ ------
Sub total -- liquidating portfolios .............. 1,339 1,460
Venture capital .................................. 335 342
------ ------
Total ............................................ $1,674 $1,802
====== ======
- --------------------------------------------------------------------------------
(1) On-balance sheet financing and leasing assets.
In early 2002, Tyco announced its break-up plan and intent to sell its
interest in CIT. Subsequent developments at Tyco prior to the separation of CIT
resulted in credit rating downgrades of Tyco and similar but more limited
actions for CIT. These rating actions caused significant disruption to our
historical funding base. As a result, the Company's access to the commercial
paper market was hindered, and the Company drew down on its existing backup
lines of credit to meet its financing requirements. Consequently, management
focused primarily on liquidity and capital as opposed to growth and
profitability. As a result of this focus, senior management met regularly to
discuss such topics as daily cash flow, forecasts and funding needs,
prioritization of liquidity to existing customers and tempering acquisition and
portfolio purchases. Significant initiatives were undertaken to fortify the
Company's liquidity position, to address bond holder protections, to re-access
the commercial paper and term debt markets and to improve our balance sheet
strength. The steps taken are outlined below.
In February 2002 we amended our bond indentures to prohibit or restrict
transactions with Tyco for as long as CIT was owned by Tyco. CIT completed a
$1.2 billion conduit financing backed by trade accounts receivable in order to
broaden funding access and repay term debt at the scheduled maturities. In March
2002, we completed a $1.0 billion securitization facility backed by home equity
loans to further broaden funding access. In April 2002, we completed a $2.5
billion unsecured debt offering comprised of $1.25 billion of 7.375% senior
notes due in April 2007, and $1.25 billion of 7.75% senior notes due in April
2012. In May 2002, we executed a $1.1 billion public asset backed transaction,
secured by equipment collateral. In June 2002, we renewed our existing $3
billion equipment conduit facility and increased the facility size to $3.5
billion. Also in June 2002, we executed a $1 billion public asset backed
transaction, secured by home equity assets.
In July 2002, we completed our 100% IPO, with the proceeds paid to our
former parent. CIT received approximately $250 million of additional capital
shortly following the IPO, which enhanced our capital base, as the underwriters
elected to exercise a portion of their over-allotment or "green shoe" option.
Immediately following the IPO and complete separation from Tyco, debt
credit ratings were upgraded by Standard & Poor's and Fitch. Shortly thereafter,
the Company commenced repayment of its drawn bank facilities, which facilitated
our re-entrance into the commercial paper markets. We re-launched our commercial
paper program, and achieved significant outstandings at market pricing levels.
We continued to pay down existing credit facilities, maintaining back-stop
liquidity to fully cover all outstanding commercial paper. In July 2002, we
entered into an agreement with a financial institution to provide us with an
additional $250 million in back-stop liquidity. The terms and conditions of that
agreement are substantially identical to those contained in our previous credit
agreements. In October 2002, we made further improvements to our maturity
profile. We retired the $3.7 billion 364-day credit facility due in March 2003
and negotiated a new $2.3 billion 364-day committed credit facility which
12
expires in October 2003. Proceeds from the new facility along with other
liquidity sources were utilized to pay down the prior facility. As a result,
outstanding bank lines were reduced by almost $2.0 billion during the three
months ended December 31, 2002. In January 2003, we repaid an additional $0.5
billion of the outstanding bank lines. The Company had aggregate committed
credit facilities of approximately $7.35 billion, with $5.23 billion available,
at December 31, 2002. Please refer to Note 10 -- Debt, for more detail on our
credit facilities.
We demonstrated successful access to the term debt markets as well. Since
the IPO, we have issued an aggregate $4.0 billion in term debt in the
institutional debt markets, comprised of $2.9 billion in fixed-rate debt and
$1.1 billion in floating-rate debt. In October 2002, we established a retail
note program and have issued $736 million through December 31, 2002. Further, in
early December 2002, we completed a 5 year-fixed rate transaction for $800
million at a spread of 235 basis points over U.S. Treasuries. The weighted
average rate on the fixed rate issuance has been lower than the weighted average
rate of our outstanding debt portfolio due to lower index rates, but the
borrowing spreads are higher than comparable borrowing spreads prior to the
onset of events surrounding our separation from Tyco. In general, the spreads on
interest rates for corporate bonds have risen over the past year. We may use
interest rate derivatives to swap some of the aforementioned debt to floating to
better match our asset base and to minimize funding costs.
The events described resulted in an increased cost of funds due to our
borrowing spreads being higher than traditionally experienced. Additionally, the
Company has been maintaining cash liquidity levels in excess of our historical
norms. Although our quality spreads have been trending towards historical levels
in recent months, management expects that margin and earnings will continue to
be negatively impacted for the foreseeable future, as results will continue to
reflect more expensive borrowing spreads and excess liquidity.
As management was executing its plan to dispose of targeted assets while
improving liquidity and capital, the U.S. and world economies slowed
drastically. The slowing economy dampened demand for new borrowings, which was
reflected in lower loan origination levels. In conjunction with our emphasis on
liquidating or selling targeted assets, and securitizing higher levels of assets
to meet liquidity needs, our on balance sheet assets decreased, which in turn
led to lower levels of net interest margin.
As the economy continued its slowdown, market interest rates continued to
decline in line with the various rate-easing moves effected by the Federal
Reserve Bank. However, given the weak economy, and difficult atmosphere created
by numerous corporate bankruptcies and financial reporting irregularities,
corporate bond quality spreads increased, or "widened out", leading to increased
borrowing costs relative to U.S. Treasury securities and various floating rate
indices for most corporate borrowers, including CIT.
The following table summarizes the trend in our quality spreads (interest
rate cost over U.S. Treasury rates) in relation to 5-year treasuries. Amounts
are in basis points and represent the average spread during the period ended:
December 31, September 30, September 30, December 31,
2002 2002 2001 2000
------------ ------------- ------------- ------------
Average spread over U.S. Treasuries ............ 302 313 147 154
Though quality spreads remain high in relation to historical levels, we
did see a tightening of our spreads during the latter half of the fourth
calendar quarter. In early December 2002, we completed a five year fixed rate
borrowing for $800 million at a spread of 235 basis points over U.S. treasuries,
and our spreads in the secondary bond market were 225 basis points over 5-year
treasuries on December 31, 2002.
The poor economy also resulted in worsening borrower performance and a
decline in equipment values, leading to higher loss frequency and severity,
which lowered earnings. In response to increasing past due and non-performing
loan levels, management increased our balance sheet reserve for credit losses,
even as portfolio asset levels continued to decline. Our exposures to
telecommunications and Argentina were evaluated, with specific reserving actions
taken in the year ended September 30, 2002. These reserves were added to the
balance sheet reserve for credit losses and are separately identified and
tracked in relationship to the performance of the corresponding portfolios.
These reserving actions were consistent with our focus to improve balance sheet
strength. While charge-offs remained high during the three months ended December
31, 2002, the dollar amounts of delinquencies and non-performing assets improved
from September 30, 2002, which we consider to be a leading indicator of possible
future charge-off activity.
13
Management's current principal focus is on improving the credit quality of
our portfolio, lowering our borrowing spreads to decrease our cost of funds,
continuing to broaden our funding access, including securitization, increasing
new business origination volumes and prudently seeking opportunities to grow our
earning assets, while maintaining our expense discipline.
Income Statement and Balance Sheet Analysis in Relation to Prior Year Periods
The following table summarizes the impact of various items for the
respective reporting periods that affect the comparability of our financial
results under accounting principles generally accepted in the U.S. ("GAAP"). We
are presenting these items as a supplement to the GAAP results to facilitate the
comparability of results between periods. The adoption of Statement of Financial
Accounting Standards No. ("SFAS") 142, "Goodwill and Other Intangible Assets"
eliminated goodwill amortization and introduced goodwill impairment charges. The
impairment charge in the September 30, 2002 fiscal year was a non-cash charge
and did not impact our tangible capital. The TCH results relate to a Tyco
acquisition company that had temporary status with respect to Tyco's acquisition
of CIT. The venture capital charges relate to a line of business in which we
have ceased originations, while reserving actions and other charges represent
significant items that relate to specific portfolios and to Tyco-related
acquisition costs. For these reasons, we believe that this table, in addition to
the GAAP results, aids in the analysis of the significant trends in our business
over the periods presented ($ in millions).
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
----------- ----------- ------------- ------------- -------------
(successor) (successor) (successor) (combined) (predecessor)
Net income (loss) -- GAAP basis ........................ $ 141.3 $ 184.1 $(6,698.7) $ 263.3 $ 611.6
Charges included in net income
(loss):
Goodwill impairment ................................ -- -- 6,511.7 -- --
Goodwill amortization .............................. -- -- -- 92.5 75.4
Reserving actions and other
charges .......................................... -- -- 220.1 158.0 --
Venture capital (gains) losses ..................... 3.9 (1.6) 25.0 (3.7) (33.3)
TCH losses ......................................... -- 54.9 723.5 70.5 --
-------- -------- --------- -------- --------
Net income -- before charges ........................... $ 145.2 $ 237.4 $ 781.6 $ 580.6 $ 653.7
======== ======== ========= ======== ========
The reduction in net income for the three months ended December 31, 2002
from the prior year quarter resulted from lower interest margin due to a lower
asset base and higher borrowing costs, as well as higher charge-offs.
The reserving actions and other charges of $220.1 million for the twelve
months ended September 30, 2002 includes the following: a $136.4 million
after-tax provision to establish reserves primarily relating to the
telecommunications portfolio, notably competitive local exchange carrier
exposures, and an $83.7 million after-tax provision for the devaluation of the
Argentine peso brought on by economic reforms instituted by the Argentine
government that converted dollar-denominated receivables into peso denominated
obligations. As a result of the adoption of SFAS 142 on October 1, 2001, there
was no goodwill amortization for the periods subsequent to September 30, 2001.
Net income for the combined nine months ended September 30, 2001 included
a charge of $221.6 million ($158.0 million after-tax), which consisted of the
following: a provision of $89.5 million for certain under-performing equipment
leasing and loan portfolios, primarily in the telecommunications industry;
write-downs of $78.1 million for certain equity investments in the
telecommunications industry and e-commerce markets; and acquisition-related
transaction costs of $54.0 million incurred by CIT prior to and in connection
with its acquisition by Tyco. The $78.1 million write-down is netted in other
revenue in the Consolidated Statement of Income and the impairment of portfolio
assets of $89.5 million is included in the provision for credit losses. The
impairment and valuation charges above relate to loans, leases and investments
that are being liquidated.
Managed assets totaled $46.4 billion at December 31, 2002 versus $47.6
billion at September 30, 2002 and $49.1 billion at December 31, 2001. Financing
and leasing portfolio assets totaled $35.9 billion at December 31,
14
2002, $36.4 billion at September 30, 2002 and $38.6 billion at December 31,
2001. The decreases in both managed and portfolio assets during these periods
reflect the factors discussed in the "Key Business Initiatives and Trends"
section, namely lower origination volume brought upon by the slow economic
conditions, growth constraints caused by the disruption to our funding base in
2002, which increased our funding costs (see "Net Finance Margin" and
"Liquidity" sections for further discussion), and the sales and continued
liquidation of several product line portfolios. The decline in assets from
September 30, 2002 to December 31, 2002 also included a $0.9 billion decline in
the Commercial Finance portfolio due to seasonal runoff. See "Financing and
Leasing Assets" for additional information.
Net Finance Margin
A comparison of finance income and net finance margin is set forth below
($ in millions).
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Finance income ........................... $ 971.7 $ 1,199.0 $ 4,342.8 $ 3,975.3 $ 5,248.4
Interest expense ......................... 340.0 373.0 1,439.3 1,619.8 2,497.7
---------- ---------- ---------- ---------- ----------
Net finance income ................... 631.7 826.0 2,903.5 2,355.5 2,750.7
Depreciation on operating lease
equipment ............................... 277.3 338.5 1,241.0 1,036.7 1,281.3
---------- ---------- ---------- ---------- ----------
Net finance margin ................... $ 354.4 $ 487.5 $ 1,662.5 $ 1,318.8 $ 1,469.4
========== ========== ========== ========== ==========
Average earning assets ("AEA") ........... $ 32,693.2 $ 37,471.2 $ 35,796.4 $ 40,442.0 $ 40,682.5
========== ========== ========== ========== ==========
As a % of AEA:
Finance income ........................... 11.89% 12.80% 12.13% 13.10% 12.90%
Interest expense ......................... 4.16% 3.98% 4.02% 5.34% 6.14%
---------- ---------- ---------- ---------- ----------
Net finance income ................... 7.73% 8.82% 8.11% 7.76% 6.76%
Depreciation on operating lease
equipment ............................... 3.39% 3.62% 3.47% 3.42% 3.15%
---------- ---------- ---------- ---------- ----------
Net finance margin........................ 4.34% 5.20% 4.64% 4.34% 3.61%
========== ========== ========== ========== ==========
The net finance margin as a percentage of AEA was favorably impacted in
2002 by the liquidation or disposal of non-strategic and under-performing
businesses, the decline in market interest rates, the effect of fair value
adjustments in the new basis of accounting (recorded as adjustments to goodwill)
to reflect market interest rates (including lower debt quality spreads) on debt
and assets (including liquidating portfolios) and lower leverage. The positive
impact on risk adjusted interest margin due to fair value adjustments to mark
receivables and debt to market in conjunction with the Tyco acquisition was
approximately 38, 48, 45 and 16 basis points for the three months ended December
31, 2002 and 2001, the twelve months ended September 30, 2002 and the nine
months ended September 30, 2001, respectively. Our funding costs increased as a
result of the draw down of bank facilities to pay off commercial paper, the
issuance of term debt at wider credit spreads in 2002 and higher levels of
excess cash maintained for liquidity purposes. These factors were particularly
evident in the comparisons for the three months ended December 31, 2002 and
2001. AEA declined during 2002 due to increased securitization, the runoff of
non-strategic, liquidating portfolios and the slower economy. See the "Key
Business Initiatives and Trends" section for further discussion of our quality
spreads and the factors causing the lower levels of AEA.
The 2001 results reflect asset levels comparable to 2000 and stable
yields, coupled with lower interest expense. Excluding higher operating lease
rentals, which were offset by higher depreciation expense, 2001 net finance
income as a percentage of AEA was essentially flat with 2000 reflecting the
disposition of non-strategic and lower margin businesses, the lower 2001
interest rate environment and the impact of the new basis method of accounting
to reflect market interest rates on debt and receivables at the time of the
acquisition.
Finance income (interest on loans and lease rentals) for the three months
ended December 31, 2002 decreased $227.3 million to $971.7 million from the same
period in 2001, reflecting a decline of 12.8% in AEA and the impact of lower
market interest rates, as well as lower operating lease rentals primarily
resulting from lower rentals
15
on the aerospace portfolio following the 2001 commercial airline industry down
turn. Although market interest rates were rising in 2000 and declining in 2001,
the 2001 increase in yield over 2000 primarily reflects changes in product mix
and the sale or liquidation of non-strategic, lower yielding assets.
Although down in dollar amount, interest expense for the three months
ended December 31, 2002 increased as a percentage of AEA in comparison to the
three months ended December 31, 2001, in spite of declining market interest
rates. Cost of funds as a percentage of AEA averaged 4.16% for the three months
ended December 31, 2002 compared to 3.98% for the three months ended December
31, 2001, reflecting the term out of floating interest rate funding sources and
higher borrowing spreads. The 2001 decrease over 2000 reflected the decline in
2001 market interest rates, in contrast to the rising interest rate environment
throughout most of 2000. At December 31, 2002, CIT had outstanding $5.0 billion
in commercial paper and $2.1 billion in drawn bank facilities. Commercial paper
outstanding at December 31, 2001 amounted to $8.0 billion and we had no
outstandings drawn under the commercial bank lines. We continue to pay down
drawn bank loans, while maintaining back-stop liquidity to fully cover all
outstanding commercial paper.
The operating lease equipment portfolio was $6.7 billion at December 31,
2002, $6.6 billion at September 30, 2002, $6.5 billion at December 31, 2001,
$6.4 billion at September 30, 2001 and $7.2 billion at December 31, 2000. The
table below summarizes operating lease margin as a % of average operating lease
equipment for the respective periods.
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Rental income ...................................... 23.6% 28.9% 26.4% 27.6% 27.9%
Depreciation expense ............................... 16.8% 21.1% 18.9% 19.4% 19.5%
---- ---- ---- ---- ----
Operating lease margin ............................. 6.8% 7.8% 7.5% 8.2% 8.4%
==== ==== ==== ==== ====
In addition to the previously mentioned reduction in aerospace rentals,
the declines in both rental income and depreciation expense for the three months
ended December 31, 2002 from the corresponding period of 2001 reflects a greater
proportion of longer-term aircraft and rail assets in the current period.
Net Finance Margin after Provision for Credit Losses
The net finance margin after provision for credit losses (risk adjusted
interest margin) for the three months ended December 31, 2002 declined by $153.6
million (41.0%) to $221.0 million from $374.6 million for the comparable period
of 2001. These amounts equated to risk adjusted margin of 2.70% and 4.00% as a
percentage of AEA for the three months ended December 31, 2002 and 2001. In
addition to the factors discussed in Net Finance Margin, these comparisons also
reflected a $20.5 million increase in the provision for credit losses, stemming
primarily from higher charge-offs in the Commercial Finance segment and
telecommunication charge-offs, which were provided for in prior period specific
reserving actions.
The risk adjusted net margin was $874.2 million (2.44%) for the twelve
months ended September 30, 2002, and $986.3 million (3.25%) for the nine months
ended September 30, 2001. Excluding the additional credit provisions to
establish reserves for the telecommunications and Argentine exposures, and
certain prior year provisions, risk adjusted margin as a percentage of AEA was
3.38% for the twelve months ended September 30, 2002, 3.54% for the nine months
ended September 30, 2001, and 2.98% for the year ended December 31, 2000.
We used discounted cash flow projection analysis to estimate the fair
value of our various liquidating portfolios by modeling the portfolio revenues,
credit costs, servicing costs and other related expenses over the remaining
lives of the portfolios, at the date of the Tyco acquisition. The resulting cash
flows were discounted to determine the estimated fair value of each portfolio,
which typically resulted in discounted values to the previously recorded book
values. These discounts are being accreted into income as the portfolios
liquidate. As loans in these liquidating portfolios are charged-off, the
corresponding reduction to the reserve for credit losses is replenished via the
provision for credit losses, which is charged against current earnings. Actual
performance of the portfolios, including revenue, credit losses, and expenses,
is compared on a quarterly basis to the original discounted cash
16
flow projections to monitor portfolio performance to determine whether scheduled
accretion should be modified. The impact on risk-adjusted margin due to purchase
accounting fair value adjustments related to the liquidating portfolios for the
three months ended December 31, 2002, the year ended September 30, 2002, and the
nine months ended September 30, 2001 were 13, 13 and 5 basis points,
respectively.
Other Revenue
We continue to emphasize growth and diversification of other "non-spread"
revenues to improve our overall profitability. For the three months ended
December 31, 2002, other revenue increased 4.9% to $257.1 million from $245.1
million in the comparable period in 2001. The venture capital impairment
valuations and write-downs in all periods, as well as special charges in 2001,
consisting of write-downs for other than temporary impairment of certain equity
investments in the telecommunications industry and e-commerce markets, were
recorded as reductions to other revenue. Excluding these items, other revenue as
a percentage of AEA was 3.22% for the three months ended December 31, 2002,
2.59% for the three months ended December 31, 2001, 2.72% for the year ended
September 30, 2002, 2.13% for the nine months ended September 30, 2001 and 2.11%
for the year ended December 31, 2000. The components of other revenue are set
forth in the following table ($ in millions).
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Fees and other income .............................. $169.2 $173.5 $644.5 $387.2 $480.9
Factoring commissions .............................. 55.1 38.3 165.5 111.9 154.7
Gains on securitizations ........................... 30.5 28.0 149.0 97.7 109.5
Gains on sales of leasing
equipment ...................................... 8.7 2.7 13.6 47.9 113.2
(Losses) gains on venture capital
investments .................................... (6.4) 2.6 (40.3) 6.0 53.7
Other charges ...................................... -- -- -- (78.1) --
------ ------ ------ ------ ------
Total .......................................... $257.1 $245.1 $932.3 $572.6 $912.0
====== ====== ====== ====== ======
For the three months ended December 31, 2002, fees and other income, which
includes servicing fees, miscellaneous fees, syndication fees and gains from
asset sales, declined slightly from the comparable period of 2001. Factoring
commissions increased $16.8 million from the quarter ended December 31, 2001 to
$55.1 million, reflecting both increased volume and higher commission rates.
Losses on venture capital investments for the three months ended December 31,
2002 are attributable to weaker economic conditions compared to the same period
in 2001.
The following table presents information regarding securitization gains
included in the table above ($ in millions):
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Volume securitized(1) ............................. $ 1,189.3 $ 1,223.8 $ 7,668.5 $ 3,293.3 $ 4,129.2
Gains ............................................. 30.5 28.0 149.0 97.7 109.5
Gains as a percentage of volume
securitized ................................... 2.57% 2.29% 1.94% 2.97% 2.65%
- --------------------------------------------------------------------------------
(1) Excludes short-term trade receivables securitized for liquidity purposes.
During the three months ended December 31, 2002, we securitized $0.3
billion of home equity loans and $0.9 billion of equipment loans. For the
periods in 2001 and 2000, the securitization volume was entirely equipment
loans. For the twelve months ended September 30, 2002, we securitized $2.7
billion of home equity loans and $4.9 billion of equipment loans. The
securitization volume increased in 2002 primarily to meet funding and liquidity
needs.
17
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are two metrics that management uses
to monitor productivity and are set forth in the following table. The efficiency
ratio measures the level of expenses in relation to revenue earned, whereas the
AMA relationship measures expenses in relation to our managed asset base ($ in
millions).
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Efficiency ratio(1) .............................. 39.6% 31.5% 35.6% 40.2% 43.8%
Salaries and general operating
expenses as a percentage
of AMA(2) .................................... 2.18% 1.93% 1.96% 2.07% 2.01%
Salaries and general operating
expenses ..................................... $ 242.1 $ 230.5 $ 923.4 $ 784.9 $ 1,035.2
- --------------------------------------------------------------------------------
(1) Efficiency ratio is the ratio of salaries and general operating expenses
to operating margin, excluding the provision for credit losses.
(2) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us.
The increase in salaries and general operating expenses for the three
months ended December 31, 2002 in relation to the same period in 2001 includes
increased expenses associated with our return to public ownership. The decreased
expenses for the twelve months ended September 30, 2002 compared to the
annualized run rates for the nine months ended September 30, 2001 and the year
ended December 31, 2000 are due to corporate staff reductions and business
restructurings effected in association with the 2001 acquisition of CIT by Tyco,
which were partially offset by higher collection, repossession and loan workout
expenses in the latter part of 2001 through 2002. The expenses relating to our
return to public company status include investor relations, advertising,
corporate governance, increased insurance premiums, and costs associated with
rebuilding our income tax function. These public company-related expenses are
expected to continue. Personnel decreased to approximately 5,835 at December 31,
2002 from 5,850 at September 30, 2002, 6,785 at September 30, 2001 and 7,355 at
December 31, 2000.
In addition to the higher expenses, the deterioration in the efficiency
ratio for the three months ended December 31, 2002 to 39.6% from 31.5% for the
comparable period of 2001 is also the result of lower net finance margin in
2002. Similarly, the deterioration in the ratio of salaries and general
operating expenses to AMA reflects reduced levels of average managed assets. We
continue to target an efficiency ratio in the mid 30% area and an AMA ratio of
under 2.00%. The higher efficiency (lower ratio) for the twelve months ended
September 30, 2002 in comparison to the nine months ended September 30, 2001 is
the result of strong fee income and cost reductions.
Expenses are monitored closely by business unit and corporate management
and are reviewed monthly with our senior management as to trends and forecasts.
To ensure overall project cost control, an approval and review procedure is in
place for major capital expenditures, such as computer equipment and software,
including post-implementation evaluations.
Goodwill and Other Intangible Assets Impairment and Amortization
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, 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 our reporting units as of
October 1, 2001. Under the transition provisions of SFAS No. 142, there was no
goodwill impairment as of October 1, 2001. Prior period goodwill and other
intangible assets amortization was $97.6 million (pretax) for the nine months
ended September 30, 2001.
During the quarter ended March 31, 2002, our 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. As a result of these events at Tyco, CIT also experienced credit
downgrades and a disruption to our funding base and ability to access capital
markets. Further, market-based information used in connection with our
18
preliminary consideration of an initial public offering for 100% of CIT
indicated that CIT's book value exceeded its estimated fair value as of March
31, 2002. As a result, management performed a Step 1 SFAS 142 impairment
analysis as of March 31, 2002 and concluded that an impairment charge was
warranted at that date.
Management's objective in performing the Step 1 SFAS 142 analysis was to
obtain relevant market-based data to calculate the fair value of each CIT
reporting unit as of March 31, 2002 based on each reporting unit's projected
earnings and market factors that would be used by market participants in
ascribing value to each of these reporting units in the planned separation of
CIT from Tyco. Management obtained relevant market data from our financial
advisors regarding the range of price to earnings multiples and market discounts
applicable to each reporting unit as of March 31, 2002 and applied this market
data to the individual reporting unit's projected annual earnings as of March
31, 2002 to calculate a fair value of each reporting unit. The fair values were
compared to the corresponding carrying value of each reporting unit at March 31,
2002, resulting in a $4.512 billion impairment charge as of March 31, 2002.
SFAS 142 requires a second step analysis whenever the reporting unit book
value exceeds its fair value. This analysis required us to determine the fair
value of each reporting unit's individual assets and liabilities to complete the
analysis of goodwill impairment as of March 31, 2002. During the quarter ended
June 30, 2002, we completed this analysis for each reporting unit and determined
that an additional Step 2 goodwill impairment charge of $132.0 million was
required based on reporting unit level valuation data.
Subsequent to March 31, 2002, CIT experienced further credit downgrades
and the business environment and other factors continued to negatively impact
the expected CIT IPO proceeds. As a result, we performed both Step 1 and Step 2
analysis as of June 30, 2002 in a manner consistent with the March 2002 process
described above. This analysis was based upon updated market data from our
financial advisors regarding the individual reporting units, and other relevant
market data at June 30, 2002 and through the period immediately following the
IPO of the Company, including the total amount of the IPO proceeds. This
analysis resulted in Step 1 and Step 2 incremental goodwill impairment charges
of $1.719 billion and $148.0 million, respectively, as of June 30, 2002, which
was recorded during the June 2002 quarter. Our remaining goodwill is
substantially in our commercial finance segment businesses. Due to a relatively
stable credit market and business environment since June 30, 2002, we determined
that no additional goodwill impairment charges were needed during the remaining
periods of 2002.
Provision for Credit Losses
The provision for credit losses was $133.4 million for the three months
ended December 31, 2002, $788.3 million for the twelve months ended September
30, 2002, and $332.5 million for the combined nine months ended September 30,
2001. The increased provision for the year ended September 30, 2002 reflects
higher charge-off levels and reserving actions relating primarily to Competitive
Local Exchange Carriers ("CLEC") exposures in the telecommunications portfolio
($200 million) and our Argentine exposure ($135 million, detailed further
below). The 2001 provision includes a provision for credit losses of $89.5
million relating to the impairment of certain under-performing equipment leasing
and loan portfolios, primarily in the Structured Finance telecommunications
portfolio. Such under-performing loans and leases are being liquidated, as
collection efforts continue.
19
Our provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions).
For the Three For the Twelve For the Nine For the
Months Ended Months Ended Months Ended Year Ended
December 31, September 30, September 30, December 31,
2002 2002 2001 2000
------------- -------------- ------------- -------------
(successor) (successor) (combined) (predecessor)
Balance beginning of period ...................................... $777.8 $492.9 $468.5 $446.9
------ ------ ------ ------
Provision for credit losses ...................................... 133.4 453.3 243.0 255.2
Provision for credit losses -- specific reserving
actions(1) ...................................................... -- 335.0 89.5 --
Reserves relating to dispositions, acquisitions,
other ........................................................... 4.1 (11.1) (16.3) 2.0
------ ------ ------ ------
Additions to reserve for credit losses ....................... 137.5 777.2 316.2 257.2
------ ------ ------ ------
Net credit losses:
Equipment Financing and Leasing .................................. 71.1 258.9 82.8 102.9
Specialty Finance -- commercial .................................. 23.2 80.3 57.0 31.7
Commercial Finance ............................................... 33.5 88.2 38.9 46.2
Structured Finance ............................................... 15.5 18.5 64.8 0.4
Specialty Finance -- consumer .................................... 11.2 46.4 48.3 54.4
------ ------ ------ ------
Total net credit losses ...................................... 154.5 492.3 291.8 235.6
------ ------ ------ ------
Balance end of period ............................................ $760.8 $777.8 $492.9 $468.5
====== ====== ====== ======
Reserve for credit losses as a percentage of
finance receivables ............................................. 2.75% 2.73% 1.55% 1.40%
====== ====== ====== ======
Reserve for credit losses as a percentage of past
due receivables (sixty days or more)(2) ......................... 76.0% 72.7% 44.7% 46.9%
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) The specific reserving actions for the twelve months ended September 30,
2002 consist of provisions relating to telecommunications ($200.0 million)
and Argentine exposures ($135.0 million), while the action for the nine
months ended September 30, 2001 consists of a provision for
under-performing loans and leases, primarily in the telecommunications
portfolio.
(2) The reserve for credit losses excluding the impact of telecommunication
and Argentine reserves and delinquencies as a percentage of past due
receivables (sixty days or more) is 49.0% at December 31, 2002 and 45.3%
at September 30, 2002.
The following table sets forth our net charge-off experience in amount and
as a percentage of average finance receivables by business segment ($ in
millions):
Net Charge-offs:
For the Three Months For the Twelve For the Nine For the
Ended December 31, Months Ended Months Ended Year Ended
------------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
(successor) (successor) (successor) (combined) (predecessor)
Equipment Financing and Leasing ............... $ 71.1 3.23% $ 62.1 2.22% $258.9 2.51% $ 82.8 0.91% $102.9 0.71%
Specialty Finance-commercial .................. 23.2 1.55% 20.7 1.25% 80.3 1.26% 57.0 1.11% 31.7 0.54%
Commercial Finance ............................ 33.5 1.92% 16.6 0.80% 88.2 1.13% 38.9 0.66% 46.2 0.60%
Structured Finance ............................ 15.5 2.24% -- -- 18.5 0.75% 64.8 4.40% 0.4 0.03%
------ ------ ------ ------ ------
Total Commercial Segments ................... 143.3 2.33% 99.4 1.41% 445.9 1.65% 243.5 1.13% 181.2 0.62%
Specialty Finance-consumer .................... 11.2 2.24% 13.4 1.70% 46.4 1.78% 48.3 1.72% 54.4 1.32%
------ ------ ------ ------ ------
Total ......................................... $154.5 2.32% $112.8 1.44% $492.3 1.67% $291.8 1.20% $235.6 0.71%
====== ====== ====== ====== ======
The increased net charge-offs in the three months ended December 31, 2002
from the comparable period in 2001, both in amount and percentage, reflect
general economic weakness leading to higher net charge-offs in most of our
business segments. In particular, weakened collateral values in the equipment
financing and leasing segment have resulted in both increased frequency and
severity of losses. The higher loss rates in the commercial finance segment in
2002 reflect charge-offs associated with several loan work-outs due to the
weaker economic trends. The higher net charge-off percentages for the twelve
months ended September 30, 2002 in relation to the prior year also
20
reflect higher charge-off rates associated with receivables in liquidation
status, which include owner-operator trucking, franchise, inventory finance,
manufactured housing and recreational vehicle receivables, as well as
charge-offs in the telecommunications portfolio which were provided for in the
specific reserving actions.
The increase in commercial net charge-offs during 2001 includes $79.5
million in charge-offs relating to certain underperforming equipment leasing and
loan portfolios as well as higher charge-offs across a wide number of
industries, including trucking, construction and technology, as the economy
slowed and non-performing assets increased.
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown for the liquidating and telecommunication, as well as all
other, portfolios for the periods under review in the following tables ($ in
millions):
Three Months Ended December 31, 2002
------------------------------------------------------------------
Excluding
Liquidating and Liquidating and
Telecommunications Telecommunications Total
------------------ ------------------ ------------------
Equipment Financing and Leasing ............. $ 57.8 2.81% $ 13.3 9.25% $ 71.1 3.23%
Specialty Finance-commercial ................ 21.2 1.42% 2.0 36.36% 23.2 1.55%
Commercial Finance .......................... 33.5 1.92% -- -- 33.5 1.92%
Structured Finance .......................... -- -- 15.5 8.75% 15.5 2.24%
------ ------ ------
Total Commercial Segments ............... 112.5 1.93% 30.8 9.44% 143.3 2.33%
Specialty Finance-consumer .................. 6.1 2.11% 5.1 2.42% 11.2 2.24%
------ ------ ------
Total ................................... $118.6 1.94% $ 35.9 6.68% $154.5 2.32%
====== ====== ======
Three Months Ended December 31, 2002
------------------------------------------------------------------
Excluding
Liquidating and Liquidating and
Telecommunications Telecommunications Total
------------------ ------------------ ------------------
Equipment Financing and Leasing ............. $168.6 1.83% $ 90.3 8.02% $258.9 2.51%
Specialty Finance-commercial ................ 70.7 1.14% 9.6 5.62% 80.3 1.26%
Commercial Finance .......................... 88.2 1.13% -- -- 88.2 1.13%
Structured Finance .......................... 0.1 0.01% 18.4 2.78% 18.5 0.75%
------ ------ ------
Total Commercial Segments ............... 327.6 1.31% 118.3 6.04% 445.9 1.65%
Specialty Finance-consumer .................. 24.4 1.33% 22.0 2.86% 46.4 1.78%
------ ------ ------
Total ................................... $352.0 1.32% $140.3 5.15% $492.3 1.67%
====== ====== ======
Reserve for Credit Losses
The reserve for credit losses was $760.8 million or 2.75% of finance
receivables at December 31, 2002. The reserve for credit losses at September 30,
2002, September 30, 2001 and December 31, 2000 was $777.8 million, $492.9
million and $468.5 million, respectively, which represented 2.73%, 1.55% and
1.40%, of finance receivables outstanding, respectively. The increase in the
reserve, both on a dollar basis and as a percentage of finance receivables, is
primarily due to two specific reserving actions taken during the year ended
September 30, 2002. In light of the continued deterioration in the
telecommunications sector, particularly with respect to our CLEC portfolio, we
added $200.0 million to the reserve for credit losses during the quarter ended
June 30, 2002. Additionally, as a result of the Argentine government's action to
convert dollar-denominated loans to pesos, and continued weakness in the peso,
we recorded a $135.0 million provision ($95 million during the quarter ended
March 31, 2002 and $40 million during the quarter ended June 30, 2002). The
specific reserve for the telecommunications portfolio was $153.6 million at
December 31, 2002 and $169.1 million at September 30, 2002, while the Argentine
specific reserve remained at $135.0 million through December 31, 2002.
21
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of finance receivables ($ in
millions):
At December 31, 2002 At September 30, 2002 At September 30, 2001 At December 31, 2000
----------------------- ----------------------- --------------------- --------------------
Amount % Amount % Amount % Amount %
-------- ---------- -------- ---------- --------- -------- -------- --------
(successor) (successor) (successor) (predecessor)
Finance receivables ............ $472.2 1.77% $473.7 1.72% $492.9 1.55% $468.5 1.40%
Telecommunications ............. 153.6 22.40%(1) 169.1 24.77%(1) -- --% -- --%
Argentina ...................... 135.0 73.11%(2) 135.0 71.85%(2) -- --% -- --%
------ ------ ------ ------
Total .......................... $760.8 2.75% $777.8 2.73% $492.9 1.55% $468.5 1.40%
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
Excluding the Argentine and telecommunication reserving actions previously
discussed, the reserve for credit losses was $472.2 million (1.77% of finance
receivables) at December 31, 2002 $473.7 million (1.72%) at September 30, 2002,
$492.9 million (1.55% of finance receivables) at September 30, 2001 and $468.5
million (1.40% of finance receivables) at December 31, 2000. On this basis, the
reserve declined in total dollars due to lower asset levels, but increased as a
percentage of finance receivables due to weaker economic conditions.
At December 31, 2002, finance receivables past due 60 days, excluding the
Argentine and the telecommunications portfolios, amounted to $964.0 million,
down $81.8 million (7.8%) from September 30, 2002. The reserve includes specific
reserves relating to SFAS 114 impaired loans (excluding telecommunications and
Argentina) of $52.9 million at December 31, 2002, down from $109.0 million at
September 30, 2002 and $122.3 million at September 30, 2001. Management
continues to believe that the credit risk characteristics of the portfolio are
well diversified by geography, industry, borrower and equipment type. Refer to
"Concentrations" for more information.
The total telecommunications portfolio and the portion comprising the CLEC
exposure amounted to $710.1 million and $262.3 million at December 31, 2002,
compared to $707.2 million and $275.2 million at September 30, 2002. During the
three months ended September 30, 2002, we charged the specific
telecommunications reserve for $18.4 million in loan charge-offs and $12.5
million in telecommunications equipment write-downs. During the three months
ended December 31, 2002, an additional $15.5 million in telecommunication loan
charge-offs were charged against the reserve.
Our consolidated reserve for credit losses is periodically reviewed for
adequacy based on portfolio collateral values and credit quality indicators,
including charge-off experience, levels of past due loans and non-performing
assets, evaluation of portfolio diversification/concentration and economic
conditions. We review finance receivables periodically to determine the
probability of loss, and record charge-offs after considering such factors as
delinquencies, the financial condition of obligors, the value of underlying
collateral, as well as third party credit enhancements such as guarantees and
recourse from manufacturers. This information is reviewed formally on a
quarterly basis with senior management, including the CEO, CFO, Chief Risk
Officer and Controller among others, in conjunction with setting the reserve for
credit losses.
The reserve for credit losses is developed based on three key components
(1) specific reserves for loans which are impaired under SFAS 114, (2) reserves
for estimated losses inherent in the portfolio based upon historical credit
trends adjusted for trend and loss outlook and, (3) general reserves for
estimation and economic risk. The level and trends over time of each of these
components are also reviewed with senior management as part of the formal
quarterly credit loss reserve process described above. The quarterly reserve
evaluation starts with our quarterly asset quality review (AQR) meetings led by
our Chief Risk Officer. Each business unit reviews its portfolio credit trends,
credit quality, exposures and risk mitigation strategies. Credit surveillance
loans of $500 thousand or greater are individually reviewed and evaluated as to
risk of loss. We also consider the effect of purchase accounting discounts that
decrease the carrying value of the liquidating portfolios. It is management's
judgment that the consolidated reserve for credit losses is adequate to provide
for credit losses inherent in the portfolios.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral, among other things. Therefore, changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses.
22
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets (finance receivables on
non-accrual status and assets received in satisfaction of loans) and the related
percentages of finance receivables at December 31, 2002; September 30, 2002; and
September 30, 2001 ($ in millions).
At December 31, At September 30, September 30, At December 31,
2002 2002 2001 2000
------------------ ------------------ ----------------- ------------------
(successor) (successor) (successor) (predecessor)
Finance receivables,
past due 60 days
or more:
Equipment Financing
and Leasing ..................... $ 444.8 5.12% $ 452.2 5.02% $ 466.5 4.08% $399.8 2.88%
Specialty Finance-
commercial ....................... 182.9 3.07% 215.4 3.54% 259.5 3.97% 184.9 3.07%
Commercial Finance ................ 172.3 2.14% 209.4 2.35% 151.4 1.75% 107.9 1.40%
Structured Finance ................ 67.6 2.31% 65.8 2.45% 38.3 1.75% 96.2 5.59%
-------- -------- -------- ------
Total Commercial
Segments ......................... 867.6 3.39% 942.8 3.53% 915.7 3.18% 788.8 2.69%
Specialty Finance-
consumer ......................... 133.7 6.66% 127.2 7.20% 188.2 6.12% 211.1 5.03%
-------- -------- -------- ------
Total ............................... $1,001.3 3.63% $1,070.0 3.76% $1,103.9 3.46% $999.9 2.98%
======== ======== ======== ======
Non-performing assets:
Equipment Financing
and Leasing ..................... $ 558.4 6.42% $ 548.5 6.09% $ 459.1 4.02% $351.0 2.53%
Specialty Finance-
commercial ....................... 98.2 1.65% 103.1 1.69% 124.2 1.90% 93.9 1.56%
Commercial Finance ................ 136.2 1.69% 176.1 1.98% 106.0 1.22% 65.3 0.85%
Structured Finance ................ 151.6 5.19% 172.2 6.40% 110.4 5.05% 118.6 6.90%
-------- -------- -------- ------
Total Commercial
Segments ......................... 944.4 3.69% 999.9 3.75% 799.7 2.78% 628.8 2.15%
Specialty Finance-
consumer ......................... 141.4 7.04% 139.9 7.92% 170.0 5.53% 199.3 4.75%
-------- -------- -------- ------
Total ............................. $1,085.8 3.93% $1,139.8 4.01% $ 969.7 3.04% $828.1 2.47%
======== ======== ======== ======
Non accrual loans ................... $ 946.4 $ 976.6 $ 851.6 $704.2
Repossessed assets .................. 139.4 163.2 118.1 123.9
-------- -------- -------- ------
Total non-performing
assets ........................... $1,085.8 $1,139.8 $ 969.7 $828.1
======== ======== ======== ======
Past due loans declined $68.7 million from September 30, 2002, ending the
quarter at 3.63% of finance receivables, versus 3.76% last quarter. This trend
reflected improvements in most businesses, particularly the Commercial Finance
Segment and the Specialty Finance -- commercial unit. The decline in Commercial
Finance reflected the fact that several large loan work outs were concluded,
while the Specialty Finance - commercial improvement included lower delinquency
in the European operations and vendor programs. Non-performing assets decreased
$54.0 million from September 30, 2002 due to reductions in the Commercial
Finance and Structured Finance Segments. Equipment Financing unit non-performing
assets declined sharply during the quarter, but were more that offset by
additional aerospace assets placed on non-accrual in the Capital Finance unit
relating to the bankruptcy filing of UAL Corp., the parent company of United
Airlines.
Past due loans decreased $33.9 million from September 30, 2001 to
September 30, 2002, despite the weakened U.S. economy. However, due to increased
securitization activity and declining asset levels, the percentage of past due
receivables increased over the same time period. Non-performing assets increased
from September 30, 2001 to September 30, 2002, both in dollars and as a
percentage of finance receivables, due to: (1) increased telecommunications
(CLEC exposure) non-accrual accounts in Structured Finance (which were
considered in a specific reserving action), (2) one large transaction placed on
non-accrual status collateralized by a municipal waste-to-energy project and
underlying revenue contracts in Equipment Financing and Leasing,
23
(3) increased non-accrual accounts in the SBL unit of Equipment Financing and
Leasing and (4) increased repossessed assets in Equipment Financing and Leasing.
Non-performing telecommunications accounts totaled $120.2 million and $137.0
million at December 31 and September 30, 2002, respectively, of which CLEC
accounts totaled $92.9 million and $109.9 million, respectively.
After peaking in March 31, 2002, we have seen steady improvement in the
Specialty Finance - commercial segment past dues. Similarly, non-performing
accounts have trended downwards since December 2001, reflecting improvement
across the majority of our small-ticket businesses and runoff of our liquidating
portfolio assets. Past due and non-performing assets of the Commercial Finance
segment were up from September 2001 to September 2002, mainly due to two large
customer balances. The Specialty Finance-consumer past due portfolio metrics
were down in dollar terms, but up in percentage to finance receivables, due to
the continued runoff of liquidating portfolios and the home equity
securitization activity, which lowered asset levels during the year.
The increases in past due and non-performing assets at September 30, 2001
from December 31, 2000 was due to a broad-based economic slowdown in 2001, led
by sharp downturns in telecommunications and technology, resulting in increases
in both past due loans and non-performing assets. The increase in commercial
past due loans and non-performing assets included trucking, construction, retail
and technology, as well as manufacturing-steel and machine tools. In Specialty
Finance-consumer, past due and non-performing loans declined. However, the
corresponding 2001 percentage of past due loans to finance receivables increased
due to significant sales and liquidation of non-strategic receivables.
Managed past due loans, which also include securitized loans, decreased to
3.55% of managed financial assets (managed assets less operating leases and
venture capital investments) at December 31, 2002 from 3.78% and 3.72% at
September 30, 2002 and September 30, 2001, respectively, as shown in the table
below ($ in millions). Managed past dues declined 9.3% to $1.4 billion at
December 31, 2002 from $1.5 billion at September 30, 2002, and 14.8% from $1.6
billion at September 30, 2001. These trends reflect the same factors that are
discussed in the owned delinquency analysis.
At December 31, 2002 At September 30, 2002 At September 30, 2001 At December 31, 2000
-------------------- --------------------- --------------------- --------------------
(successor) (successor) (successor) (predecessor)
Managed Financial Assets,
past due 60 days or more:
Equipment Financing
and Leasing ......................... $ 631.2 4.95% $ 710.6 5.27% $ 810.5 5.06% $ 661.3 3.21%
Specialty Finance-
commercial .......................... 265.1 2.62% 303.3 2.94% 386.4 3.57% 424.3 4.44%
Commercial Finance ................... 172.3 2.14% 209.4 2.35% 151.4 1.75% 113.3 1.47%
Structured Finance ................... 67.6 2.31% 65.8 2.45% 38.3 1.75% 96.2 4.10%
-------- -------- -------- --------
Total Commercial ..................... 1,136.2 3.36% 1,289.1 3.64% 1,386.6 3.63% 1,295.1 3.22%
Specialty Finance-
consumer ............................ 259.4 4.71% 249.5 4.71% 253.2 4.32% 264.0 3.65%
-------- -------- -------- --------
Total ................................ $1,395.6 3.55% $1,538.6 3.78% $1,639.8 3.72% $1,559.1 3.29%
======== ======== ======== ========
In light of the continued general economic weakness, and the circumstances
surrounding particular sectors as discussed in "Concentrations", past due
finance receivables and non-performing assets may increase from December 31,
2002 amounts.
Income Taxes
The effective tax rates for the three months ended December 31, 2002, the
year ended September 30, 2002, the combined nine months ended September 30, 2001
and the year ended December 31, 2000 were 39.0%, (5.9)%, 47.1% and 37.9%,
respectively. The provision for income taxes totaled $92.0 million for the three
months ended December 31, 2002 and $118.2 million (38.8%) for the comparable
period in 2001. The effective tax rates for the three months ended December 31,
2002 and 2001 were 39.0% and 38.0% (excluding TCH), respectively. The provision
for income taxes for the year ended September 30, 2002, the combined nine months
ended September 30, 2001 and the year ended December 31, 2000 was $374.0
million, $242.2 million and $381.2 million, respectively.
24
The effective tax rate, excluding the 2002 goodwill impairment, goodwill
amortization and TCH results of operations, was 38.1% for the year ended
September 31, 2002 and 39.6% for the combined nine months ended September 30,
2001.
As of December 31, 2002 we had approximately $1,559.0 million of tax loss
carry-forwards, primarily related to U.S. Federal and state jurisdictions, which
expire at various dates beginning in 2010. These loss carry-forwards are
available to offset current federal income tax liabilities, subject to certain
limitations.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO and separation from Tyco we are rebuilding our tax functions,
including hiring personnel, and rebuilding systems and processes.
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, the
allocation of most corporate expenses and the exclusion of TCH results of
operations ($ in millions).
Three Months Twelve Nine
Ended December 31, Months Ended Months Ended Year Ended
---------------------------- September 30, September 30, December 31,
2002 2001 2002 2001 2000
---------- ---------- ------------- ------------- ------------
(successor) (successor) (successor) (combined) (predecessor)
Net Income
Equipment Financing and Leasing .................... $ 36.2 $ 61.7 $ 202.0 $ 215.1 $ 287.8
Specialty Finance .................................. 73.7 93.9 349.8 196.7 222.2
Commercial Finance ................................. 63.4 51.3 198.9 134.8 161.8
Structured Finance ................................. 13.9 17.1 65.2 45.8 65.4
------ ------ --------- ------- -------
Total Segments ................................. 187.2 224.0 815.9 592.4 737.2
Corporate, including certain charges ............... (45.9) 15.0 (6,791.1) (258.6) (125.6)
------ ------ --------- ------- -------
Total .......................................... $141.3 $239.0 $(5,975.2) $ 333.8 $ 611.6
====== ====== ========= ======= =======
Return on AEA
Equipment Financing and Leasing .................... 1.02% 1.55% 1.32% 1.64% 1.42%
Specialty Finance .................................. 2.86% 2.91% 2.98% 1.83% 1.73%
Commercial Finance ................................. 5.18% 3.48% 3.41% 3.14% 3.03%
Structured Finance ................................. 1.96% 2.62% 2.47% 2.37% 3.25%
Total Segments ................................. 2.32% 2.40% 2.29% 1.97% 1.82%
Corporate .......................................... (0.59)% 0.15% (18.98)% (0.87)% (0.32)%
Total .......................................... 1.73% 2.55% (16.69)% 1.10% 1.50%
For the three months ended December 31, 2002, net income as a percentage
of AEA declined 81 basis points to 173 basis points from the comparable 2001
period. While total segment returns were down modestly from the prior year
quarter, the fluctuation in Corporate drove the majority of the decline due
primarily to higher borrowing costs. In terms of the individual segments,
Commercial Finance reported the most marked improvement due to strong earnings
in both our factoring operation and Business Credit, while the Equipment
Financing unit within the Equipment Financing and Leasing Segment experienced
lower finance income on lower assets and significantly higher charge-offs.
For the year ended September 30, 2002, net income sharply improved in the
Specialty Finance Segment in relation to 2001 based on stronger margins and
higher securitization gains. The Commercial Finance segment also showed
improvement from 2001 due to stronger factoring revenues on increased business
volume. The Equipment Financing and Leasing segment reported reduced net income
and return on assets due to the decline in portfolio assets, higher charge-offs
in the Equipment Financing business and lower aerospace rentals in the Capital
Finance business.
25
The Corporate segment included the following items in the year ended
September 30, 2002: (1) goodwill impairment of $6,511.7 million, (2) provision
for telecommunications of $200.0 million ($124.0 million after tax), (3)
Argentine provision of $135.0 million ($83.7 million after tax), (4) funding
costs of $85.9 million ($53.2 million after tax), and (5) unallocated corporate
operating items totaling $7.2 million pre-tax (income) or $3.9 million after
tax. For the other periods shown in the table above, the corporate segment
included funding costs and unallocated corporate operating expenses. Corporate
segment funding costs increased significantly in 2002 from 2001, reflecting
management's decision to not allocate to the business units the incremental
costs of borrowing and liquidity relating to the disruption to our funding base
and credit downgrades, discussed previously. Such 2002 additional costs included
higher debt quality spreads, use of bank line versus commercial paper
borrowings, incremental cost of liquidity facilities, and excess cash held to
enhance liquidity. Although management chose to not allocate these incremental
costs because they were viewed as relating to temporary conditions, costs will
be allocated beginning January 1, 2003. For all periods shown, Corporate
includes the results of the venture capital business.
All business segments reported improved earnings in 2001 compared to 2000
as a percentage of AEA, with the exception of Structured Finance. The 2001
returns in Equipment Financing and Leasing and Specialty Finance were driven
predominately by stronger margins and other revenue, while the Specialty Finance
trends also reflected the reorganization of the higher return Vendor Technology
business into this segment and the exiting of non-strategic lower-return
businesses as described previously in the Key Business Initiatives and Trends
section. The Commercial Finance improvement over 2000 was primarily the result
of stronger results in factoring. The lower Structured Finance income in 2001 is
attributable primarily to significantly lower venture capital gains.
Financing and Leasing Assets
Managed assets, comprised of financing and leasing assets and finance
receivables securitized that we continue to manage, totaled $46.4 billion at
December 31, 2002 compared to $47.6 billion at September 30, 2002. Owned
financing and leasing portfolio assets totaled $35.9 billion at December 31,
2002, compared to $36.4 billion at September 30, 2002.
The decline in financing and leasing assets from September 30, 2002
included a $0.9 billion drop in the Commercial Finance segment, reflecting
seasonal runoff in both the factoring (Commercial Services) and asset-base
lending (Business Credit) businesses. Growth in most core portfolios during the
quarter, including $86.1 million in the Capital Finance aerospace portfolio, was
offset by the continued runoff in the liquidating portfolios.
The 2002 trend of declining asset levels reflects the factors discussed
previously in the "Key Business Initiatives and Trends" section, including the
increased use of securitization as a funding tool in 2002. At December 31, 2002,
the liquidating portfolios excluding certain venture capital investments totaled
$1.3 billion, down from $1.5 billion at September 30, 2002 and $3.1 billion at
September 30, 2001. The December 31, 2002 liquidating portfolio balances were as
follows: manufactured housing $0.6 billion, franchise finance $0.3 billion,
owner-operator trucking $0.2 billion and other $0.2 billion. New origination
volume for the twelve months ended September 30, 2002 (excluding factoring) was
down by approximately 12% from the comparable 2001 period.
However, new business origination volume, excluding factoring, increased
by approximately 20% during the three months ended December 31, 2002 from the
prior quarter, driven by stronger organic originations in all business segments.
This flow included working capital facilities and debtor-in-possession
financings in the Business Credit unit, collateralized transactions in
Structured Finance, aerospace placements in Capital Finance and stronger volume
from our vendor partnerships.
26
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions).
% Change
At At At --------------------------
December 31, September 30, September 30, Dec. '02 vs Sep. '02 vs
2002 2002 2001 Sep. '02 vs. Sep. '01
----------- ------------- ------------- ----------- ------------
Equipment Financing:
Finance receivables ......................... $ 7,476.9 $ 7,633.0 $ 9,782.0 (2.0)% (22.0)%
Operating lease equipment, net .............. 668.3 765.8 1,281.7 (12.7) (40.3)
--------- --------- ---------
Total ..................................... 8,145.2 8,398.8 11,063.7 (3.0) (24.1)
--------- --------- ---------
Capital Finance:
Finance receivables ......................... 1,335.8 1,479.5 1,773.0 (9.7) (16.6)
Operating lease equipment, net .............. 4,719.9 4,388.9 3,272.4 7.5 34.1
--------- --------- ---------
Total ..................................... 6,055.7 5,868.4 5,045.4 3.2 16.3
--------- --------- ---------
Total Equipment Financing
and Leasing Segment ..................... 14,200.9 14,267.2 16,109.1 (0.5) (11.4)
--------- --------- ---------
Specialty Finance:
Commercial:
Finance receivables ......................... 6,722.4 6,620.2 6,791.6 1.5 (2.5)
Operating lease equipment, net .............. 1,257.3 1,353.2 1,796.1 (7.1) (24.7)
--------- --------- ---------
Total commercial .......................... 7,979.7 7,973.4 8,587.7 0.1 (7.2)
--------- --------- ---------
Consumer:
Home equity ................................. 962.7 1,314.2 2,760.2 (26.7) (52.4)
Other ....................................... 1,374.4 831.8 1,443.2 65.2 (42.4)
--------- --------- ---------
Total consumer ............................ 2,337.1 2,146.0 4,203.4 8.9 (48.9)
--------- --------- ---------
Total Specialty Finance Segment ........... 10,316.8 10,119.4 12,791.1 2.0 (20.9)
--------- --------- ---------
Commercial Services ............................. 4,392.5 5,040.4 5,112.2 (12.9) (1.4)
Business Credit ................................. 3,649.1 3,869.8 3,544.9 (5.7) 9.2
--------- --------- ---------
Total Commercial Finance
Segment ................................. 8,041.6 8,910.2 8,657.1 (9.7) 2.9
--------- --------- ---------
Structured Finance:
Finance receivables ......................... 2,920.9 2,689.6 2,777.1 8.6 (3.2)
Operating lease equipment, net .............. 59.1 59.5 52.6 (0.7) 13.1
Equity investments .......................... 335.4 341.7 342.2 (1.8) (0.1)
--------- --------- ---------
Total Structured Finance Segment .......... 3,315.4 3,090.8 3,171.9 7.3 (2.6)
--------- --------- ---------
TOTAL FINANCING AND
LEASING PORTFOLIO ASSETS ................. 35,874.7 36,387.6 40,729.2 (1.4) (10.7)
--------- --------- ---------
Finance receivables securitized:
Equipment Financing ......................... 3,936.2 4,384.1 4,464.8 (10.2) (1.8)
Specialty Finance-commercial ................ 3,377.4 3,703.1 4,023.2 (8.8) (8.0)
Specialty Finance-consumer .................. 3,168.8 3,147.5 1,659.9 0.7 89.6
--------- --------- ---------
Total ..................................... 10,482.4 11,234.7 10,147.9 (6.7) 10.7
--------- --------- ---------
TOTAL MANAGED ASSETS(1) ................... $46,357.1 $47,622.3 $50,877.1 (2.7)% (6.4)%
========= ========= =========
- --------------------------------------------------------------------------------
(1) Managed assets are compromised of financing and leasing assets and finance
receivables previously securitized that we continue to manage.
Concentrations
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.0% of our total financing and leasing assets at December 31, 2002
(with the largest account representing less than 1.0%), 4.8% at September 30,
2002 and 3.7% at September 30, 2001. All ten accounts at each period of time
were commercial accounts and were secured by equipment, accounts receivable or
inventory.
27
Geographic Composition
The following table summarizes significant state concentrations greater
than 5.0% and foreign concentrations in excess of 1.0% of our owned financing
and leasing portfolio assets at December 31, 2002, September 30, 2002 and
December 31, 2001. In each period, our managed asset geographic composition did
not differ significantly from our owned asset geographic composition.
December 31, September 30, September 30, December 31,
2002 2002 2001 2000
------------ ------------- ------------- ------------
State
California ...................................... 9.8% 10.0% 10.4% 10.4%
New York ........................................ 7.9% 7.8% 8.8% 6.9%
Texas ........................................... 7.0% 7.1% 7.7% 7.9%
Total United States ......................... 79.3% 79.9% 83.1% 83.0%
Country
Canada .......................................... 5.0% 4.7% 4.8% 5.4%
England ......................................... 3.2% 3.1% 2.1% 2.8%
Australia ....................................... 1.3% 1.3% (1) (1)
China ........................................... 1.2% 1.1% (1) (1)
Germany ......................................... 1.1% 1.2% (1) (1)
Brazil .......................................... 1.1% (1) (1) (1)
France .......................................... 1.0% (1) (1) (1)
Total Outside U.S. .......................... 20.7% 20.1% 16.9% 17.0%
- --------------------------------------------------------------------------------
(1) The applicable balances are less than 1.0%.
Industry Composition
At December 31, 2002, our commercial aerospace portfolio in the Capital
Finance business unit consists of financing and leasing assets of $4,072.8
million covering 194 aircraft, with an average age of approximately 6.9 years.
The portfolio is spread over 78 accounts, with the majority placed with major
airlines. The commercial aerospace portfolio at September 30, 2002 was $3,986.7
million of financing and leasing assets, which covered 193 aircraft spread over
77 accounts, with an average age of approximately 7.4 years. The commercial
aircraft all comply with stage III noise regulations.
The following table summarizes the composition of the commercial aerospace
portfolio as of December 31, and September 30, 2002 ($ in millions):
At December 31, 2002 At September 30, 2002
--------------------- ---------------------
Net Number of Net Number of
Investment Planes Investment Planes
---------- --------- ---------- ---------
By Geography:
Europe ....................................... $1,506.5 51 $1,586.9 55
North America ................................ 1,042.2 75 1,025.9 76
Asia Pacific ................................. 853.6 35 813.4 31
Latin America ................................ 595.9 29 483.3 27
Africa/Middle East ........................... 74.6 4 77.2 4
-------- --- -------- ---
Total ............................................ $4,072.8 194 $3,986.7 193
======== === ======== ===
By Manufacturer:
Boeing ....................................... $2,388.1 135 $2,439.6 137
Airbus ....................................... 1,647.9 42 1,507.7 38
Other ........................................ 36.8 17 39.4 18
-------- --- -------- ---
Total ............................................ $4,072.8 194 $3,986.7 193
======== === ======== ===
By Body Type(1):
Narrow ....................................... $2,799.4 142 $2,723.3 141
Intermediate ................................. 859.2 17 849.0 16
Wide ......................................... 377.4 18 375.0 18
Other ........................................ 36.8 17 39.4 18
-------- --- -------- ---
Total ............................................ $4,072.8 194 $3,986.7 193
======== === ======== ===
- --------------------------------------------------------------------------------
(1) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglass DC10
series aircraft.
28
As of December 31, 2002, operating leases represented approximately 75% of
the portfolio, with the remainder consisting of capital leases (including
leveraged leases) and loans. Tax-optimization leveraged leases, which generally
have increased risk for lessors in relation to our other lease and leveraged
lease structures, were approximately $215 million at December 31, 2002. Total
leveraged leases, including the tax optimization structures described above,
were $474 million or 12% of the aerospace portfolio at December 31, 2002. Of the
194 aircraft, 9 are off-lease, 6 of which have been remarketed with leases
pending as of December 31, 2002.
The regional aircraft portfolio at December 31, 2002 consists of 117
planes and a net investment of $344.0 million, primarily in the Structured
Finance segment. The planes are primarily located in North America and Europe.
Operating leases account for about 16% of the portfolio, with the rest capital
leases or loans. There are 5 aircraft in this portfolio that are off-lease. At
September 30, 2002, the regional aircraft portfolio consisted of 94 planes and a
net investment of $245.0 million. The increase during the quarter reflected one
collateralized transaction, supported by sovereign credit.
On August 11, 2002, U.S. Airways announced its Chapter 11 bankruptcy
filing. CIT's outstandings are approximately $60 million to this carrier as of
December 31, 2002, secured primarily by five narrow-body 737's. On November 6,
2002 National Airlines, which was operating in bankruptcy, announced that it
would cease operations effective November 6, 2002. We have repossessed our two
narrow-body Boeing 757 aircraft previously leased to National, with a carrying
value of $39.7 million, and are remarketing the aircraft. On December 9, 2002,
UAL Corp., the parent of United Airlines, announced its Chapter 11 bankruptcy
filing. Under existing agreements, CIT has capital leases where United Airlines
is the lessee of four CIT-owned aircraft narrow body (2 Boeing 757 aircraft and
2 Boeing 737 aircraft), totaling $95.7 million. These United Airlines leases are
on non-accrual status and are included in non-performing assets at December 31,
2002. Additionally, CIT holds $38.0 million in Senior A tranche Enhanced
Equipment Trust Certificates (EETCs) issued by United Airlines, which are debt
instruments collateralized by aircraft operated by United Airlines. As of
January 31, 2003, all the planes on lease to the two bankrupt carriers are
flying. In connection with United Airlines' filing under Chapter 11, CIT is a
co-arranger in a $1.2 billion secured revolving and term loan facility with a
commitment of $300 million. This debtor-in-possession facility, with an
outstanding balance of $96.4 million at December 31, 2002, is secured by, among
other collateral, previously unencumbered aircraft. Future revenues and aircraft
values could be impacted by the actions of the carriers, management's actions
with respect to re-marketing the aircraft, airline industry performance and
aircraft utilization.
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in Note 7 to the Consolidated Financial
Statements. This portfolio totals approximately $710.1 million at December 31,
2002, or approximately 2.0% of total financing and leasing assets. The portfolio
consists of 52 accounts with an average balance of approximately $13.7 million.
The 10 largest accounts in the portfolio aggregate $264.5 million with the
largest single account totaling $32.9 million. Non-performing accounts totaled
$120.2 million (10 accounts) or 16.9% of this portfolio. The telecommunications
portfolio includes CLECs, wireless, and towers, with the largest group being
CLEC accounts, which totaled $262.3 million, or 36.9% of the telecommunications
portfolio at December 31, 2002. The metrics of the telecommunications portfolio
have not changed significantly since September 30, 2002, at which time the
portfolio totaled $707.2 million (approximately 1.9% of total financing and
leasing assets) and consisted of 52 accounts with an average balance of
approximately $13.6 million. Total CLEC exposure at September 30, 2002 amounted
to $275.2 million. Many of these CLEC accounts are still in the process of
building out their networks and developing their customer bases. Our
telecommunications transactions are collateralized by the assets of the customer
(equipment, receivables, cash, etc.) and typically are also secured by a pledge
of the stock of non-public companies. Weak economic conditions and industry
overcapacity have driven down values in this sector. As discussed in "Provision
and Reserve for Credit Losses," $153.6 million of previously recorded reserves
remain for telecommunication exposures. As management continues the evaluation
and work out of the individual accounts in this portfolio, charge-offs will
likely be recorded against this reserve in subsequent periods. Weakness in this
sector could result in additional losses or require additional reserves.
29
Direct and private fund venture capital equity investments totaled $335.4
million at December 31, 2002 and $341.7 million at September 30, 2002. At
December 31, 2002, this portfolio was comprised of direct investments of
approximately $188.8 million in 57 companies and $146.6 million in 52 private
equity funds. Our direct investments totaled $196.6 million (60 companies) and
our investment in private equity funds amounted to $145.1 million (52 funds) as
of September 30, 2002. These investments are principally in emerging growth
enterprises in selected industries, including industrial buyout, information
technology, life science and consumer products. In 2001, we ceased making new
venture capital investments beyond existing commitments, which totaled
approximately $164.9 million at December 31, 2002 and $176.6 million at
September 30, 2002. These commitments, which are mainly to private equity funds,
may, or may not, be drawn. Performance of both our direct investments and our
fund investments will depend upon individual performance of the underlying
companies, the economy and the venture capital and private equity markets.
At December 31, 2002, we had approximately $184.7 million of U.S.
dollar-denominated loans and assets outstanding to customers located or doing
business in Argentina. During 2002, the Argentine government instituted economic
reforms, including the conversion of certain dollar-denominated loans into
pesos. Due to these actions and the weakness of the peso, we established a
reserve of $135.0 million during the year. The underlying portfolio continues to
perform as to collection, but payments are now in pesos. Therefore, our exposure
is primarily currency related.
Management strives to maximize the profitability of the lease equipment
portfolio by balancing equipment utilization levels with market rental rates and
lease term. Substantially all equipment was subject to lease agreements
throughout 2002 and 2001. Equipment not subject to lease agreements were $385.9
million, $267.3 million and $247.2 million at December 31, 2002, September 30,
2002, and September 30, 2001, respectively. The increase in the December 31,
2002 primarily reflects aircraft repossessed during the period. The current
weakness in the commercial airline industry and the slower economy could
adversely impact both rental and utilization rates going forward.
See Note 8 "Concentrations" of Item 8. Financial Statements and
Supplementary Data for further discussion on concentrations.
Other Assets
Other assets totaled $4.7 billion at December 31, 2002 and $4.8 billion at
September 30, 2002, as both the total balance and the underlying components were
essentially unchanged.
Other assets primarily consisted of the following at December 31, 2002:
securitization assets, including interest-only strips, retained subordinated
securities, cash reserve accounts and servicing assets of $1.5 billion,
investments in and receivables from non-consolidated subsidiaries of $0.7
billion, accrued interest and receivables from derivative counterparties of $0.7
billion, deposits on commercial aerospace flight equipment of $0.4 billion,
direct and private fund equity investments of $0.3 billion, repossessed assets
and off-lease equipment of $0.2 billion, prepaid expenses of $0.1 billion and
investment in aerospace securities of $0.1 billion. The remaining balance
includes furniture and fixtures, miscellaneous receivables and other assets.
Results and Trends in Relation to the Prior Quarter
The following analysis is provided in addition to the year-over-prior year
period analysis in order to discuss trends in our business in the periods
subsequent to our July 2, 2002 IPO.
Net income for the quarter ended December 31, 2002 was $141.3 million, or
$0.67 per diluted share, compared to $134.7, million or $0.64 per diluted share
for the quarter ended September 30, 2002. The current quarter results included
charges of $3.9 million, $0.02 per share ($6.4 million pretax), related to the
run-off venture
30
capital equity investment business, versus venture capital charges of $22.4
million, $0.11 per share ($36.2 million pretax), during the prior quarter. The
table that follows presents results for the quarters ended December 31, 2002 and
September 30, 2002, both in amount and as a percentage of average earning assets
("AEA") ($ in millions).
Quarter ended Quarter ended
December 31, 2002 September 30, 2002
---------------------------- --------------------------
Amount % AEA Amount % AEA
---------- ---------- ---------- ----------
Finance income .............................................. $ 971.7 11.89% $ 1,015.2 11.96%
Interest expense ............................................ 340.0 4.16% 347.8 4.10%
--------- ----- --------- -----
Net finance income .......................................... 631.7 7.73% 667.4 7.86%
Depreciation on operating lease equipment ................... 277.3 3.39% 296.6 3.49%
--------- ----- --------- -----
Net finance margin .......................................... 354.4 4.34% 370.8 4.37%
Provision for credit losses ................................. 133.4 1.64% 122.7 1.45%
--------- ----- --------- -----
Net finance margin after provision for credit
losses .................................................. 221.0 2.70% 248.1 2.92%
Other revenue ............................................... 257.1 3.15% 209.0 2.46%
--------- ----- --------- -----
Operating margin ............................................ 478.1 5.85% 457.1 5.38%
Salaries and general operating expenses ..................... 242.1 2.96% 235.6 2.77%
--------- ----- --------- -----
Income before provision for income taxes .................... 236.0 2.89% 221.5 2.61%
Provision for income taxes .................................. (92.0) (1.13%) (84.1) (0.99%)
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax ............. (2.7) (0.03%) (2.7) (0.03%)
--------- ----- --------- -----
Net income .................................................. $ 141.3 1.73% $ 134.7 1.59%
========= ===== ========= =====
Net income per share - basic and diluted .................... $ 0.67 $ 0.64
========= =========
Average Earning Assets (AEA) ................................ $32,693.2 $33,959.4
========= =========
Net finance margin, while down $16.4 million from last quarter, declined
more modestly as a percentage of AEA due to the continued decline in assets.
Higher funding costs, which reflected our term funding initiatives and improved
liquidity position, were essentially offset by higher yield-related fees.
Further, approximately $20 million of the $35.7 million decline in net finance
income from last quarter resulted from the trade receivable securitization
during the current quarter. Although this facility was fully paid down at
December 31, 2002, this alternate source of liquidity shifted net finance income
to other revenue during the quarter for financial reporting.
The drop in depreciation expense from the prior quarter reflects the
continued trend toward a greater proportion of longer-term aircraft and rail
equipment on operating lease, as well as management's decision during the prior
quarter to more rapidly depreciate certain shorter-lived assets. Our depreciable
assets range from smaller-ticket, shorter-term leases (e.g. computers) to
larger-ticket, longer-term leases (e.g. commercial aircraft and rail assets).
Operating lease margin (rental income less depreciation expense) as a percentage
of average operating lease equipment was 6.8% during the quarter ended December
31, 2002, versus 7.0% during the prior quarter.
The provision for credit losses increased $10.7 million from the quarter
ended September 30, 2002, reflecting a $13.5 million increase quarterly in net
charge-offs. The higher net charge-offs were predominantly in the Business
Credit unit within the Commercial Finance Segment, reflecting write-offs in
connection with financing several loan work-outs. The tables that follow detail
charge-offs by business segment, both in amount and as a percentage of average
finance receivables, for the current and prior quarter ($ in millions).
Net Charge-offs: Quarter Ended December 31, 2002
-------------------------------------------------------------------
Excluding
Liquidating and Liquidating and
Telecommunications Telecommunications Total
------------------ ------------------ -----------------
Equipment Financing and Leasing ............. $ 57.8 2.81% $ 13.3 9.25% $ 71.1 3.23%
Specialty Finance -- commercial ............. 21.2 1.42% 2.0 36.36% 23.2 1.55%
Commercial Finance .......................... 33.5 1.92% -- -- 33.5 1.92%
Structured Finance .......................... -- -- 15.5 8.75% 15.5 2.24%
------ ------ ------
Total Commercial Segments ............... 112.5 1.93% 30.8 9.44% 143.3 2.33%
Specialty Finance -- consumer ............... 6.1 2.11% 5.1 2.42% 11.2 2.24%
------ ------ ------
Total ................................... $118.6 1.94% $ 35.9 6.68% $154.5 2.32%
====== ====== ======
31
Net Charge-offs: Quarter Ended September 30, 2002
-------------------------------------------------------------------
Excluding
Liquidating and Liquidating and
Telecommunications Telecommunications Total
------------------ ------------------ -----------------
Equipment Financing and Leasing ............. $ 59.2 2.88% $ 11.6 5.13% $ 70.8 3.10%
Specialty Finance -- commercial ............. 17.6 1.15% 1.2 10.74% 18.8 1.22%
Commercial Finance .......................... 22.4 1.06% -- -- 22.4 1.06%
Structured Finance .......................... -- -- 18.4 10.67% 18.4 2.78%
------ ------ ------
Total Commercial Segments ............... 99.2 1.60% 31.2 7.62% 130.4 1.98%
Specialty Finance -- consumer ............... 6.2 2.27% 4.4 2.05% 10.6 2.17%
------ ------ ------
Total ................................... $105.4 1.63% $ 35.6 5.70% $141.0 1.99%
====== ====== ======
For the quarter ended December 31, 2002, other revenue totaled $257.1
million, up from $209.0 million for the quarter ended September 30, 2002,
reflecting lower venture capital losses, increased factoring revenues (including
approximately $20 million that was re-characterized from net finance income
relating to the trade receivables securitization), higher fee income and a
modest increase in equipment gains, primarily in the Equipment Financing and
Leasing Segment. These improvements were offset in part by lower other income.
Venture capital impairment valuations and write-downs of $6.4 million were
recognized as a reduction to other revenue in the quarter compared to $36.2
million of such charges in the previous quarter. Securitization gains during the
current quarter totaled $30.5 million, 12.9% of pretax income, on volume of
$1,189 million, compared to $29.2 million, 13.2% of pretax income, on volume of
$980 million during the prior quarter. The components of other revenue are set
forth in the following table ($ in millions).
Three Months Ended
----------------------------
December 31, September 30,
2002 2002
------------ -------------
(successor) (successor)
Fees and other income ............................ $169.2 $165.7
Factoring commissions ............................ 55.1 47.7
Gains on securitizations ......................... 30.5 29.2
Gains on sales of leasing equipment .............. 8.7 2.6
Losses on venture capital investments ............ (6.4) (36.2)
------ ------
Total ........................................ $257.1 $209.0
====== ======
Salaries and general operating expenses were $242.1 million for the
current quarter, compared to $235.6 million reported for the September 2002
quarter. The increase from last quarter included incremental expenses associated
with our return to public ownership and higher legal and collection expenses.
Salaries and general operating expenses were 2.18% of average managed assets
during the quarter, versus 2.08% for the prior quarter. The efficiency ratio for
the quarter (salaries and general operating expenses divided by operating
margin, excluding provision for credit losses) was 39.6% as compared to 40.6% in
the prior quarter. Headcount was 5,835 at December 31, 2002 compared to 5,850 at
September 30, 2002.
Risk Management
We performed additional risk management procedures in 2002 in light of the
factors discussed previously in the "Key Business Initiatives and Trends"
section. Our ongoing risk management activities, beyond these special liquidity
and capital measures, are described more fully in the sections that follow. Our
business activities involve various elements of risk. We consider the principal
types of risk to be credit risk (including credit, collateral and equipment
risk) and market risk (including interest rate, foreign currency and liquidity
risk.)
We consider the management of risk essential to conducting our commercial
and consumer businesses and to maintaining profitability. Accordingly, our risk
management systems and procedures are designed to identify and analyze risks, to
set appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.
We review and monitor credit exposures, both owned and managed, on an
ongoing basis to identify, as early as possible, those customers that may be
experiencing declining creditworthiness or financial difficulty, and
periodically evaluate our finance receivables across the entire organization. We
monitor concentrations by
32
borrower, industry, geographic region and equipment type, and we adjust limits
as conditions warrant to minimize the risk of substantial credit loss. We have
maintained a standard practice of reviewing our aerospace portfolio regularly
and, in accordance with SFAS 13 and SFAS 144 we test for asset impairment based
upon projected cash flows and relevant market data, with any impairment in value
charged to operating earnings. Given the developments in the aerospace sector
during the year, performance, profitability and residual values relating to
aerospace assets were reviewed more frequently with the Executive Credit
Committee during 2002.
Our Asset Quality Review Committee is comprised of members of senior
management, including the Chief Risk Officer, the Chief Financial Officer, the
Controller and the Director of Credit Audit. Periodically, the Committee meets
with senior executives of our strategic business units and corporate credit risk
management group to review portfolio performance, including the status of
individual financing and leasing assets, owned and managed, to obligors with
higher risk profiles. In addition, this committee periodically meets with the
Chief Executive Officer of CIT to review overall credit risk, including
geographic, industry and customer concentrations, and the reserve for credit
losses.
Credit Risk Management
We have developed systems specifically designed to manage credit risk in
each of our business segments. We evaluate financing and leasing assets for
credit and collateral risk during the credit granting process and periodically
after the advancement of funds. The Corporate credit risk management group,
which reports to the Chief Risk Officer, oversees and manages credit risk
throughout CIT. This group includes senior credit executives aligned with each
of the business units, as well as a senior executive with corporate-wide asset
recovery and work-out responsibilities. In addition, our Executive Credit
Committee, which includes the Chief Executive Officer, the Chief Risk Officer,
members of the corporate credit risk management group and group Chief Executive
Officers, approve large transactions and transactions which are outside of
established target market definitions and risk acceptance criteria or which
exceed the strategic business units' credit authority. The credit risk
management group also includes an independent credit audit function.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These guidelines set forth risk
acceptance criteria for:
o acceptable maximum credit lines;
o selected target markets and products;
o creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow, financial performance and quality
of management; and
o the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
Compliance with established corporate policies and procedures and the
credit management processes at each strategic business unit are reviewed by the
credit audit group. The credit audit group examines adherence with established
credit policies and procedures and tests for inappropriate credit practices,
including whether potential problem accounts are being detected and reported on
a timely basis.
Commercial
The commercial credit management process starts with the initial
evaluation of credit risk and underlying collateral at the time of origination
and continues over the life of the finance receivable or operating lease,
including collecting past due balances and liquidating underlying collateral.
Credit personnel review each potential borrower's financial condition,
results of operations, management, industry, customer base, operations,
collateral and other data, such as third party credit reports, to thoroughly
evaluate the customer's borrowing and repayment ability. Borrowers are graded
according to credit quality based upon our uniform credit grading system, which
considers both the borrower's financial condition and the underlying collateral.
Credit facilities are subject to approval within our overall credit approval and
underwriting guidelines and are issued commensurate with the credit evaluation
performed on each borrower.
33
Consumer and Small Ticket Leasing
We employ proprietary automated credit scoring models by loan type that
include both customer demographics and credit bureau characteristics in our
Specialty Finance segment. The profiles emphasize, among other things, occupancy
status, length of residence, length of employment, debt to income ratio (ratio
of total installment debt and housing expenses to gross monthly income), bank
account references, credit bureau information and combined loan to value ratio.
The models are used to assess a potential borrower's credit standing and
repayment ability considering the value or adequacy of property offered as
collateral. Our credit criteria include reliance on credit scores, including
those based upon both our proprietary internal credit scoring model and external
credit bureau scoring, combined with judgment. The credit scoring models are
regularly reviewed for effectiveness utilizing statistical tools.
We regularly evaluate the consumer loan portfolio using past due, vintage
curve and other statistical tools to analyze trends and credit performance by
loan type, including analysis of specific credit characteristics and other
selected subsets of the portfolios. Adjustments to credit scorecards and lending
programs are made when deemed appropriate. Individual underwriters are assigned
credit authority based upon their experience, performance and understanding of
the underwriting policies and procedures of our consumer and small-ticket
leasing operations. A credit approval hierarchy also exists to ensure that all
applications are reviewed by an underwriter with the appropriate level of
authority. See "Provision for Credit Losses."
Equipment/Residual Risk Management
We have developed systems, processes and expertise to manage the equipment
and residual risk in our commercial segments. Our process consists of the
following: 1) setting residual value at deal inception; 2) systematic residual
reviews; and 3) monitoring of residual realizations. Reviews for impairment are
performed at least annually. Residual realizations, by business unit and
product, are reviewed as part of our ongoing financial and asset quality review,
both within the business units and by senior management.
Market Risk Management
Market risk is the risk of loss arising from changes in values of
financial instruments, including interest rate risk, foreign exchange risk,
derivative credit risk and liquidity risk. We engage in transactions in the
normal course of business that expose us to market risks. However, we maintain
what we believe are appropriate management practices and policies designed to
effectively mitigate such risks. The objectives of our market risk management
efforts are to preserve company value by hedging changes in future expected net
cash flows and to decrease the cost of capital. Strategies for managing market
risks associated with changes in interest rates and foreign exchange rates are
an integral part of the process, because those strategies affect our future
expected cash flows as well as our cost of capital.
Our Capital Committee sets policies, oversees and guides the interest rate
and currency risk management process, including establishment and monitoring of
risk metrics, and ensures the implementation of those policies. Other risks
monitored by the Capital Committee include derivative credit risk and liquidity
risk. The Capital Committee meets periodically and includes members of senior
management, including the Chief Executive Officer, the Chief Financial Officer,
the Treasurer, and the Controller, with business unit executives serving on a
rotating basis.
Interest Rate and Foreign Exchange Risk Management
We offer a variety of financing products to our customers, including fixed
and floating-rate loans of various maturities and currency denominations, and a
variety of leases, including operating leases. Changes in market interest rates,
relationships between short-term and long-term market interest rates, or
relationships between different interest rate indices (i.e., basis risk) can
affect the interest rates charged on interest-earning assets differently than
the interest rates paid on interest-bearing liabilities, and can result in an
increase in interest expense relative to finance income. We measure our
asset/liability position in economic terms through duration measures and
sensitivity analysis, and we periodically measure the effect on earnings using
maturity gap analysis.
A matched asset/liability position is generally achieved through a
combination of financial instruments, including commercial paper, medium-term
notes, long-term debt, interest rate and currency swaps, foreign
34
exchange contracts, and through asset syndication and securitization. We do not
speculate on interest rates or foreign exchange rates, but rather seek to
mitigate the possible impact of such rate fluctuations encountered in the normal
course of business. This process is ongoing due to prepayments, refinancings and
actual payments varying from contractual terms, as well as other portfolio
dynamics.
We periodically enter into structured financings (involving both the
issuance of debt and an interest rate swap with corresponding notional principal
amount and maturity) to manage liquidity and reduce interest rate risk at a
lower overall funding cost than could be achieved by solely issuing debt.
CIT uses derivatives for hedging purposes only, and does not enter into
derivative financial instruments for trading or speculative purposes. As part of
managing the exposure to changes in market interest rates, CIT, as an end-user,
enters into various interest rate swap transactions in the over-the-counter
markets, with other financial institutions acting as principal counterparties.
To ensure both appropriate use as a hedge and hedge accounting treatment, all
derivatives entered into are designated according to a hedge objective against a
specified liability, including long term debt, bank credit facilities, and
commercial paper. CIT's primary hedge objectives include the conversion of
variable-rate liabilities to fixed rates, and the conversion of fixed-rate
liabilities to variable rates. The notional amounts, rates, indices and
maturities of CIT's derivatives are required to closely match the related terms
of CIT's hedged liabilities.
Interest rate swaps with notional principal amounts of $7.8 billion at
December 31, 2002, $7.1 billion at September 30, 2002 and $6.9 billion at
September 30, 2001 were designated as hedges against outstanding debt. A
comparative analysis of the weighted average principal outstanding and interest
rates on our debt before and after the effect of interest rate swaps is shown in
the following table ($ in millions).
Three Months Ended Twelve Months Ended Nine Months Ended Year Ended
December 31, 2002 September 30, 2002 September 30, 2001 December 31, 2000
------------------ ------------------- ------------------ ------------------
(successor) (successor) (combined) (predecessor)
Before Swaps
Commercial paper,
variable-rate senior
notes and bank credit
facilities ....................... $12,344.2 2.09% $17,087.2 2.34% $20,373.6 4.91% $19,848.6 6.53%
Fixed-rate senior and
subordinated notes ............... 18,055.3 6.20% 16,764.8 6.11% 17,078.6 4.63% 17,689.7 6.72%
--------- --------- --------- ---------
Composite .......................... $30,399.5 4.54% $33,852.0 4.21% $37,452.2 4.14% $37,538.3 6.62%
========= ========= ========= =========
After Swaps
Commercial paper,
variable-rate notes
and bank credit
facilities ....................... $13,103.1 2.82% $14,813.2 2.55% $14,209.8 4.97% $14,762.1 6.74%
Fixed-rate senior and
subordinated note ................ 17,296.4 5.87% 19,038.8 5.90% 23,242.4 4.71% 22,776.2 6.67%
--------- --------- --------- ---------
Composite .......................... $30,399.5 4.56% $33,852.0 4.43% $37,452.2 4.34% $37,538.3 6.70%
========= ========= ========= =========
The weighted average composite interest rate after swaps in each of the
years presented increased from the composite interest rate before swaps
primarily because a larger proportion of our debt, after giving effect to
interest rate swaps, was subject to a fixed interest rate. However, the weighted
average interest rates before swaps do not necessarily reflect the interest
expense that would have been incurred over the life of the borrowings had we
chosen to manage interest rate risk without the use of such swaps. Derivatives
are discussed further in Note 11 -- Derivative Financial Instruments of Item 8.
Financial Statements and Supplementary Data.
We regularly monitor and simulate through computer modeling our degree of
interest rate sensitivity by measuring the re-pricing characteristics of
interest-sensitive assets, liabilities, and derivatives. The Capital Committee
reviews the results of this modeling periodically. The interest rate sensitivity
modeling techniques employed by us include the creation of prospective twelve
month "baseline" and "rate shocked" net interest income simulations.
35
At the date that interest rate sensitivity is modeled, "baseline" net
interest income is derived considering the current level of interest-sensitive
assets and related run-off (including both contractual repayment and historical
prepayment experience), the current level of interest-sensitive liabilities and
related maturities and the current level of derivatives. The "baseline"
simulation assumes that, over the next successive twelve months, market interest
rates (as of the date of simulation) are held constant and that no new loans or
leases are extended. Once the "baseline" net interest income is calculated,
market interest rates, which were previously held constant, are raised 100 basis
points instantaneously and parallel across the entire yield curve, and a "rate
shocked" simulation is run. Interest rate sensitivity is then measured as the
difference between calculated "baseline" and "rate shocked" net interest income.
An immediate hypothetical 100 basis point parallel increase in the yield
curve on January 1, 2003 would reduce net income by an estimated $16 million
after-tax over the next twelve months, with a decrease in the yield curve
causing an increase in net income of like amount. A 100 basis point increase in
the yield curve on October 1, 2002 would have reduced net income by an estimated
$12 million after tax, while a decrease in the yield curve would have increased
net income by a like amount. Although management believes that this measure
provides a meaningful estimate of our interest rate sensitivity, it does not
account for potential changes in the credit quality, size, composition and
prepayment characteristics of the balance sheet and other business developments
that could affect net income. Accordingly, no assurance can be given that actual
results would not differ materially from the potential outcome simulated by our
computer modeling. Further, it does not necessarily represent management's
current view of future market interest rate movements.
We also utilize foreign currency exchange forward contracts to hedge
currency risk underlying our net investments in foreign operations and cross
currency interest rate swaps to hedge both foreign currency and interest rate
risk underlying foreign debt. At December 31, 2002, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $3.0 billion
and maturities ranging from 2003 to 2006. CIT was also party to cross currency
interest rate swaps with notional amounts totaling $1.5 billion and maturities
ranging from 2003 to 2027. At September 30, 2002, $3.1 billion in notional
principal amount of foreign currency exchange forward contracts and $1.7 billion
in notional principal amount of cross-currency swaps were designated as
currency-related debt hedges. At September 30, 2001, $3.3 billion in notional
principal amount of foreign currency exchange forward contracts and $1.7 billion
in notional principal amount of cross-currency swaps were designated as
currency-related debt hedges. Translation gains and losses of the underlying
foreign net investment, as well as offsetting derivative gains and losses on
designated hedges, are reflected in other comprehensive income in the
Consolidated Balance Sheet.
Derivative Risk Management -- We enter into interest rate and currency
swaps and foreign exchange forward contracts as part of our overall market risk
management practices. We assess and manage the external and internal risks
associated with these derivative instruments in accordance with the overall
operating goals established by our Capital Committee. External risk is defined
as those risks outside of our direct control, including counter-party credit
risk, liquidity risk, systemic risk, legal risk and market risk. Internal risk
relates to those operational risks within the management oversight structure and
includes actions taken in contravention of CIT policy.
The primary external risk of derivative instruments is counter-party
credit exposure, which is defined as the ability of a counter-party to perform
its financial obligations under a derivative contract. We control the credit
risk of our derivative agreements through counter-party credit approvals,
pre-established exposure limits and monitoring procedures.
The Capital Committee approves each counter-party and establishes exposure
limits based on credit analysis and market value. All derivative agreements are
entered into with major money center financial institutions rated investment
grade by nationally recognized rating agencies, with the majority of our
counter-parties rated "AA" or better. Credit exposures are measured based on the
market value of outstanding derivative instruments. Exposures are calculated for
each derivative contract to monitor counter-party credit exposure.
Liquidity Risk Management -- Liquidity risk refers to the risk of CIT
being unable to meet potential cash outflows promptly and cost effectively.
Factors that could cause such a risk to arise might be a disruption of a
securities market or other source of funds. We actively manage and mitigate
liquidity risk by maintaining diversified sources of funding and committed
alternate sources of funding. The primary funding sources are commercial paper
(U.S.) long-term debt (U.S., International) and asset-backed securities (U.S.
and Canada).
36
Included as part of our securitization programs are committed asset-backed
commercial paper programs in the U.S. and Canada. We also maintain committed
bank lines of credit to provide back-stop support of commercial paper borrowings
and local bank lines to support our international operations. Additional sources
of liquidity are loan and lease payments from customers, whole loan asset sales
and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability. Among
the target ratios are maximum percentage of outstanding commercial paper to
total debt, minimum percentage of committed bank line coverage to outstanding
commercial paper and minimum percentage of alternate liquidity sources to
current cash obligations.
Liquidity
We successfully launched our dealer based commercial paper program during
the final fiscal quarter of 2002 and quickly reached $4.7 billion outstanding at
September 30, 2002, with $5.0 billion outstanding at December 31, 2002. In
addition, existing bank facilities were paid down, maintaining back-stop
liquidity to fully cover all outstanding commercial paper. These events followed
the draw down in February 2002 of our $8.5 billion unsecured credit facilities,
which have historically been maintained as liquidity support for our commercial
paper programs. The bank facilities proceeds had been used to satisfy our
outstanding commercial paper obligations as they came due. Our targeted program
size remains at $5 billion and our goal is to maintain at least 100% back-up
liquidity support for our outstanding commercial paper.
At December 31, 2002, we had total bank credit facilities of $7,353.0
million, of which $2,118.0 million was drawn (down from drawn facilities of
$4,037.4 million at September 30, 2002). Accordingly, undrawn backstop liquidity
coverage of outstanding commercial paper was 105% at December 31, 2002. In
January 2003, we repaid an additional $0.5 billion of the outstanding
facilities, further improving coverage. On October 15, 2002, we retired a $3.7
billion 364 day bank facility due in March 2003, and negotiated a new $2.3
billion 364 day committed credit facility expiring in October 2003. One facility
for $3,720 million, undrawn and available, expires March 2005, and the remainder
expire periodically during 2003.
In addition to the commercial paper markets, CIT accesses the unsecured
term debt markets. From time to time, CIT files registration statements for debt
securities, which it may sell in the future. At December 31, 2002, we had $8.2
billion of registered, but unissued, debt securities available under a shelf
registration statement. During the three months ended December 31, 2002, we
issued $2.5 billion in term debt. The majority of the term debt issued was fixed
rate and was virtually evenly split among global, medium-term note and retail
issuances.
In October 2002, we introduced a retail note program, in which we offer
senior, unsecured notes utilizing numerous broker / dealers for placement to
retail accounts. As of December 31, 2002, we had issued $736 million under this
program having maturities of between 2 and 10 years.
To further strengthen our funding flexibility, we maintain committed asset
backed facilities, which cover a range of assets from equipment to consumer home
equity receivables, and trade accounts receivable. While these facilities are
predominately in the U.S., we also maintain facilities for Canadian domiciled
assets. As of December 31, 2002 we had approximately $2.7 billion of
availability in our committed asset-backed facilities and $4.4 billion of
registered, but unissued, securities available under public shelf registration
statements relating to our asset-backed securitization program. Securitization
volume increased to $1.2 billion during the quarter from $1.0 billion in the
three months ended September 20, 2002.
37
Our credit ratings are shown for December 31, 2002, September 30, 2002,
June 30, 2002 and September 30, 2001 in the following table.
At December 31, 2002 At September 30, 2002 At June 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------- ---------------------
Short Long Short Long Short Long Short Long
Term Term Term Term Term Term Term Term
--------- -------- --------- -------- --------- ------ --------- --------
Moody's .......................... P-1 A2 P-1 A2 P-1 A2 P-1 A2
Standard & Poor's ................ A-1 A A-1 A A-2 BBB+ A-1 A+
Fitch ............................ F1 A F1 A F2 BBB F1 A+
The security ratings stated above are not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal by the assigning
rating organization. Each rating should be evaluated independently of any other
rating.
While we have minimal material covenants within our legal documents that
govern our funding sources, some do exist. The most significant covenant in
CIT's indentures and credit agreements is a negative pledge provision, which
prohibits granting or permitting liens on our assets, but provides for
exceptions for certain ordinary course liens needed in order to operate our
business. Various credit agreements also contain a minimum net worth test of
$3.75 billion.
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of December 31, 2002.
Projected proceeds from sale of operating lease equipment, interest revenue from
finance receivables, debt interest expense and other items are excluded ($ in
millions).
Payments and Collections by Period
---------------------------------------------------------------
After
Contractual Obligations Total 2003 2004 2005 2006 2006
- ----------------------- --------- --------- --------- --------- --------- ---------
Commercial paper ................................. $ 4,974.6 $ 4,974.6 $ -- $ -- $ -- $ --
Bank credit facilities ........................... 2,118.0 2,118.0 -- -- -- --
Variable-rate term debt .......................... 4,906.9 3,906.4 727.3 29.1 31.0 213.1
Fixed-rate term debt ............................. 19,681.8 4,245.8 3,231.0 3,939.7 1,137.1 7,128.2
Lease rental expense ............................. 274.2 68.1 57.2 48.3 37.5 63.1
--------- --------- --------- --------- --------- ---------
Total contractual obligations ................ 31,955.5 15,312.9 4,015.5 4,017.1 1,205.6 7,404.4
--------- --------- --------- --------- --------- ---------
Finance receivables(1) ........................... 27,621.3 12,076.3 3,598.8 2,483.6 1,697.6 7,765.0
Operating lease rental income .................... 3,365.3 1,131.0 725.8 458.1 300.1 750.3
Finance receivables held for sale(2) ............. 1,213.4 1,213.4 -- -- -- --
Cash -- current balance .......................... 2,036.6 2,036.6 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total projected cash availability ............ 34,236.6 16,457.3 4,324.6 2,941.7 1,997.7 8,515.3
--------- --------- --------- --------- --------- ---------
Net projected cash inflow (outflow) .............. $ 2,281.1 $ 1,144.4 $ 309.1 $(1,075.4) $ 792.1 $ 1,110.9
========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amount could differ due to prepayments,
charge-offs and other factors.
(2) Based upon management's intent to sell rather than contractual maturities
of underlying assets.
Commitment Expiration by Period
---------------------------------------------------------------
After
Contractual Obligations Total 2003 2004 2005 2006 2006
- ----------------------- --------- --------- --------- --------- --------- ---------
Aircraft purchases ............................... $3,796.0 $ 828.0 $1,043.0 $1,248.0 $585.0 $ 92.0
Credit extensions ................................ 3,618.9 3,254.3 111.9 34.5 39.2 179.0
Letters of credit ................................ 1,103.1 1,101.2 1.9 -- -- --
Guarantees ....................................... 745.8 745.8 -- -- -- --
Venture capital funds ............................ 164.9 -- -- -- -- 164.9
Acceptances ...................................... 5.6 5.6 -- -- -- --
-------- -------- -------- -------- ------ ------
Total commitments ............................ $9,434.3 $5,934.9 $1,156.8 $1,282.5 $624.2 $435.9
======== ======== ======== ======== ====== ======
See the "-- Overview" and "-- Net Finance Margin" sections for information
regarding the impact of our liquidity and capitalization plan on results of
operations.
38
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and to provide an additional
source of liquidity, we use an array of securitization programs, including both
conduit/warehouse and term structures, to access both the public and private
asset-backed securitization markets. Current products in these programs include
receivables and leases secured by equipment as well as consumer loans secured by
residential real estate. During the three months ended December 31, 2002, we
securitized $1.2 billion of financing and leasing assets and the outstanding
securitized asset balance at December 31, 2002 was $10.5 billion or 22.6% of our
total managed assets. During the quarters ended September 30, 2002 and December
31, 2001, we securitized $1.0 billion and $1.2 billion, respectively. At
September 30, 2002 and December 31, 2001, outstanding securitized assets were
$11.2 billion and $10.4 billion, respectively, and represented 23.6% and 21.3%
of total managed assets, respectively. Beginning in the quarter ended March 31,
2002, we experienced a disruption to our funding base, which was prompted by
Tyco's announcement to dispose of CIT and subsequent credit rating downgrades of
both Tyco and CIT As a result, during the March and June 2002 quarters, we
relied more heavily on securitization as a funding source. In addition to our
conventional securitization programs, we also completed conduit facilities
backed by trade accounts receivable and home equity receivables in order to
further broaden our funding access.
Under our typical asset-backed securitization, we sell a "pool" of secured
loans or leases to a special-purpose entity, typically a trust. The
special-purpose entity, in turn, issues certificates and/or notes that are
collateralized by the pool and entitle the holders thereof to participate in
certain pool cash flows. We retain the servicing of the securitized contracts,
for which we earn a servicing fee. We also participate in certain "residual"
cash flows (cash flows after payment of principal and interest to certificate
and/or note holders, servicing fees and other credit-related disbursements). At
the date of securitization, we estimate the "residual" cash flows to be received
over the life of the securitization, record the present value of these cash
flows as a retained interest in the securitization (retained interests can
include bonds issued by the special-purpose entity, cash reserve accounts on
deposit in the special-purpose entity or interest only receivables) and
typically recognize a gain.
In estimating residual cash flows and the value of the retained interests,
we make a variety of financial assumptions, including pool credit losses,
prepayment speeds and discount rates. These assumptions are supported by both
our historical experience and anticipated trends relative to the particular
products securitized. Subsequent to recording the retained interests, we review
them quarterly for impairment based on estimated fair value. These reviews are
performed on a disaggregated basis. Fair values of retained interests are
estimated utilizing current pool demographics, actual note/certificate
outstandings, current and anticipated credit losses, prepayment speeds and
discount rates.
During the three months ended December 31, 2002, we recorded
securitization gains of $30.5 million on approximately $1.2 billion of financing
and leasing assets securitized, which equates to 12.9% of pretax income.
Securitization gains for the three months ended September 30, 2002 and December
31, 2001 were $29.2 million, on approximately $1.0 billion of financing and
leasing assets securitized, and $28.0 million on approximately $1.2 billion in
volume, respectively. Securitization gains for these latter periods represented
13.2 % and 7.2% of pretax income, respectively. Absent funding source
disruptions, management targets a maximum of 15% of pre-tax income from
securitization gains.
Our retained interests had a carrying value at December 31, 2002 of
$1,355.9 million, including interests in commercial securitized assets of
$1,042.1 million and consumer securitized assets of $313.8 million. The total
retained interest as of December 31, 2002 is comprised of $698.2 million in
over-collateralization, $383.1 million of interest only strips, and $274.6
million of cash reserve accounts. Retained interests are subject to credit and
prepayment risk. As of December 31, 2002, approximately 50% of our outstanding
securitization pool balances are in conduit structures. Our interests relating
to commercial securitized assets are generally subject to lower prepayment risk
because of the contractual terms of the underlying receivables. These assets are
subject to the same credit granting and monitoring processes which are described
in the "Credit Risk Management" section. See "Securitization and Joint Venture
Activities" for information regarding recent accounting pronouncements and the
impact on our securitization program.
39
Capitalization
On July 2, 2002, the underwriters sold 200 million shares of CIT's stock
in the Company's initial public offering. The net proceeds were paid to Tyco,
the selling stockholder. On July 12, 2002, as part of CIT's IPO, the
underwriters exercised a portion of their over-allotment option to purchase an
additional 11.6 million shares of CIT stock from the Company, increasing capital
by approximately $255 million.
During the quarter ended December 31, 2002, our managed assets declined by
$1.3 billion (2.7%) from September 30, 2002 and our owned assets declined by
$0.5 billion (1.4%). We continued to sell or liquidate various portfolios we had
previously ceased originating new business in: owner-operator trucking,
franchise, manufactured housing, recreational vehicle and inventory finance. In
all, these portfolios declined from approximately $1.5 billion at September 30,
2002 and $2.0 billion at December 31, 2001 to $1.3 billion at December 31, 2002
due to liquidation and sales. Our additions to retained earnings and our asset
runoff continued to improve our capitalization and leverage ratios. The
following table presents information regarding our capital structure ($ in
millions).
December 31, September 30, September 30, December 31,
2002 2002 2001 2000
------------ ------------- ------------- ------------
(successor) (successor) (successor) (predecessor)
Commercial paper ..................................... $ 4,974.6 $ 4,654.2 $ 8,869.2 $ 9,063.5
Bank credit facilities ............................... 2,118.0 4,037.4 -- --
Term debt ............................................ 24,588.7 23,764.4 26,828.5 28,901.6
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company
("Preferred Capital Securities") ................. 257.2 257.7 260.0 250.0
Stockholders' equity(1) .............................. 4,968.5 4,857.3 10,661.4(2) 6,007.2
--------- --------- --------- ---------
Total capitalization ................................. 36,907.0 37,571.0 46,619.1 44,222.3
Goodwill ............................................. (384.4) (384.4) (6,569.5) (1,964.6)
--------- --------- --------- ---------
Total tangible capitalization ........................ $36,522.6 $37,186.6 $40,049.6 $42,257.7
========= ========= ========= =========
Tangible stockholders' equity(1) and Preferred
Capital Securities to managed assets ............. 10.44% 9.93% 8.55%(2) 7.82%(2)
Total debt (excluding overnight deposits)
to tangible shareholder's equity(1) and
Preferred Capital Securities ..................... 6.22x 6.54x 8.20x(2) 8.78x(2)
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 11 to the Consolidated
Financial Statements and certain unrealized gains or losses on retained
interests and investments.
(2) Excludes equity deficit relating to TCH that was relieved via capital
contributions by Tyco as of June 30, 2002.
The Company-obligated mandatorily redeemable preferred securities are
7.70% Preferred Capital Securities issued in 1997 by CIT Capital Trust I, a
wholly-owned subsidiary. CIT Capital Trust I invested the proceeds of that issue
in Junior Subordinated Debentures of CIT having identical rates and payment
dates.
See 'Liquidity Risk Management' for discussion on risks impacting our
liquidity and capitalization
Securitization and Joint Venture Activities
We utilize special purpose entities (SPE's) and joint ventures in the
normal course of business to execute securitization transactions and conduct
business in key vendor relationships.
Securitization Transactions -- SPE's are used to achieve "true sale" and
bankruptcy remote requirements for these transactions in accordance with SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." Pools of assets are originated and sold to
special purpose entities, which in turn issue debt securities to investors
solely backed by asset pools. Accordingly, CIT has no legal obligations to repay
the investment certificates in the event of a default by the Trust. CIT retains
the servicing rights and participates in certain cash flows of the pools. The
present value of expected net cash flows that exceeds the estimated cost of
servicing is recorded in other assets as a "retained interest." Assets
securitized are shown in our managed assets and our capitalization ratios on
managed assets. Under the recently-issued rules relating to consolidation and
SPE's,
40
non-qualifying securitization entities will have to be consolidated. Based on
our preliminary analysis, we believe that all of our public asset-backed
structures and the majority of our conduit facilities will continue to qualify
as off-balance sheet transactions.
Joint Ventures -- We utilize joint ventures to conduct financing
activities with certain strategic vendor partners. Receivables are originated by
the joint venture and purchased by CIT. These distinct legal entities are
jointly owned by the vendor partner and CIT, and there is no third-party debt
involved. These arrangements are accounted for using the equity method, with
profits and losses distributed according to the joint venture agreement. See
related FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities" disclosure in Item 8. Financial Statements and Supplementary Data,
Note 24-Certain Relationships and Related Transactions.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to use judgment in making
estimates and assumptions that affect 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. The following accounting policies include inherent risks and
uncertainties related to judgments and assumptions made by management.
Management's estimates are based on the relevant information available at the
end of each period.
Investments -- Investments, for which the Company does not have the
ability to exercise significant influence and for which there is not a readily
determinable market value, the majority of which are venture capital equity
investments, are accounted for under the cost method. Management uses judgment
in determining when an unrealized loss is deemed to be other than temporary, in
which case such loss is charged to earnings. As of December 31, 2002, the
balance of venture capital equity investments was $335.4 million. A 10%
fluctuation in value of these investments equates to $0.10 in earnings per
share.
Charge-off of Finance Receivables -- Finance receivables are reviewed
periodically to determine the probability of loss. Charge-offs are taken after
considering such factors as the borrower's financial condition and the value of
underlying collateral and guarantees (including recourse to dealers and
manufacturers).
Impaired Loans -- Loan impairment is defined as any shortfall between the
estimated value and the recorded investment 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.
Reserve for Credit Losses -- On a quarterly basis, the reserve for credit
losses is set and reviewed by senior management for adequacy considering
economic conditions, collateral values and credit quality indicators, including
historical and expected charge-off experience and levels of past-due loans and
non-performing assets. Management uses judgment in determining the level of the
consolidated reserve for credit losses and in evaluating the adequacy of the
reserve. The reserve for credit losses is set and recorded based on the
establishment of three components -- specific reserves for collateral dependent
loans which are impaired under SFAS 114, reserves for estimated losses inherent
in the portfolio based upon historic credit trends and general reserves for
"estimation" risk. As of December 31, 2002, the reserve for credit losses was
$760.8 million or 2.75% of finance receivables and 76.0% of past due
receivables. A $10.0 million change in the reserve for credit losses equates to
the following variances: 4 basis points (0.04%) in the percentage of reserves to
finance receivables; 100 basis points (1.00%) in the percentage of reserves to
past due receivables and $0.03 in earnings per share.
Retained Interests in Securitizations -- Significant financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates, are utilized to determine the fair values of retained interests, both at
the date of the securitization and in the subsequent quarterly valuations of
retained interests. Any resulting losses, representing the excess of carrying
value over estimated fair value, are recorded against current earnings. However,
unrealized gains are reflected in stockholders' equity as part of other
comprehensive income. Sensitivities to changes in financial assumptions are
summarized in Item 8. Financial Statements and Supplementary Data, Note 9 --
Investments in Equity Securities.
Lease Residual Values -- Operating lease equipment is carried at cost less
accumulated depreciation and is depreciated to estimated residual value using
the straight-line method over the lease term or projected economic life of the
asset. Direct financing leases are recorded at the aggregated future minimum
lease payments plus estimated
41
residual values less unearned finance income. Management performs periodic
reviews of the estimated residual values, with impairment, other than temporary,
recognized in the current period. As of December 31, 2002, our direct financing
lease residual balance was $2,350 million and our operating lease equipment
balance was $6,705 million. A 10 basis points (0.1%) fluctuation in the total of
these amounts equates to $0.03 in earnings per share.
Goodwill -- CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001, the beginning of CIT's fiscal 2002. The
Company determined that there was no impact of adopting this new standard under
the transition provisions of SFAS No. 142. Since adoption, goodwill is no longer
amortized, but instead will be 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. See "--Goodwill and Other Intangible
Assets Amortization" above for a discussion of our recent impairment analysis.
Goodwill was $384.4 million at December 31, 2002. A 10% fluctuation in the value
of goodwill equates to $0.18 in earnings per share.
Accounting and Technical Pronouncements
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities that are
initiated after December 31, 2002. SFAS 146 is not expected to have a
significant impact on our financial position or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147, which is effective for acquisitions on or
after October 1, 2002, supercedes specialized accounting guidance in SFAS No. 72
in order to conform the accounting for certain acquisitions of Banking or Thrift
institutions to SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 147
did not and is not expected to impact our financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." This pronouncement
amends SFAS No. 123 to provide alternative methods of transition for an entity
that voluntarily changes to the fair value-based method of accounting for
stock-based compensation. SFAS also expands the disclosure requirements with
respect to stock-based compensation. CIT does not intend to change to the fair
value method of accounting. The required expanded disclosure is included in the
December 31, 2002 financial statements and notes thereto.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing certain guarantees. The expanded disclosure
requirements are required for financial statements ending after December 15,
2002, while the liability recognition provisions are applicable to all guarantee
obligations modified or issued after December 31, 2002. We are currently
assessing the impact of this new required liability recognition. The expanded
disclosure requirements are included in our December 31, 2002 financial
statements and notes thereto.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 addresses consolidation by
business enterprises of variable interest entities (selected entities with
related contractual, ownership, voting or other monetary interests, including
certain special purpose entities), and requires additional disclosure with
respect to these entities. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and for reporting periods beginning
after June 15, 2003 for entities that existed prior to February 1, 2003. This
new interpretation is not expected to have a significant impact on our financial
position or results of operations. The expanded disclosure requirements are
included in our December 31, 2002 financial statements and notes thereto.
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements
42
contained herein, in press releases, written statements or other documents filed
with the Securities and Exchange Commission or in communications and discussions
with investors and analysts in the normal course of business through meetings,
webcasts, phone calls and conference calls, concerning our operations, economic
performance and financial condition are subject to known and unknown risks,
uncertainties and contingencies. Forward-looking statements are included, for
example, in the discussions about:
o our liquidity risk management,
o our credit risk management,
o our asset/liability risk management,
o our capital, leverage and credit ratings,
o our operational and legal risks,
o our commitments to extend credit or purchase equipment, and
o how we may be affected by legal proceedings.
All forward-looking statements involve risks and uncertainties, many of
which are beyond our control, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Also, forward-looking statements are based upon management's
estimates of fair values and of future costs, using currently available
information. Therefore, actual results may differ materially from those
expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o risks of economic slowdown, downturn or recession,
o industry cycles and trends,
o risks inherent in changes in market interest rates and quality
spreads,
o funding opportunities and borrowing costs,
o changes in funding markets, including commercial paper, term debt
and the asset-backed securitization markets,
o uncertainties associated with risk management, including credit,
prepayment, asset/liability, interest rate and currency risks,
o adequacy of reserves for credit losses,
o risks associated with the value and recoverability of leased
equipment and lease residual values,
o changes in laws or regulations governing our business and
operations,
o changes in competitive factors, and
o future acquisitions and dispositions of businesses or asset
portfolios.
43
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIT Group Inc.
In our opinion, the accompanying consolidated balance sheets as of
December 31, 2002 and September 30, 2002 and 2001, and the related consolidated
statements of income, of stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of CIT Group Inc. (formerly
Tyco Capital Corporation) and its subsidiaries at December 31, 2002 and
September 30, 2002 and 2001 and the results of their operations and their cash
flows for the three months ended December 31, 2002, the fiscal year ended
September 30, 2002 and for the period from June 2, 2001 through September 30,
2001 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," on June 2, 2001 the Company
changed its basis of accounting for purchased assets and liabilities, and on
October 1, 2001 the Company implemented the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
New York, New York
January 23, 2003
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIT Group Inc.
In our opinion, the accompanying consolidated statements of income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of CIT Group Inc. (formerly Tyco
Capital Corporation) and its subsidiaries for the period from January 1, 2001
through June 1, 2001 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on January 1, 2001 the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities."
PricewaterhouseCoopers LLP
New York, New York
October 18, 2001, except as to
the fourth paragraph of Note 24
and first paragraph of Note 1,
which are as of February 11, 2002
and July 1, 2002, respectively
45
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of
The CIT Group, Inc.:
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity, and cash flows of The CIT Group, Inc. and
subsidiaries for the year ended December 31, 2000. These consolidated financial
statements are the responsibility of CIT's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the cash
flows of The CIT Group, Inc. and subsidiaries for the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Short Hills, New Jersey
January 25, 2001
46
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
December 31, September 30, September 30,
2002 2002 2001
--------- --------- ---------
ASSETS
Financing and leasing assets:
Finance receivables ................................................... $27,621.3 $28,459.0 $31,879.4
Reserve for credit losses ............................................. (760.8) (777.8) (492.9)
--------- --------- ---------
Net finance receivables ............................................... 26,860.5 27,681.2 31,386.5
Operating lease equipment, net ........................................ 6,704.6 6,567.4 6,402.8
Finance receivables held for sale ..................................... 1,213.4 1,019.5 2,014.9
Cash and cash equivalents ................................................. 2,036.6 2,274.4 808.0
Goodwill, net ............................................................. 384.4 384.4 6,547.5
Receivables from Tyco affiliates .......................................... -- -- 362.7
Other assets .............................................................. 4,732.9 4,783.6 3,826.9
--------- --------- ---------
Total Assets .............................................................. $41,932.4 $42,710.5 $51,349.3
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ...................................................... $ 4,974.6 $ 4,654.2 $ 8,869.2
Variable-rate bank credit facilities .................................. 2,118.0 4,037.4 --
Variable-rate senior notes ............................................ 4,906.9 5,379.0 9,614.6
Fixed-rate senior notes ............................................... 19,681.8 18,385.4 17,113.9
Subordinated fixed-rate notes ......................................... -- -- 100.0
--------- --------- ---------
Total debt ................................................................ 31,681.3 32,456.0 35,697.7
Note payable to Tyco Affiliates ........................................... -- -- 5,017.3
Credit balances of factoring clients ...................................... 2,270.0 2,513.8 2,392.9
Accrued liabilities and payables .......................................... 2,853.2 2,725.2 2,033.8
--------- --------- ---------
Total Liabilities ......................................................... 36,804.5 37,695.0 45,141.7
--------- --------- ---------
Commitments and Contingencies (Note 22)
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company ........................................................ 257.2 257.7 260.0
Stockholders' Equity:
Preferred stock, $0.01 par value, 100,000,000 authorized;
none issued ......................................................... -- -- --
Common stock, $0.01 par value, 600,000,000 authorized;
211,573,200 issued and outstanding .................................. 2.1 2.1 --
Paid-in capital, net of deferred compensation of
$5.5 and $6.4 ....................................................... 10,676.2 10,674.8 --
Contributed capital ................................................... -- -- 5,842.5
Accumulated (deficit) earnings ........................................ (5,606.9) (5,722.8) 181.9
Accumulated other comprehensive loss .................................. (200.7) (196.3) (76.8)
--------- --------- ---------
Total Stockholders' Equity ................................................ 4,870.7 4,757.8 5,947.6
--------- --------- ---------
Total Liabilities and Stockholders' Equity ................................ $41,932.4 $42,710.5 $51,349.3
========= ========= =========
See Notes to Consolidated Financial Statements
47
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Three Months Twelve Months June 2 January 1
Ended Ended through through Year Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------- ------------- ------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Finance income .................................. $ 971.7 $ 4,342.8 $ 1,676.5 $ 2,298.8 $ 5,248.4
Interest expense ................................ 340.0 1,439.3 597.1 1,022.7 2,497.7
--------- --------- --------- --------- ---------
Net finance income .............................. 631.7 2,903.5 1,079.4 1,276.1 2,750.7
Depreciation on operating lease
equipment ..................................... 277.3 1,241.0 448.6 588.1 1,281.3
--------- --------- --------- --------- ---------
Net finance margin .............................. 354.4 1,662.5 630.8 688.0 1,469.4
Provision for credit losses ..................... 133.4 788.3 116.1 216.4 255.2
--------- --------- --------- --------- ---------
Net finance margin after provision
for credit losses ............................. 221.0 874.2 514.7 471.6 1,214.2
Other revenue ................................... 257.1 932.3 335.1 237.5 912.0
--------- --------- --------- --------- ---------
Operating margin ................................ 478.1 1,806.5 849.8 709.1 2,126.2
--------- --------- --------- --------- ---------
Salaries and general operating
expenses ...................................... 242.1 946.4 348.5 446.0 1,035.2
Interest expense -- TCH ......................... -- 662.6 97.7 1.1 --
Goodwill impairment ............................. -- 6,511.7 -- -- --
Goodwill amortization ........................... -- -- 59.8 37.8 86.3
Acquisition-related costs ....................... -- -- -- 54.0 --
--------- --------- --------- --------- ---------
Operating expenses .............................. 242.1 8,120.7 506.0 538.9 1,121.5
--------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes .................................. 236.0 (6,314.2) 343.8 170.2 1,004.7
Provision for income taxes ...................... (92.0) (374.0) (157.4) (84.8) (381.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax ............................ (2.7) (10.5) (3.6) (4.9) (11.9)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 141.3 $(6,698.7) $ 182.8 $ 80.5 $ 611.6
========= ========= ========= ========= =========
Net income (loss) per basic share ............... $ 0.67 $ (31.66) $ 0.86 $ 0.38 $ 2.89
========= ========= ========= ========= =========
Net income (loss) per diluted share ............. $ 0.67 $ (31.66) $ 0.86 $ 0.38 $ 2.89
========= ========= ========= ========= =========
Note: Per share calculations for the periods June 2 through September 30, 2001,
January 1 through June 1, 2001 and the year ended December 31, 2000 assume that
the shares for the twelve months ended September 30, 2002 were outstanding for
the respective periods.
See Notes to Consolidated Financial Statements.
48
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated Total Total
Common Paid-in Contributed Treasury Earnings/ Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income/(Loss) Equity
--------- --------- ----------- -------- --------- ------------- ------------
December 31, 1999 (predecessor) ...... $ 2.7 $ 3,521.8 $ -- $ (70.5) $ 2,097.6 $ 2.8 $ 5,554.4
Net income ........................... 611.6 611.6
Foreign currency translation
adjustments ........................ 4.3 4.3
Unrealized gain on equity and
securitization investments, net .... 4.6 4.6
---------
Total comprehensive income ........... 620.5
---------
Cash dividends ....................... (105.9) (105.9)
Repurchase of common stock ........... (67.2) (67.2)
Restricted common stock grants ....... 5.4 5.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2000 (predecessor) ...... 2.7 3,527.2 -- (137.7) 2,603.3 11.7 6,007.2
Net income ........................... 80.5 80.5
Foreign currency translation
adjustments ........................ (33.7) (33.7)
Cumulative effect of new
accounting principle ............... (146.5) (146.5)
Change in fair values of
derivatives qualifying as
cash flow hedges ................... 0.6 0.6
---------
Total comprehensive loss ............. (99.1)
---------
Cash dividends ....................... (52.9) (52.9)
Issuance of treasury stock ........... 27.6 27.6
Restricted common stock grants ....... 12.4 12.4
Merger of TCH ........................ (4,579.9) (4,579.9)
--------- --------- --------- --------- --------- --------- ---------
June 1, 2001 (predecessor) ........... 2.7 3,539.6 (4,579.9) (110.1) 2,630.9 (167.9) 1,315.3
Recapitalization at acquisition ...... (3,539.6) 3,539.6
Effect of push-down accounting
of Tyco's purchase price on
CIT's net assets ................... (2.7) 5,945.1 110.1 (2,631.7) 167.9 3,588.7
--------- --------- --------- --------- --------- --------- ---------
June 1, 2001 (successor) ............. -- -- 4,904.8 -- (0.8) -- 4,904.0
Net income ........................... 182.8 182.8
Foreign currency translation
adjustments ........................ (13.4) (13.4)
Change in fair values of
derivatives qualifying as
cash flow hedges ................... (63.4) (63.4)
---------
Total comprehensive income ........... 106.0
---------
Cash dividends ....................... (0.1) (0.1)
Tax benefit on stock
transactions ....................... 39.4 39.4
Capital contribution from Tyco ....... 898.3 898.3
--------- --------- --------- --------- --------- --------- ---------
September 30, 2001 (successor) ....... -- -- 5,842.5 -- 181.9 (76.8) 5,947.6
Net loss ............................. (6,698.7) (6,698.7)
Foreign currency translation
adjustments ........................ (62.4) (62.4)
Change in fair values of
derivatives qualifying as
cash flow hedges ................... (57.1) (57.1)
Unrealized gain on equity and
securitization investments, net .... 21.0 21.0
Minimum pension liability
adjustment ......................... (21.0) (21.0)
---------
Total comprehensive loss ............. (6,818.2)
---------
Issuance of common stock in
connection with the initial
public offering .................... 2.0 10,420.4 (10,422.4) --
Common stock issued --
overallotment ...................... 0.1 249.2 249.3
Capital contribution from Tyco
for TCH ............................ 4,579.9 794.0 5,373.9
Restricted common stock grants ....... 5.2 5.2
--------- --------- --------- --------- --------- --------- ---------
September 30, 2002 (successor) ....... 2.1 10,674.8 -- -- (5,722.8) (196.3) 4,757.8
Net income ........................... 141.3 141.3
Foreign currency translation
adjustments ........................ 0.2 0.2
Change in fair values of
derivatives
qualifying as cash flow
hedges ............................. 2.2 2.2
Unrealized losses on equity and
securitization investments, net .... (6.8) (6.8)
---------
Total comprehensive income ........... 136.9
---------
Cash dividends ....................... (25.4) (25.4)
Restricted common stock grants ....... 1.4 1.4
--------- --------- --------- --------- --------- --------- ---------
December 31, 2002 (successor) ........ $ 2.1 $10,676.2 $ -- $ -- $(5,606.9) $ (200.7) $ 4,870.7
========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
49
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three Months Twelve Months June 2 January 1
Ended Ended through through Year Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
--------- --------- --------- --------- ---------
(successor) (successor) (successor) (predecessor) (predecessor)
Cash Flows From Operations:
Net income (loss) .................................. $ 141.3 $(6,698.7) $ 182.8 $ 80.5 $ 611.6
Adjustments to reconcile net income
(loss) to net cash flows from operations:
Goodwill impairment .............................. -- 6,511.7 -- -- --
Provision for credit losses ...................... 133.4 788.3 116.1 216.4 255.2
Depreciation and amortization .................... 287.5 1,286.5 521.3 642.4 1,408.7
Provision for deferred federal
income taxes ................................... 71.9 276.9 113.6 63.7 211.5
Gains on equipment, receivable and
investment sales, net .......................... (51.8) (203.1) (119.1) (18.2) (371.8)
Increase (decrease) in accrued
liabilities and payables ....................... 55.4 57.0 (349.8) (28.2) 449.0
Decrease (increase) in other assets .............. 26.7 (626.7) (429.7) 69.9 (690.9)
Other ............................................ (76.6) (32.3) (70.6) 36.0 31.9
--------- --------- --------- --------- ---------
Net cash flows provided by (used for)
operations ....................................... 587.8 1,359.6 (35.4) 1,062.5 1,905.2
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Loans extended ..................................... (12,873.8) (48,300.6) (15,493.1) (20,803.0) (49,275.8)
Collections on loans ............................... 12,089.7 42,584.2 12,750.6 18,520.2 41,847.5
Proceeds from asset and receivable
sales ............................................ 1,085.4 10,992.4 5,213.0 2,879.6 7,055.4
Purchases of assets to be leased ................... (449.1) (1,877.2) (756.9) (694.0) (2,457.6)
Purchases of finance receivable
portfolios ....................................... (254.7) (372.7) -- -- (1,465.6)
Net decrease (increase) in short-term
factoring receivables ............................ 391.7 (651.9) (471.2) (131.0) (175.4)
Other .............................................. (4.3) (52.5) 3.2 (24.4) (79.4)
--------- --------- --------- --------- ---------
Net cash flows (used for) provided
by investing activities .......................... (15.1) 2,321.7 1,245.6 (252.6) (4,550.9)
--------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from the issuance of variable
and fixed rate notes ............................. 2,463.2 13,093.4 1,000.0 6,246.6 12,645.3
Repayments of variable and
fixed-rate notes ................................. (3,558.3) (12,148.8) (3,272.2) (6,491.5) (10,143.2)
Net increase (decrease) in commercial
paper ............................................ 320.4 (4,186.2) (1,007.8) 813.6 89.5
Net repayments of non-recourse
leveraged lease debt ............................. (35.0) (187.7) (26.6) (8.7) (31.2)
Capital contributions from former
Parent ........................................... -- 923.5 744.7 0.8 --
Proceeds from issuance of common
stock ............................................ -- 254.6 -- -- --
Cash dividends paid ................................ (25.4) -- -- (52.9) (105.9)
Issuance (purchase) of treasury stock .............. -- -- -- 27.6 (67.2)
--------- --------- --------- --------- ---------
Net cash flows (used for) provided by
financing activities ............................. (835.1) (2,251.2) (2,561.9) 535.5 2,387.3
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ...................................... (262.4) 1,430.1 (1,351.7) 1,345.4 (258.4)
Exchange rate impact on cash ....................... 24.6 36.3 3.3 (1.1) (2.9)
Cash and cash equivalents, beginning
of period ........................................ 2,274.4 808.0 2,156.4 812.1 1,073.4
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period ........................................... $ 2,036.6 $ 2,274.4 $ 808.0 $ 2,156.4 $ 812.1
========= ========= ========= ========= =========
Supplementary Cash Flow Disclosure:
Interest paid ...................................... $ 418.5 $ 1,713.9 $ 652.9 $ 1,067.6 $ 2,449.7
Federal, foreign and state and local
income taxes (refunded) paid-- net ............... $ 44.2 $ (43.9) $ 31.4 $ 14.7 $ 28.4
Supplementary Non-cash Disclosure:
Push-down of purchase price by Parent .............. -- -- $ 9,484.7 -- --
See Notes to Consolidated Financial Statements.
50
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"),
formerly known as Tyco Capital Corporation, and previously The CIT Group, Inc.,
is a leading global source of financing and leasing capital for companies in a
wide variety of industries, including many of today's leading industries and
emerging businesses, offering vendor, equipment, commercial, factoring,
consumer, and structured financing capabilities. 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, unless indicated otherwise,
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. Information relating to all "predecessor" periods prior to the
acquisition is presented using CIT's historical basis of accounting. On July 8,
2002, our former parent, Tyco International Ltd, 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.
CIT consolidates entities in which it owns or controls more than fifty
percent of the voting shares, unless control is likely to be temporary. Entities
that are twenty to fifty percent owned by CIT are included in other assets and
presented at the corresponding share of equity plus loans and advances. Entities
in which CIT owns less than twenty percent of the voting shares, and over which
the Company has no significant influence, are included in other assets at cost,
less declines in value that are other than temporary. In accordance with SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", Qualifying Special Purpose Entities utilized in
securitizations are not consolidated. Interests in securitizations are included
in other assets. All significant intercompany 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 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 aggregate cost or market value.
Income Recognition
Finance income includes interest on loans, the accretion of income on
direct financing leases, and rents on operating leases. Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is
recognized on an accrual basis commencing in the month of origination using
methods that generally approximate the interest method. Leveraged lease income
is recognized on a basis calculated to achieve a constant after-tax rate of
return for periods in which CIT has a positive investment in the transaction,
net of related deferred tax liabilities. Rental income on operating leases is
recognized on an accrual basis.
The accrual of finance income on commercial finance receivables is
generally suspended and an account is placed on non-accrual status when payment
of principal or interest is contractually delinquent for 90 days or more, or
earlier when, in the opinion of management, full collection of all principal and
interest due is doubtful. Given the nature of revolving credit facilities,
including those combined with term loan facilities (advances and interest
51
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, venture capital
investments and sales and securitizations of finance receivables, and (5) equity
in earnings of joint ventures and unconsolidated subsidiaries.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. Lease
receivables include leveraged leases, for which a major portion of the funding
is provided by third party lenders on a nonrecourse basis, with CIT providing
the balance and acquiring title to the property. Leveraged leases are recorded
at the aggregate value of future minimum lease payments plus estimated residual
value, less nonrecourse third party debt and unearned finance income. Management
performs periodic reviews of the estimated residual values with impairment,
other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables
The consolidated reserve for credit losses is periodically reviewed for
adequacy considering economic conditions, collateral values and credit quality
indicators, including historical and expected charge-off experience and levels
of and trends in past due loans and non-performing assets. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses. In management's judgment, the consolidated reserve for credit losses is
adequate to provide for credit losses inherent in the portfolio.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and guarantees
(including recourse to dealers and manufacturers). Such charge-offs are deducted
from the carrying value of the related finance receivables. To the extent that
an unrecovered balance remains due, a final charge-off is taken at the time
collection efforts are deemed no longer useful. Charge-offs are recorded on
consumer and certain small ticket commercial finance receivables beginning at
180 days of contractual delinquency based upon historical loss severity.
Collections on accounts previously charged off are recorded as increases to the
reserve for credit losses.
Impaired Loans
Impaired loans include any loans for $500 thousand or greater, outside of
homogeneous pools of loans, that are placed on non-accrual status or any
troubled debt restructuring that is subject to periodic individual review by
CIT's Asset Quality Review Committee ("AQR"). The AQR, which is comprised of
members of senior management, reviews overall portfolio performance, as well as
individual accounts meeting certain credit risk grading parameters. Excluded
from impaired loans are: 1) certain individual commercial non-accrual loans for
52
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which the collateral value supports the outstanding balance and the continuation
of earning status, 2) consumer loans, which are subject to automatic charge-off
procedures, and 3) short-term factoring customer receivables, generally having
terms of no more than 30 days. Loan impairment is defined as any shortfall
between the estimated value and the recorded investment in the loan, with the
estimated value determined using the fair value of the collateral and other cash
flows if the loan is collateral dependent, or the present value of expected
future cash flows discounted at the loan's effective interest rate.
Long-Lived Assets
A review for impairment of long-lived assets, such as operating lease
equipment, is performed at least annually and whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Impairment of assets is determined by comparing the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair value is based upon discounted cash
flow analysis and available market data. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Goodwill and Other Identified Intangibles
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets acquired, less the fair value of liabilities assumed from
business combinations. CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. The Company determined that there was no
impact of adopting this standard under the transition provisions of SFAS No.
142. Since adoption, goodwill is no longer amortized, but instead is assessed
for impairment at least annually. During this assessment, management relies on a
number of factors, including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data. See Note 17 -- Accounting Change -- Goodwill.
Securitizations
Pools of assets are originated and sold to special purpose entities which,
in turn, issue debt securities backed by the asset pools or sell individual
interests in the assets to investors. CIT retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected
net cash flows (after payment of principal and interest to certificate and/or
note holders and credit-related disbursements) that exceeds the estimated cost
of servicing is recorded at the time of sale as a "retained interest." Retained
interests in securitized assets are included in other assets and classified as
available-for-sale securities under SFAS 115. CIT, in its estimation of those
net cash flows and retained interests, employs a variety of financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates. These assumptions are supported by both CIT's historical experience,
market trends and anticipated performance relative to the particular assets
securitized. Subsequent to the recording of retained interests, CIT reviews such
values quarterly. Fair values of retained interests are calculated utilizing
current and anticipated credit losses, prepayment speeds and discount rates and
are then compared to the respective carrying values. Unrealized losses,
representing the excess of carrying value over estimated current fair value, are
recorded as an impairment. Unrealized gains are not credited to current
earnings, but are reflected in stockholders' equity as part of other
comprehensive income.
Other Assets
Assets received in satisfaction of loans are carried at the lower of
carrying value or estimated fair value less selling costs, with write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets, which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.
Realized and unrealized gains (losses) on marketable equity securities
included in CIT's venture capital investment companies are recognized currently
in operations. Unrealized gains and losses, representing the difference between
carrying value and estimated current fair market value, for all other debt and
equity securities are recorded in other accumulated comprehensive income, a
separate component of equity.
53
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 cost. These valuations are periodically reviewed and a write-down is
recorded if a decline in value is considered other than temporary. Gains and
losses are recognized upon sale or write-down of these investments as a
component of other revenues.
Derivative Financial Instruments
CIT uses interest rate swaps, currency swaps and foreign exchange forward
contracts as part of a worldwide market risk management program to hedge against
the effects of future interest rate and currency fluctuations. CIT does not
enter into derivative financial instruments for trading or speculative purposes.
On January 1, 2001, CIT adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative instruments are recognized in
the balance sheet at their fair values in other assets and accrued liabilities
and payables, and changes in fair values are recognized immediately in earnings,
unless the derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in accumulated other comprehensive income as
a separate component of equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any
ineffective portion of a hedge is reported in current earnings. Amounts
accumulated in other comprehensive income are reclassified to earnings in the
same period that the hedged transaction impacts earnings.
The net interest differential, including premiums paid or received, if
any, on interest rate swaps, is recognized on an accrual basis as an adjustment
to finance income or as interest expense to correspond with the hedged position.
In the event that early termination of a derivative instrument occurs, 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 in such instances that 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.
Stock-Based Compensation
Stock option plans are accounted for in accordance with SFAS 123, which
allows for the retention of principles within Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance
with APB 25, no compensation expense is recognized for stock options issued.
Compensation expense associated with restricted stock awards is recognized over
the associated vesting periods. See Note 19 -- Post Retirement and Other Benefit
Plans for the pro forma impact on net income/loss and per share amounts assuming
recognition of stock option compensation costs based upon the provisions of SFAS
123.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is the local
currency. The value of the assets and liabilities of these operations is
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenue and expense items are translated at the average exchange
rates effective during the year. The resulting foreign currency translation
gains and losses, as well as offsetting gains and losses on hedges of net
investments in foreign operations, are reflected in accumulated other
comprehensive loss.
Income Taxes
Deferred tax liabilities and assets 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
54
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
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,
and the changes in fair values of derivative instruments designated as hedges of
future cash flows and minimum pension liability adjustments.
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.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. In addition, companies are required to
review goodwill and intangible assets reported in connection with prior
acquisitions, possibly disaggregate and report separately previously identified
intangible assets, and possibly reclassify certain intangible assets into
goodwill. CIT implemented the provisions of SFAS No. 142 on October 1, 2001.
Since adoption, existing goodwill is no longer amortized but instead is assessed
for impairment at least annually. See Note 17 -- Accounting Change Goodwill.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities that are
initiated after December 31, 2002. SFAS 146 is not expected to have a
significant impact on CIT's financial position or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147, which is effective for acquisitions on or
after October 1, 2002, supercedes specialized accounting guidance in SFAS No. 72
in order to conform the accounting for certain acquisitions of Banking or Thrift
institutions to SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 147
did not and is not expected to impact CIT's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." This pronouncement
amends SFAS No. 123 to provide alternative methods of transition for an entity
that voluntarily changes to the fair value-based method of accounting for
stock-based compensation. SFAS also expands the disclosure requirements with
respect to stock-based compensation. CIT does not intend to change to the fair
value method of accounting. The required expanded disclosure is included in the
December 31, 2002 financial statements and notes thereto.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the
55
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
guarantee. The expanded disclosure requirements are required for financial
statements ending after December 15, 2002, while the liability recognition
provisions are applicable to certain guarantee obligations modified or issued
after December 31, 2002. CIT is currently assessing the impact of this new
required liability recognition.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 addresses consolidation by
business enterprises of variable interest entities (selected entities with
related contractual, ownership, voting or other monetary interests, including
certain special purpose entities), and requires additional disclosure with
respect to these entities. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and for reporting periods beginning
after June 15, 2003 for entities that existed prior to February 1, 2003. The
expanded disclosure requirements are required for financial statements ending
after December 15, 2002. This new interpretation is not expected to have a
significant impact on the financial position or results of operations.
Note 2 -- Consolidating Financial Statements -- Tyco Capital Holdings Inc. (TCH)
The September 30, 2001 balance sheet includes the activity of TCH, which
was a wholly-owned subsidiary of a Tyco affiliate. TCH's activity was in
connection with its capacity as the holding company for the acquisition of CIT
by Tyco, which included an outstanding loan from and related interest expense
payable to an affiliate of Tyco. Immediately prior to the IPO of CIT on July 8,
2002, TCH was merged with CIT and the activity of TCH (accumulated net deficit)
was relieved via a capital contribution from Tyco. As a result, TCH had no
subsequent impact on the CIT consolidated financial statements.
($ in millions) September 30, 2001
--------------------------------------------------
CIT TCH Eliminations Consolidated
--------- --------- ------------ ------------
ASSETS
Financing and leasing assets:
Finance receivables ......................... $31,879.4 $ -- $ -- $31,879.4
Reserve for credit losses ................... (492.9) -- -- (492.9)
--------- --------- ---------- ---------
Net finance receivables ..................... 31,386.5 -- -- 31,386.5
Operating lease equipment, net .............. 6,402.8 -- -- 6,402.8
Finance receivables held for sale ........... 2,014.9 -- -- 2,014.9
Cash and cash equivalents ..................... 808.0 -- -- 808.0
Goodwill, net ................................. 6,547.5 -- -- 6,547.5
Receivables from Tyco affiliates .............. 200.0 362.7 (200.0) 362.7
Investment in subsidiaries .................... -- 10,598.0 (10,598.0) --
Other assets .................................. 3,627.3 199.6 -- 3,826.9
--------- --------- ---------- ---------
Total Assets .................................. $50,987.0 $11,160.3 $(10,798.0) $51,349.3
========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial Paper ............................ $ 8,869.2 $ -- $ -- $ 8,869.2
Variable-rate senior notes .................. 9,614.6 -- -- 9,614.6
Fixed-rate senior notes ..................... 17,113.9 -- -- 17,113.9
Subordinated fixed-rate notes ............... 100.0 -- -- 100.0
--------- --------- ---------- ---------
Total debt .................................... 35,697.7 -- -- 35,697.7
Notes and payables to Tyco affiliates ......... 7.6 5,209.7 (200.0) 5,017.3
Credit balances of factoring clients .......... 2,392.9 -- -- 2,392.9
Accrued liabilities and payables .............. 2,030.8 3.0 -- 2,033.8
--------- --------- ---------- ---------
Total Liabilities ............................. 40,129.0 5,212.7 (200.0) 45,141.7
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company .... 260.0 -- -- 260.0
Stockholders' Equity:
Contributed capital ......................... 10,422.4 5,842.5 (10,422.4) 5,842.5
Accumulated earnings (deficit) .............. 252.4 181.9 (252.4) 181.9
Accumulated other comprehensive (loss) income (76.8) (76.8) 76.8 (76.8)
--------- --------- ---------- ---------
Total Stockholders' Equity .................... 10,598.0 5,947.6 (10,598.0) 5,947.6
--------- --------- ---------- ---------
Total Liabilities and Stockholders' Equity .... $50,987.0 $11,160.3 $(10,798.0) $51,349.3
========= ========= -========= =========
56
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in millions) For the Year Ended For the Nine Months Ended
September 30, 2002 September 30, 2001
---------------------------------- ----------------------------------
CIT TCH Consolidated CIT TCH Consolidated
-------- ------- ------------ -------- ------- ------------
(successor) (combined)
Finance Income ...................... $ 4,342.8 $ -- $ 4,342.8 $3,975.3 $ -- $3,975.3
Interest expense .................... 1,439.3 -- 1,439.3 1,619.8 -- 1,619.8
--------- ------- --------- -------- ------- --------
Net finance income .................. 2,903.5 -- 2,903.5 2,355.5 -- 2,355.5
Depreciation on operating lease
equipment ......................... 1,241.0 -- 1,241.0 1,036.7 -- 1,036.7
--------- ------- --------- -------- ------- --------
Net finance margin .................. 1,662.5 -- 1,662.5 1,318.8 -- 1,318.8
Provision for credit losses ......... 788.3 -- 788.3 332.5 -- 332.5
--------- ------- --------- -------- ------- --------
Net finance margin after provision
for credit losses ................. 874.2 -- 874.2 986.3 -- 986.3
Other revenue ....................... 932.3 -- 932.3 572.6 -- 572.6
--------- ------- --------- -------- ------- --------
Operating margin .................... 1,806.5 -- 1,806.5 1,558.9 -- 1,558.9
--------- ------- --------- -------- ------- --------
Salaries and general operating
expenses .......................... 923.4 23.0 946.4 784.9 9.6 794.5
Interest expense -- TCH ............. -- 662.6 662.6 -- 98.8 98.8
Goodwill impairment ................. 6,511.7 -- 6,511.7 -- -- --
Goodwill amortization ............... -- -- -- 97.6 -- 97.6
Acquisition related costs ........... -- -- -- 54.0 -- 54.0
--------- ------- --------- -------- ------- --------
Operating expenses .................. 7,435.1 685.6 8,120.7 936.5 108.4 1,044.9
--------- ------- --------- -------- ------- --------
(Loss) income before provision for
income taxes ...................... (5,628.6) (685.6) (6,314.2) 622.4 (108.4) 514.0
(Provision) benefit for income taxes (336.1) (37.9) (374.0) (280.1) 37.9 (242.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax ................ (10.5) -- (10.5) (8.5) -- (8.5)
--------- ------- --------- -------- ------- --------
Net (loss) income ................... $(5,975.2) $(723.5) $(6,698.7) $ 333.8 $ (70.5) $ 263.3
========= ======= ========== ======== ======= ========
Note 3 -- Initial Public Offering and Acquisition by Tyco International Ltd.
On July 8, 2002, our former parent, Tyco International Ltd. ("Tyco")
completed a sale of 100% of CIT's outstanding common stock in an initial public
offering ("IPO"). All proceeds from the IPO were collected by Tyco. Immediately
prior to the offering, a restructuring was effectuated whereby our predecessor,
CIT Group Inc., a Nevada corporation, was merged with and into its parent Tyco
Capital Holding, Inc. ("TCH") and that combined entity was further merged with
and into CIT Group Inc. (Del), a Delaware corporation. In connection with the
reorganization, CIT Group Inc. (Del) was renamed CIT Group Inc. As a result of
the reorganization, CIT is the successor to CIT Group Inc. (Nevada)'s business,
operations, and obligations. On July 12, 2002, the underwriters of the IPO
exercised a portion of their over-allotment option to purchase an additional
11.6 million shares of the Company's Common Stock from CIT at the IPO price of
$23.00 per share, before underwriting discounts and commissions. CIT received
the funds from this sale.
57
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price paid by Tyco for CIT was valued at approximately $9.5
billion. The $9.5 billion value consisted of the following: the issuance of
approximately 133.0 million Tyco common shares valued at $6,650.5 million on
June 1, 2001 in exchange for approximately 73% of the outstanding CIT common
stock (including exchangeable shares of CIT Exchangeco, Inc.); the payment of
$2,486.4 million in cash to Dai-Ichi Kangyo Bank, Limited ("DKB") on June 1,
2001 for approximately 27% of the outstanding CIT common stock; options for Tyco
common shares valued at $318.6 million issued in exchange for CIT stock options;
and $29.2 million in acquisition-related costs incurred by Tyco. In addition,
$22.3 million in acquisition-related costs incurred by Tyco were paid and were
reflected in CIT's equity as an additional capital contribution. The purchase of
the CIT common stock held by DKB, which was contingent upon the satisfaction of
the conditions of the merger, took place immediately prior to the closing of the
merger on June 1, 2001. Additionally, Tyco made capital contributions totaling
$898.3 million for the period June 2, 2001 through September 30, 2001, including
a note receivable of $200.0 million paid by Tyco during the first fiscal quarter
of 2002. Except for the capital contribution used to unwind the activity of TCH,
there were no further capital contributions from Tyco subsequent to September
30, 2001.
In connection with the acquisition by Tyco, CIT recorded acquired assets
and liabilities at their estimated June 2, 2001 fair values. During the first
six months of fiscal 2002, CIT recorded additions to goodwill of $348.6 million.
The goodwill adjustments were related to fair value adjustments to purchased
assets and liabilities, and accruals related to severance, facilities or other
expenses incurred as a result of the purchase transaction. The accruals recorded
during the six months ended March 31, 2002 related to finalizing integration and
consolidation plans for the elimination of additional corporate administrative
and other personnel located primarily in North America and Europe. These
accruals resulted in additional purchase accounting liabilities, which also
increased goodwill and deferred tax assets. The severance reserve established at
the acquisition date was primarily related to corporate administrative personnel
in North America. The Other Reserve established consisted primarily of
acquisition-related costs incurred by Tyco.
The following table summarizes purchase accounting liabilities (pre-tax)
related to severance of employees and closing facilities that were recorded in
connection with the acquisition by Tyco, as well as utilization during the
respective periods ($ in millions).
Severance Facilities
-------------------- -----------------------------------------------
Number of Number of Other Total
Employees Reserves Facilities Reserves Reserves Reserves
--------- -------- ---------- -------- -------- ---------
Reserves established in fiscal 2001 .. 671 $ 45.8 -- $ -- $ 55.9 $101.7
Fiscal 2001 utilization .............. (408) (20.2) -- -- (51.5) (71.7)
---- ------ --- ----- ------ ------
Ending balance at September 30, 2001.. 263 25.6 -- -- 4.4 30.0
Fiscal 2002 acquisition reserves ..... 826 58.4 29 20.7 -- 79.1
Fiscal 2002 utilization .............. (808) (60.8) (5) (6.5) (4.4) (71.7)
---- ------ --- ----- ------ ------
Balance September 30, 2002 ........... 281 23.2 24 14.2 -- 37.4
October 1 - December 31, 2002
utilization ........................ (41) (6.0) (2) (1.8) -- (7.8)
---- ------ --- ----- ------ ------
Balance December 31, 2002 ............ 240 $ 17.2 22 $12.4 $ -- $ 29.6
==== ====== === ===== ====== ======
Note 4 -- Change in Fiscal Year
Following our acquisition by Tyco in June 2001, we changed our fiscal year
end 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. The quarter ended December 31, 2002
constitutes a transitional fiscal period. The following table provides
comparative results for the three months ended December 31, 2002 and the
unaudited three months ended December 31, 2001 ($ in millions).
58
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
December 31, December 31,
2002 2001
------------ ------------
Finance income ................................ $971.7 $1,199.0
Interest expense .............................. 340.0 373.0
------ --------
Net finance income ............................ 631.7 826.0
Depreciation on operating lease
equipment ................................... 277.3 338.5
------ --------
Net finance margin ............................ 354.4 487.5
Provision for credit losses ................... 133.4 112.9
------ --------
Net finance margin after provision
for credit losses ........................... 221.0 374.6
Other revenue ................................. 257.1 245.1
------ --------
Operating margin .............................. 478.1 619.7
------ --------
Salaries and general operating
expenses .................................... 242.1 238.7
Interest expense - TCH ........................ -- 76.3
------ --------
Operating expenses ............................ 242.1 315.0
------ --------
Income before provision for
income taxes ................................ 236.0 304.7
Provision for income taxes .................... (92.0) (118.2)
Minority interest in subsidiary trust
holding solely debentures of the
Company, after tax .......................... (2.7) (2.4)
------ --------
Net income .................................... $141.3 $ 184.1
====== ========
Net income per diluted share .................. $ 0.67 $ 0.87(1)
====== ========
- --------------------------------------------------------------------------------
(1) Assumes that common shares outstanding as a result of the July 2002 IPO
(211.7 million) were outstanding.
Note 5 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables ($ in millions).
At December 31, At September 30, At September 30,
2002 2002 2001
--------------- ---------------- ----------------
Loans .................. $19,854.9 $20,494.5 $23,590.9
Leases ................. 7,766.4 7,964.5 8,288.5
--------- --------- ---------
Finance receivables .. $27,621.3 $28,459.0 $31,879.4
========= ========= =========
Finance Receivables included $2.4 billion, $2.3 billion and $2.6 billion
in equipment residual values at December 31, 2002, September 30, 2002 and
September 30, 2001, respectively. Included in lease receivables at December 31,
2002, September 30, 2002 and September 30, 2001 are leveraged leases of $1.2
billion, $1.1 billion and $1.0 billion, respectively. Leveraged leases exclude
the portion funded by third party non-recourse debt payable of $3.7 billion at
December 31, 2002, $3.6 billion at September 30, 2002 and $2.4 billion at
September 30, 2001.
Additionally, at December 31, 2002, September 30, 2002 and September 30,
2001, finance receivables previously securitized totaling $10.5 billion, $11.2
billion and $10.1 billion, respectively, were still managed by CIT.
The following table sets forth the contractual maturities of finance
receivables due in the respective calendar or fiscal years ($ in millions).
At December 31, 2002 At September 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- ---------- ---------
Due within one year ................. $12,076.3 43.7% $13,136.8 46.2% $14,212.6 44.6%
Due within one to two years ......... 3,598.8 13.0 3,541.2 12.4 5,233.5 16.4
Due within two to four years ........ 4,181.2 15.2 4,375.7 15.4 4,515.2 14.2
Due after four years ................ 7,765.0 28.1 7,405.3 26.0 7,918.1 24.8
--------- ----- --------- ----- --------- -----
Total ........................... $27,621.3 100.0% $28,459.0 100.0% $31,879.4 100.0%
========= ===== ========= ===== ========= =====
59
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth certain information regarding total non-performing assets ($ in millions).
At December 31, 2002 At September 30, 2002 At September 30, 2001
--------------------- --------------------- ---------------------
Non-accrual finance receivables .......... $ 946.4 $ 976.6 $851.6
Assets received in satisfaction of loans.. 139.4 163.2 118.1
-------- -------- ------
Total non-performing assets .............. $1,085.8 $1,139.8 $969.7
======== ======== ======
Percentage of finance receivables ........ 3.93% 4.01% 3.04%
======== ======== ======
At December 31, 2002, September 30, 2002 and September 30, 2001, the
recorded investment in loans considered for impairment totaled $959.9 million,
$1,001.2 million, and $555.3 million, respectively. Loans whose estimated fair
market value is less than current recorded value totaled $522.3 million, $449.8
million and $304.1 million at December 31, 2002, September 30, 2002 and
September 30, 2001, respectively. The corresponding specific reserve for credit
loss allocations were $156.9 million, $197.4 million and $122.3 million included
in the reserve for credit losses. The average monthly recorded investment in
loans considered for impairment was $980.6 million (including $327.3 million
relating to telecommunications), $818.9 million (including $185.5 million
relating to telecommunications), $409.8 million and $256.6 million for the three
months ended December 31, 2002, twelve months ended September 30, 2002, nine
months ended September 30, 2001, and year ended December 31, 2000, respectively.
After being classified as impaired, there was no finance income recognized on
these loans because our definition of an impaired loan is linked to non-accrual
classification. The amount of finance income that would have been recorded under
contractual terms for impaired loans would have been $19.2 million, $65.2
million, $46.1 million and $38.1 million for the three months ended December 31,
2002, for the twelve months ended September 30, 2002, for the nine months ended
September 30, 2001, and for the year ended December 31, 2000, respectively.
Note 6 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
For the Three For the Twelve June 2 January 1 For the
Months Ended Months Ended through through Year Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------- ------------- ------------- -------------
(successor) (successor) (successor) (predecessor) (predecessor)
Balance, beginning of period ..... $ 777.8 $ 492.9 $462.7 $ 468.5 $ 446.9
------- ------- ------ ------- -------
Provision for credit losses ...... 133.4 453.3 116.1 126.9 255.2
Provision for credit losses -
specific reserving actions(1) .. -- 335.0 -- 89.5 --
Reserves relating to dispositions,
acquisitions, other ............ 4.1 (11.1) 0.9 (17.2) 2.0
------- ------- ------ ------- -------
Additions to the reserve for
credit losses ................ 137.5 777.2 117.0 199.2 257.2
------- ------- ------ ------- -------
Finance receivables charged-off .. (173.2) (539.1) (93.7) (215.8) (255.8)
Recoveries on finance receivables
previously charged-off ......... 18.7 46.8 6.9 10.8 20.2
------- ------- ------ ------- -------
Net credit losses .............. (154.5) (492.3) (86.8) (205.0) (235.6)
------- ------- ------ ------- -------
Balance, end of period ........... $ 760.8 $ 777.8 $492.9 $ 462.7 $ 468.5
======= ======= ====== ======= =======
Reserve for credit losses as a
percentage of finance
receivables .................... 2.75% 2.73% 1.55% 1.50% 1.40%
======= ======= ====== ======= =======
- --------------------------------------------------------------------------------
(1) The 2002 amounts consist of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2001 amount consists of a provision for under-performing
loans and leases, primarily in the telecommunications portfolio.
60
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of $1.3 billion, $1.2 billion and $0.4 billion) of
operating lease equipment by equipment type at December 31, 2002, September 30,
2002 and September 30, 2001 ($ in millions).
At December 31, At September 30, At September 30,
2002 2002 2001
--------------- ---------------- ----------------
Commercial aircraft ........ $3,185.4 $3,005.5 $2,017.2
Railcars and locomotives ... 1,507.7 1,373.9 1,242.5
Communications ............. 507.5 554.5 799.5
Information technology ..... 337.6 370.3 702.1
Business aircraft .......... 292.6 341.3 359.6
Transportation -- other .... 179.2 191.2 298.1
Other ...................... 694.6 730.7 983.8
-------- -------- --------
Total .................... $6,704.6 $6,567.4 $6,402.8
======== ======== ========
Included in the preceding table is equipment not currently subject to
lease agreements of $385.9 million, $267.3 million and $247.2 million at
December 31, 2002, September 30, 2002, and September 30, 2001, respectively.
Rental income on operating leases, which is included in finance income,
totaled $0.4 billion for the three months ended December 31, 2002, $1.7 billion
for the twelve months ended September 30, 2002, $1.5 billion for the combined
nine months ended September 30, 2001 and $1.8 billion for the year ended
December 31, 2000. The following table presents future minimum lease rentals on
non-cancelable operating leases as of December 31, 2002. Excluded from this
table are variable rentals calculated on the level of asset usage, re-leasing
rentals, and expected sales proceeds from remarketing operating lease equipment
at lease expiration, all of which are components of operating lease
profitability ($ in millions).
Years Ended December 31, Amount
- ------------------------ ------
2003 .............................................................. $1,131.0
2004 .............................................................. 725.8
2005 .............................................................. 458.1
2006 .............................................................. 300.1
2007 .............................................................. 232.3
Thereafter ........................................................ 518.0
--------
Total ........................................................... $3,365.3
========
Note 8 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets at December 31, 2002,
September 30, 2002 and September 30, 2001 ($ in millions):
At December 31, 2002 At September 30, 2002 At September 30, 2001
---------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Geographic
North America:
Northeast .................... $ 7,833.8 21.8% $ 8,047.0 22.1% $ 9,117.9 22.4%
West ......................... 6,223.8 17.4 6,339.1 17.4 7,561.7 18.6
Midwest ...................... 5,748.3 16.0 5,941.0 16.3 6,957.3 17.0
Southeast .................... 4,946.8 13.8 4,854.1 13.3 5,505.4 13.5
Southwest .................... 3,691.9 10.3 3,932.0 10.8 4,708.1 11.6
Canada ....................... 1,804.9 5.0 1,688.4 4.7 1,952.4 4.8
--------- ----- --------- ----- --------- -----
Total North America .......... 30,249.5 84.3 30,801.6 84.6 35,802.8 87.9
Other foreign ................ 5,625.2 15.7 5,586.0 15.4 4,926.4 12.1
--------- ----- --------- ----- --------- -----
Total ...................... $35,874.7 100.0% $36,387.6 100.0% $40,729.2 100.0%
========= ===== ========= ===== ========= =====
61
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2002 At September 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Industry
Manufacturing(1) (no industry
greater than 2.7%) ................ $ 7,063.3 19.7% $ 7,446.2 20.5% $ 8,442.2 20.7%
Commercial airlines
(including regional airlines) ..... 4,587.6 12.8 4,285.3 11.8 3,412.3 8.4
Retail(2) ........................... 4,469.2 12.5 4,939.4 13.6 5,020.9 12.3
Transportation(3) ................... 2,715.7 7.6 2,665.8 7.3 2,675.8 6.6
Communications(4) ................... 1,787.3 5.0 1,840.1 5.1 1,590.3 3.9
Construction equipment .............. 1,721.3 4.8 1,760.2 4.8 2,273.7 5.6
Services ............................ 1,654.3 4.6 1,533.4 4.2 1,755.3 4.3
Wholesaling ......................... 1,306.9 3.6 1,245.5 3.4 1,435.7 3.5
Home mortgage ....................... 1,292.7 3.6 1,314.2 3.6 2,760.2 6.8
Automotive Services ................. 1,179.6 3.3 1,116.2 3.1 1,073.0 2.6
Other (no industry greater than 3.0%) 8,096.8 22.5 8,241.3 22.6 10,289.8 25.3
--------- ----- --------- ----- --------- -----
Total ............................. $35,874.7 100.0% $36,387.6 100.0% $40,729.2 100.0%
========= ===== ========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (4.5%) and general merchandise (4.4%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes $710.1 million, $707.2 million and $637.7 million of
telecommunication related assets at December 31, 2002, September 30, 2002
and September 30, 2001, respectively.
Note 9 -- Investments in Debt and Equity Securities
Investments in debt and equity securities designated as available for sale
(and included in other assets) as of December 31, 2002, September 30, 2002 and
September 30, 2001 are shown in the following table ($ in millions).
At December 31, 2002 At September 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------------
Retained interests in securitized
commercial loans .......................... $1,042.1 $1,039.7 $843.6
Retained interests in securitized
consumer loans ............................ 313.8 274.0 126.5
Aerospace equipment trust certificates ...... 95.5 96.7 --
-------- -------- ------
Total ..................................... $1,451.4 $1,410.4 $970.1
======== ======== ======
Retained interests in securitizations include interest-only strips,
retained subordinated securities and cash reserves related to securitizations.
The composition of retained interests in securitizations as of December 31,
2002, September 30, 2002 and September 30, 2001 was as follows ($ in millions).
At December 31, 2002 At September 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------------
Retained subordinated securities ............ $ 698.2 $ 658.9 $564.9
Interest-only strips ........................ 383.1 362.2 155.0
Cash reserve accounts ....................... 274.6 292.6 250.2
-------- -------- ------
Total ..................................... $1,355.9 $1,313.7 $970.1
======== ======== ======
The carrying value of the retained interests in securitized assets is
reviewed quarterly for valuation impairment. During the three months ended
December 31, 2002, net accretion of $33.2 million was recognized in pretax
earnings, including $10.6 million of impairment charges. For the twelve months
ended September 30, 2002, net accretion of $97.1 million was recognized in
pretax earnings, including $49.9 million of impairment charges, respectively.
Unrealized after tax gains totaled $20.5 million and $25.8 million at December
31, 2002 and September 30, 2002, respectively, and are reflected in
stockholders' equity as a part of accumulated other comprehensive loss.
62
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The securitization programs cover a wide range of products and collateral
types with significantly 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 the three months ended
December 31, 2002 were as follows:
Commercial Equipment
----------------------
Equipment
Specialty Finance and Consumer
Finance Leasing Home Equity
--------- ----------- -----------
Weighted average prepayment speed ........ 12.83% 11.58% 24.00%
Weighted average expected credit losses .. 0.79% 1.08% 0.97%
Weighted average discount rate ........... 9.68% 9.00% 11.00%
Weighted average life (in years) ......... 1.46 2.01 3.67
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at December 31, 2002 were as
follows:
Commercial Equipment Consumer
-------------------------- ---------------------------
Equipment Manufactured Recreational
Specialty Financing and Housing & Vehicle &
Finance Leasing Home Equity Boat
--------- ------------- ------------- ------------
Weighted average prepayment speed ........... 17.85% 11.71% 25.85% 18.03%
Weighted average expected credit losses ..... 1.24% 2.23% 1.09% 0.50%
Weighted average discount rate .............. 11.09% 10.73% 12.68% 14.30%
Weighted average life (in years) ............ 1.18 1.53 3.07 3.21
The impact of 10 percent and 20 percent adverse changes to the key
assumptions on the fair value of retained interests as of December 31, 2002 is
shown in the following tables ($ in millions).
Consumer
---------------------------
Manufactured Recreational
Commercial Housing & Vehicle &
Equipment Home Equity Boat
---------- ------------- ------------
Prepayment speed:
10 percent adverse change .......... $(4.4) $(9.2) $(1.6)
20 percent adverse change .......... (8.3) (17.0) (3.1)
Expected credit losses:
10 percent adverse change .......... (15.7) (5.2) (1.3)
20 percent adverse change .......... (31.4) (10.3) (2.6)
Weighted average discount rate:
10 percent adverse change .......... (14.4) (4.9) (2.1)
20 percent adverse change .......... (28.4) (9.6) (4.0)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 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.
63
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize static pool credit losses, which represent
the sum of actual losses (life to date) and projected future credit losses,
divided by the original balance of each pool of the respective assets for the
securitizations during the period.
Commercial Equipment Securitizations During
-------------------------------------------
2002 2001 2000
---- ---- ----
(successor) (combined) (predecessor)
Actual and projected losses at:
December 31, 2002 ................ 1.96% 2.94% 4.31%
September 30, 2002 ............... 1.92% 2.87% 4.34%
September 30, 2001 ............... -- 1.92% 3.43%
December 31, 2000 ................ -- -- 1.83%
Home Equity Securitizations During
----------------------------------
2002 2001 2000
---- ---- ----
(successor) (combined) (predecessor)
Actual and projected losses at:
December 31, 2002 ................ 2.65% -- --
September 30, 2002 ............... 2.68% -- --
September 30, 2001 ............... -- -- --
December 31, 2000 ................ -- -- --
The tables that follow summarize the roll-forward of retained interest
balances and certain cash flows received from and paid to securitization trusts
for the three months ended December 31, 2002 and twelve months ended September
30, 2002 ($ in millions).
Three Months Ended Twelve Months Ended
December 31, 2002 September 30, 2002
------------------ -------------------
Retained Interests (successor) (successor)
- ------------------
Retained interest at beginning
of period .............................. $1,313.7 $ 970.1
New sales ................................ 154.9 792.9
Distributions from trusts ................ (175.3) (512.6)
Other, including net accretion,
and clean-up calls ..................... 67.0 20.2
Change in fair value ..................... (4.4) 43.1
-------- --------
Retained interest at end of period ....... $1,355.9 $1,313.7
======== ========
Three Months Ended Twelve Months Ended
December 31, 2002 September 30, 2002
------------------ -------------------
Retained Interests (successor) (successor)
- ------------------
Proceeds from new securitizations ........ $1,060.2 $6,603.9
Other cash flows received on
retained interests ..................... 175.3 551.5
Servicing fees received .................. 19.7 72.3
Repurchases of delinquent or
foreclosed assets and ineligible
contracts .............................. (3.7) (104.7)
Purchases of contracts through
clean up calls ......................... (8.2) (456.9)
Reimbursable servicing advances,
net .................................... (4.0) (21.9)
Guarantee draws .......................... (0.2) (1.2)
-------- --------
Total, net ............................... $1,239.1 $6,643.0
======== ========
Total net charge-offs, for both finance receivables and managed
receivables, and net charge-offs as a percentage of average finance receivables
and managed receivables, for the three months ended December 31,
64
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002, the twelve months ended September 30, 2002, and combined nine months ended
September 30, 2001 are set forth below. In addition to finance receivables,
managed receivables include finance receivables previously securitized and still
managed by us, but exclude operating leases and equity investments ($ in
millions).
Net Charge-offs of Finance Receivables
-----------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended Combined Nine Months Ended
December 31, 2002 September 30, 2002 September 30, 2001
----------------------- ---------------------- --------------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial ....... $143.3 2.33% $445.9 1.65% $243.5 1.13%
Consumer ......... 11.2 2.24% 46.4 1.78% 48.3 1.72%
------ ------ ------
Total ............ $154.5 2.32% $492.3 1.67% $291.8 1.20%
====== ====== ======
Net Charge-offs of Managed Receivables
-----------------------------------------------------------------------------------
Three Months Ended Twelve Months Ended Combined Nine Months Ended
December 31, 2002 September 30, 2002 September 30, 2001
----------------------- ---------------------- --------------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial ....... $187.5 2.29% $701.6 2.71% $351.6 1.87%
Consumer ......... 18.7 1.62% 78.8 1.35% 71.5 1.04%
------ ------ ------
Total ............ $206.2 2.21% $780.4 1.94% $423.1 1.64%
====== ====== ======
Receivables past due 60 days or more, for both finance receivables and
managed receivables, and receivables past due 60 days or more as a percentage of
finance receivables and managed receivables, at December 31, 2002, September 30,
2002 and September 30, 2001, are set forth below. In addition to finance
receivables, managed receivables include finance receivables previously
securitized and still managed by us, but exclude operating leases and equity
investments ($ in millions).
Finance Receivables Past Due 60 Days or More
----------------------------------------------------------------------------------
At December 31, 2002 At September 30, 2002 At September 30, 2001
----------------------- ----------------------- -----------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial ....... $ 867.6 3.39% $ 942.8 3.53% $ 915.7 3.18%
Consumer ......... 133.7 6.66% 127.2 7.20% 188.2 6.12%
-------- -------- --------
Total ............ $1,001.3 3.63% $1,070.0 3.76% $1,103.9 3.46%
======== ======== ========
Managed Receivables Past Due 60 Days or More
----------------------------------------------------------------------------------
At December 31, 2002 At September 30, 2002 At September 30, 2001
----------------------- ----------------------- -----------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Commercial ....... $1,136.2 3.36% $1,289.1 3.64% $1,386.6 3.63%
Consumer ......... 259.4 4.71% 249.5 4.71% 253.2 4.32%
-------- -------- --------
Total ............ $1,395.6 3.55% $1,538.6 3.78% $1,639.8 3.72%
======== ======== ========
Note 10 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
At December 31, 2002 At September 30, 2002 At September 30, 2001
-------------------- --------------------- ---------------------
(successor) (successor) (successor)
Borrowings outstanding ............ $4,974.6 $4,654.2 $8,869.2
Weighted average interest rate .... 1.62% 1.87% 3.37%
Weighted average remaining days
to maturity ..................... 38 days 37 days 31 days
65
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Three For the Twelve For the Nine For the
Months Ended Months Ended Months Ended Year Ended
December 31, 2002 September 30, 2002 September 30, 2001 December 31, 2000
----------------- ------------------ ------------------ -----------------
(successor) (successor) (combined) (predecessor)
Daily average borrowings ............... $4,758.7 $ 4,564.7 $10,142.5 $10,565.1
Maximum amount outstanding ............. 4,994.1 $10,713.5 $11,726.4 $12,868.2
Weighted average interest rate ......... 1.75% 2.25% 4.67% 6.23%
The consolidated weighted average interest rates on variable-rate senior
notes at December 31, 2002, September 30, 2002 and September 30, 2001 were
2.08%, 2.31% and 3.49%, respectively. Fixed-rate senior debt outstanding at
December 31, 2002 matures at various dates through 2028. The consolidated
weighted-average interest rates on fixed-rate senior debt at December 31, 2002,
September 30, 2002 and September 30, 2001 was 6.74%, 6.82% and 6.72%,
respectively. Foreign currency-denominated debt (stated in U.S. Dollars) totaled
$1,652.4 million at December 31, 2002, of which $1,334.4 was fixed-rate and
$318.0 was variable-rate. Foreign currency-denominated debt at September 30,
2002 totaled $1,627.9 million, of which $1,290.5 million was fixed-rate and
$337.4 million was variable-rate debt. As of September 30, 2001,
foreign-currency denominated debt was $1,306.1 million, of which $1,286.1
million was fixed-rate and $20.0 million was variable-rate debt.
The following tables present calendar year contractual maturities and the
high and low interest rates for total variable-rate and fixed-rate debt at
December 31, 2002, fiscal year contractual maturities at September 30, 2002 and
fiscal year contractual maturities of September 30, 2001 ($ in millions).
At December 31, 2002
----------------------------------------------------- At At
Commercial Variable-rate Bank Credit September 30, September 30,
Variable-Rate Paper Senior Notes Facilities Total 2002 2001
- ------------- ---------- ------------- ---------- --------- ------------- -------------
(successor) (successor)
Due in 2002 ................... $ -- $ -- $ -- $ -- $ -- $14,594.2
Due in 2003 (rates ranging
from 1.43% to 4.50%) ........ 4,974.6 3,906.4 2,118.0 10,999.0 12,601.9 3,889.6
Due in 2004 (rates ranging
from 2.22% to 2.93%) ........ -- 727.3 -- 727.3 1,247.0 --
Due in 2005 (rates ranging
from 2.22% to 2.63%) ........ -- 29.1 -- 29.1 23.4 --
Due in 2006 (rates ranging
from 2.22% to 2.63%) ........ -- 31.0 -- 31.0 25.0 --
Due in 2007 (rates ranging
from 2.22% to 2.63%) ........ -- 33.0 -- 33.0 26.6 --
Due after 2007 (rates ranging
from 2.22% to 2.63%) ........ -- 180.1 -- 180.1 146.7 --
--------- --------- --------- --------- --------- ---------
$ 4,974.6 $ 4,906.9 $ 2,118.0 $11,999.5 $14,070.6 $18,483.8
========= ========= ========= ========= ========= =========
At At At
December 31, September 30, September 30,
Fixed-Rate 2002 2002 2001
- ---------- ------------ ------------- -------------
Due in 2002 ................................................ $ -- $ -- $ 2,456.4
Due in 2003 (rates ranging from 2.85% to 8.26%) ............ 4,245.8 2,784.9 2,889.0
Due in 2004 (rates ranging from 3.80% to 8.26%) ............ 3,231.0 4,321.5 4,391.9
Due in 2005 (rates ranging from 4.20% to 8.26%) ............ 3,939.7 4,704.1 4,593.6
Due in 2006 (rates ranging from 3.25% to 7.12%) ............ 1,137.1 1,179.1 1,175.8
Due in 2007 (rates ranging from 5.10% to 7.38%) ............ 3,386.8 2,307.1 86.8
Due after 2007 (rates ranging from 6.50% to 8.25%) ......... 3,741.4 3,088.7 1,620.4
--------- --------- ---------
Total .................................................. $19,681.8 $18,385.4 $17,213.9
========= ========= =========
At December 31, 2002, there remained $8.2 billion of registered, but
unissued debt securities under a shelf registration statement.
66
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table represents information on unsecured committed lines of
credit at December 31, 2002 that can be drawn upon to support commercial paper
borrowings ($ in millions).
Expiration Total Drawn Available
- ---------- ----- ----- ---------
March 2003 ..................... $ 318.0 $ 318.0 $ --
April 2003 ..................... 765.0 -- 765.0
July 2003 ...................... 250.0 -- 250.0
October 2003 ................... 2,300.0 1,800.0 500.0
March 2005 ..................... 3,720.0 -- 3,720.0
-------- -------- --------
Total credit lines ............. $7,353.0 $2,118.0 $5,235.0
======== ======== ========
The credit line agreements contain clauses that permit extensions beyond
the expiration dates upon written consent from the participating lenders.
Certain foreign operations utilize local financial institutions to fund
operations. At December 31, 2002, local credit facilities totaled $171.6
million, of which $146.8 million was undrawn and available.
Note 11 -- Derivative Financial Instruments
CIT adopted SFAS 133 on January 1, 2001 and recorded a $146.5 million, net
of tax, cumulative effect adjustment to Accumulated Other Comprehensive Loss,
for derivatives qualifying as hedges of future cash flows, in accordance with
this accounting standard. The components of the adjustment to Accumulated Other
Comprehensive Loss for derivatives qualifying as hedges of future cash flows as
of December 31, 2002 and September 30, 2002 are presented in the following table
($ in millions).
Adjustment of Income Total
Fair Value of Tax Unrealized
Derivatives Effects Loss
------------- ------- ----------
Balance at September 30, 2001 .......... $102.3 $(38.9) $ 63.4
Changes in values of derivatives
qualifying as cash flow hedges ....... 92.1 (35.0) 57.1
------ ------ ------
Balance at September 30, 2002 .......... 194.4 (73.9) 120.5
Changes in values of derivatives
qualifying as cash flow hedges ....... (3.6) 1.4 (2.2)
------ ------ ------
Balance at December 31, 2002 ........... $190.8 $(72.5) $118.3
====== ====== ======
The unrealized loss as of December 31, 2002, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, and lower market interest rates. For the
three months ended December 31, 2002, the ineffective portion of changes in the
fair value of cash flow hedges amounted to $0.4 million and has been recorded as
a decrease to interest expense. For the year ended September 30, 2002, the
ineffective portion of changes in the fair value of cash flow hedges amounted to
$1.4 million and was recorded as an increase to interest expense. Assuming no
change in interest rates, $61.4 million, net of tax, of Accumulated Other
Comprehensive Loss is expected to be reclassified to earnings over the next
twelve months as contractual cash payments are made. The Accumulated Other
Comprehensive Loss (along with the corresponding swap liability) will be
adjusted as market interest rates change over the remaining life of the swaps.
As part of managing the exposure to changes in market interest rates, CIT,
as an end-user, enters into various interest rate swap transactions, all of
which are transacted in over-the-counter markets with other financial
institutions acting as principal counterparties. We use derivatives for hedging
purposes only, and do not enter into derivative financial instruments for
trading or speculative purposes. To ensure both appropriate use as a hedge and
hedge accounting treatment, derivatives entered into are designated according to
a hedge objective against a specific liability, including commercial paper, or a
specifically underwritten debt issue. The notional amounts, rates, indices and
maturities of our derivatives are required to closely match the related terms of
our hedged liabilities. CIT exchanges variable-rate interest on certain debt
instruments for fixed-rate amounts. These interest rate swaps are designated as
cash flow hedges. We also exchange fixed-rate interest on certain of our debt
for variable-rate amounts. These interest rate swaps are designated as fair
value hedges.
67
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position at December
31, 2002 ($ in millions)
Interest Rate Swaps Notional Amount Comments
- ------------------ --------------- --------
Effectively converts the interest rate on an
Floating to fixed-rate swaps -- equivalent amount of commercial paper and
cash flow hedges ................... $3,280.5 variable-rate notes to a fixed rate.
Fixed to floating-rate swaps -- Effectively converts the interest rate on an equivalent
fair value hedges .................. 4,489.8 amount of fixed-rate notes to a variable rate.
--------
Total interest rate swaps .......... $7,770.3
========
Foreign exchange forward contracts or cross-currency swaps are used to
convert U.S. dollar borrowings into local currency to the extent that local
borrowings are not cost effective or available. We also use foreign exchange
forward contracts to hedge our net investment in foreign operations.
CIT is exposed to credit risk to the extent that the counterparty fails to
perform under the terms of a derivative instrument. This risk is measured as the
market value of interest rate swaps or foreign exchange forwards with a positive
fair value, which totaled $456.8 million at December 31, 2002, reduced by the
effects of master netting agreements as presented in Note 23 -"Fair Values of
Financial Instruments." We manage this credit risk by requiring that all
derivative transactions be conducted with counterparties rated investment grade
by nationally recognized rating agencies, with the majority of the
counterparties rated "AA" or higher, and by setting limits on the exposure with
any individual counterparty. Accordingly, counterparty credit risk at December
31, 2002 is not considered significant.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid of U.S.
dollar interest rate swaps at December 31, 2002 ($ 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
- ------------ -------- ------- ---- -------- ------- ----
2003 ....................... $1,292.4 1.42% 6.21% $ 311.0 7.35% 2.88%
2004 ....................... 261.0 1.44% 4.98% 11.0 7.69% 2.17%
2005 ....................... 265.1 1.45% 4.93% 257.8 7.20% 2.47%
2006 ....................... 99.2 1.51% 5.25% -- -- --
2007 ....................... 81.8 1.53% 5.67% 2,160.0 6.48% 4.35%
2008 - Thereafter .......... 946.7 1.47% 6.38% 1,750.0 7.39% 4.24%
-------- --------
Total ...................... $2,946.2 1.45% 5.99% $4,489.8 6.94% 4.09%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid, of foreign
currency interest rate swaps that converted floating-rate debt to fixed rate
debt at December 31, 2002 ($ in million).
Foreign Currency Notional Amount Receive Rate Pay Rate Maturity Range
- ---------------- --------------- ------------ -------- --------------
Canadian Dollar ............ $240.7 2.85% 6.21% 2003 -- 2009
Australian Dollar .......... $ 78.1 4.83% 6.05% 2003 -- 2006
British Pound .............. $ 15.5 3.94% 5.43% 2003 -- 2024
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
At December 31, 2002, CIT was party to foreign currency exchange forward
contracts with notional amounts totaling $3.0 billion and maturities ranging
from 2002 to 2006. CIT was also party to cross currency interest rate
68
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
swaps with notional amounts totaling $1.5 billion and maturities ranging from
2003 to 2027. The following table presents the maturity, notional principal
amounts of foreign exchange forwards and cross currency swaps at December 31,
2002 ($ in millions).
Notional Principal Amount
-------------------------------------
Maturity Years Ended Foreign Exchange Cross-Currency
December 31, Forwards Swaps
- -------------------- ---------------- ---------------
2003 ............................... $2,724.7 $ 136.3
2004 ............................... 267.7 126.1
2005 ............................... 6.7 1,082.1
2006 ............................... 12.4 57.5
2007 ............................... -- 17.8
2008 - Thereafter .................. -- 84.4
-------- --------
Total ............................ $3,011.5 $1,504.2
======== ========
Note 12 -- 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, 2007, 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. CIT records distributions
payable on the Capital Securities as minority interest, after tax, in the
Consolidated Statements of Income. The Capital Securities were valued at $260.0
million on June 1, 2001, the date of acquisition by Tyco, in new basis
accounting and the current balance reflects accretion of the premium.
69
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------ ------------ ----------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Fees and other income .................. $169.2 $644.5 $212.3 $174.9 $480.9
Factoring commissions .................. 55.1 165.5 50.7 61.2 154.7
Gains on securitizations ............... 30.5 149.0 59.0 38.7 109.5
Gains on sales of leasing equipment .... 8.7 13.6 14.2 33.7 113.2
(Losses) gains on venture capital
investments .......................... (6.4) (40.3) (1.1) 7.1 53.7
Other Charges(1) ....................... -- -- -- (78.1) --
------ ------ ------ ------ ------
Total ................................ $257.1 $932.3 $335.1 $237.5 $912.0
====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) During the period January 1 through June 1, 2001, the Company recorded
write-downs of $78.1 million for certain equity investments in the
telecommunications industry and e-commerce markets.
Note 14 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 15.4 million shares for the three months ended December 31, 2002.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the quarter ended December 31, 2002 ($ in
millions, except per share amounts and shares which are in whole dollars and
thousands, respectively).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS:
Income available to common
stockholders .................... $141.3 211,573 $0.67
Effect of Dilutive Securities:
Restricted shares ................. -- 253 --
Stock options ..................... -- -- --
------ ------- -----
Diluted EPS ......................... $141.3 211,826 $0.67
====== ======= =====
The following table summarizes the earnings per share amounts for the year
ended September 30, 2002, the period June 2 through September 30, 2001, the
period January 1 through June 1, 2001, and the year ended December 31, 2000,
assuming that the shares outstanding at September 30, 2002 were outstanding for
all historical periods ($ in millions, except per share amounts).
Net (Loss) Diluted
Income Basic EPS(1) EPS(1)
---------- ------------ --------
Year ended September 30, 2002
(successor) ......................... $(6,698.7) $(31.66) $(31.66)
June 2 through September 30, 2001
(successor) ......................... $ 182.8 $ 0.86 $ 0.86
January 1 through June 1, 2001
(predecessor) ....................... $ 80.5 $ 0.38 $ 0.38
Year ended December 31, 2000
(predecessor) ....................... $ 611.6 $ 2.89 $ 2.89
- --------------------------------------------------------------------------------
(1) Based on 211,573 and 211,695 shares for basic and diluted EPS, except
where anti-dilutive.
70
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------ ------------- ----------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Salaries and employee benefits .............. $126.8 $517.4 $204.7 $262.0 $ 600.7
Other operating expenses -- CIT ............. 115.3 406.0 134.2 184.0 434.5
Other operating expenses -- TCH ............. -- 23.0 9.6 -- --
------ ------ ------ ------ --------
Total ..................................... $242.1 $946.4 $348.5 $446.0 $1,035.2
====== ====== ====== ====== ========
Note 16 -- Acquisition-Related Costs
For the combined nine months ended September 30, 2001, acquisition-related
costs of $54.0 million, consisting primarily of investment banking and other
professional fees, were incurred by CIT prior to and in connection with the
acquisition of CIT by Tyco.
Note 17 -- Accounting Change-Goodwill
The Company periodically reviews and evaluates its goodwill and other
intangible assets for potential impairment. Effective October 1, 2001, the
beginning of CIT's 2002 fiscal year, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," 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 our reporting units as of
October 1, 2001. Under the transition provisions of SFAS No. 142, there was no
goodwill impairment as of October 1, 2001. Prior period goodwill and other
intangible assets amortization (pretax) was $97.6 million for the combined nine
months ended September 30, 2001 and $86.3 million for the year ended December
31, 2000.
During the quarter ended March 31, 2002, our 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. As a result of these events at Tyco, CIT also experienced credit
downgrades and a disruption to our funding base and ability to access capital
markets. Further, market-based information used in connection with our
preliminary consideration of an initial public offering for 100% of CIT
indicated that CIT's book value exceeded its estimated fair value as of March
31, 2002. As a result, management performed a Step 1 SFAS 142 impairment
analysis as of March 31, 2002 and concluded that an impairment charge was
warranted at that date.
Management's objective in performing the Step 1 SFAS 142 analysis was to
obtain relevant market-based data to calculate the fair value of each CIT
reporting unit as of March 31, 2002 based on each reporting unit's projected
earnings and market factors that would be used by market participants in
ascribing value to each of these reporting units in the planned separation of
CIT from Tyco. Management obtained relevant market data from our financial
advisors regarding the range of price to earnings multiples and market discounts
applicable to each reporting unit as of March 31, 2002 and applied this market
data to the individual reporting unit's projected annual earnings as of March
31, 2002 to calculate an estimated fair value of each reporting unit. The
estimated fair values were compared to the corresponding carrying value of each
reporting unit at March 31, 2002, resulting in a $4.512 billion impairment
charge as of March 31, 2002.
SFAS 142 requires a second step analysis whenever the reporting unit book
value exceeds its estimated fair value. This analysis required the Company to
estimate the fair value of each reporting unit's individual assets and
liabilities to complete the analysis of goodwill impairment as of March 31,
2002. During the quarter ended June 30, 2002, we completed this analysis for
each reporting unit and determined that an additional Step 2 goodwill impairment
charge of $132.0 million was required based on reporting unit level valuation
data.
71
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to March 31, 2002, CIT experienced credit downgrades and the
business environment and other factors continued to negatively impact the
expected CIT IPO proceeds. As a result, we performed both Step 1 and Step 2
analysis as of June 30, 2002 in a manner consistent with the March 2002 process
described above. This analysis was based upon updated market data from our
financial advisors regarding the individual reporting units, and other relevant
market data at June 30, 2002 and through the period immediately following the
IPO of the Company, including the total amount of the IPO proceeds. This
analysis resulted in Step 1 and Step 2 incremental goodwill impairment of $1.719
billion and $148.0 million, respectively, as of June 30, 2002, which was
recorded during the June quarter. Our remaining goodwill is substantially all
allocated to our commercial finance segment businesses.
There have been no changes in the carrying value of goodwill for the three
months ended December 31, 2002.
The changes in the carrying amount of goodwill for the twelve months ended
September 30, 2002 were as follows ($ in millions):
Equipment
Financing and Specialty Commercial Structured
Leasing Finance Finance Finance Total
------- ------- ------- ------- ----------
Balance as of September 30, 2001 ........... $2,070.7 $2,572.3 $1,863.1 $63.4 $6,569.5
Reclassification of intangible assets
to other assets .......................... -- -- (22.0) -- (22.0)
--------- --------- --------- ------ ---------
Balances as of September 30, 2001
after reclassification ................... 2,070.7 2,572.3 1,841.1 63.4 6,547.5
Goodwill adjustments related to our
acquisition by Tyco ...................... 163.8 178.0 4.1 2.7 348.6
Goodwill impairment ........................ (2,234.5) (2,736.3) (1,474.8) (66.1) (6,511.7)
--------- --------- --------- ------ ---------
Balance as of September 30, 2002 ........... $ -- $ 14.0 $ 370.4 $ -- $ 384.4
========= ========= ========= ====== =========
Following is a reconciliation of previously reported net income to net
income excluding goodwill amortization ($ in millions, except per share
amounts):
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ -------------- ------------- ------------ ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Net income (loss) as reported ............... $141.3 $(6,698.7) $182.8 $ 80.5 $611.6
Goodwill amortization, net of tax ........... -- -- 59.8 32.7 75.4
------ --------- ------ ------ ------
Net income (loss) as adjusted ............... $141.3 $(6,698.7) $242.6 $113.2 $687.0
====== ========= ====== ====== ======
Net income (loss) as adjusted per
share -- basic and fully diluted .......... $ 0.67 $ (31.66) $ 1.15 $ 0.53 $ 3.25
====== ========= ====== ====== ======
Other intangible assets, net, comprised primarily of proprietary computer
software and related transaction processes, totaled $16.5 million, $17.6 million
and $22.0 million at December 31, 2002, September 30, 2002, and September 30,
2001, respectively, and are included in Other Assets on the Consolidated Balance
Sheets. These assets are being amortized over a five year period on a
straight-line basis, resulting in an annual amortization of $4.4 million.
72
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 18 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows.
Percentage of Pretax Income
-------------------------------------------------------------------------------
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------- ------------ ----------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Federal income tax rate .................... 35.0% 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
Goodwill impairment ........................ -- (36.1) -- -- --
Interest expense-- TCH ..................... -- (4.2) -- -- --
Goodwill amortization ...................... -- -- 6.2 7.8 3.0
Foreign income taxes ....................... 1.6 (0.4) 2.2 2.2 2.0
State and local income taxes, net of
federal income tax benefit ........... 2.6 (0.3) 2.2 2.2 1.6
Other ...................................... (0.2) 0.1 0.2 2.6 (3.7)
---- ---- ---- ---- ----
Effective tax rate ......................... 39.0% (5.9)% 45.8% 49.8% 37.9%
==== ==== ==== ==== ====
The provision for income taxes is comprised of the following ($ in
millions):
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------ ------------ ----------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Current federal income tax provision ....... $ -- $ -- $ -- $ -- $ 31.9
Deferred federal income tax provision ...... 71.9 276.9 113.6 63.7 211.5
----- ------ ------ ----- ------
Total federal income taxes ............... 71.9 276.9 113.6 63.7 243.4
Foreign income taxes ....................... 10.7 66.7 32.1 15.4 113.2
State and local income taxes ............... 9.4 30.4 11.7 5.7 24.6
----- ------ ------ ----- ------
Total provision for income taxes ......... $92.0 $374.0 $157.4 $84.8 $381.2
===== ====== ====== ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred federal and foreign income tax assets and liabilities
are presented below ($ in millions).
At December 31, At September 30, At September 20,
2002 2002 2001
--------------- ---------------- ---------------
(successor) (successor) (successor)
Assets:
Accrued liabilities and reserves ................ $ 316.2 $ 310.7 $ 282.8
Net operating loss carryforwards ................ 612.4 612.4 524.2
Purchase price adjustments ...................... 446.9 778.8 877.9
Provision for credit losses ..................... 200.0 206.2 95.5
Alternative minimum tax credits ................. 85.7 85.7 85.7
Other ........................................... 267.3 267.3 83.5
-------- -------- ---------
Total deferred tax assets ..................... 1,928.5 2,261.1 1,949.6
-------- -------- ---------
Liabilities:
Leasing transactions ............................ (1,737.4) (2,007.8) (1,679.2)
Securitization transactions ..................... (430.8) (419.7) (371.4)
Market discount income .......................... (36.2) (36.2) (35.2)
-------- -------- ---------
Total deferred tax liabilities ................ (2,204.4) (2,463.7) $(2,085.8)
-------- -------- ---------
Net deferred tax (liability) .................... $ (275.9) $ (202.6) $ (136.2)
======== ======== =========
73
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2002, the Company had net operating losses of
approximately $1,559.0 million, primarily related to US Federal and state
jurisdictions. Utilization of net operating losses, which begin to expire at
various times starting in 2010, may be subject to certain annual use limitations
under Section 382 of the Internal Revenue Code of 1986, as amended, and other
limitations under state laws.
Note 19 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
CIT has a number of defined benefit retirement plans covering certain of
its U.S. and non-U.S. employees, designed in accordance with conditions and
practices in the countries concerned. The retirement benefits under the defined
benefit plans are based on the employee's age, years of service and qualifying
compensation. Funded plans' assets consist of marketable securities, including
common stock and government and corporate debt securities. CIT's funding policy
is to make contributions to the extent such contributions 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 77% of the total Benefit Obligation at December 31, 2002. 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 the Internal Revenue
Code limitations.
The Plan was revised with a new "cash balance" formula which 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 this new
formula, the member's accrued benefits as of December 31, 2000 were converted to
a lump sum amount, and each year thereafter, the balance is to be 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 incentive and
commissions). These balances also receive annual interest credits, subject to
certain government limits. The interest credit was 5.76% and 7.00% for the plan
years ended December 31, 2002 and 2001, respectively. Upon termination after
five years of employment or retirement, the amount credited to a member is to be
paid in a lump sum or converted into an annuity.
CIT also provides certain health care and life insurance benefits to
eligible retired employees. Salaried participants generally become eligible for
retiree health care 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 plans are
funded on a pay as you go basis.
74
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 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 Plans and various
international plans.
Retirement Benefits
-----------------------------------------------------------
Three Months Year June 2 January 1
Ended Ended through through
December 31, September 30, September 30, June 1,
2002 2002 2001 2001
------------ ------------- ------------- ------------
(successor) (successor) (successor) (predecessor)
Change in Benefit Obligation
Benefit obligation at beginning of period .............. $ 214.4 $184.4 $185.2 $176.3
Service cost ........................................... 4.0 12.6 4.1 5.5
Interest cost .......................................... 3.5 13.0 4.3 5.1
Actuarial loss (gain) .................................. 6.2 15.6 (1.6) 3.4
Benefits paid .......................................... (1.1) (4.2) (1.2) (1.2)
Plan settlements ....................................... (2.3) (7.1) (6.8) (8.5)
Plan curtailments ...................................... -- (0.5) -- --
Plan amendments ........................................ -- -- -- 5.5
Other .................................................. 0.5 0.6 0.4 (0.9)
------- ------ ------ ------
Benefit obligation at end of period .................... $ 225.2 $214.4 $184.4 $185.2
======= ====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period ....... $ 119.6 $126.5 $145.4 $154.4
Actual return on plan assets ........................... 6.1 (12.7) (13.9) 1.0
Employer contributions ................................. 0.6 16.9 2.8 0.3
Plan settlements ....................................... (2.3) (7.1) (6.8) (8.5)
Benefits paid .......................................... (1.1) (4.2) (1.2) (1.2)
Other .................................................. 0.2 0.2 0.2 (0.6)
------- ------ ------ ------
Fair value of plan assets at end of period ............. $ 123.1 $119.6 $126.5 $145.4
======= ====== ====== ======
Reconciliation of Funded Status
Funded status .......................................... $(102.1) $(94.8) $(57.9) $(39.9)
Unrecognized net loss .................................. 56.5 54.7 15.1 13.2
Unrecognized net transition obligation ................. -- -- -- 11.2
Unrecognized prior service cost ........................ -- -- -- --
------- ------ ------ ------
Prepaid (accrued) benefit cost ......................... $ (45.6) $(40.1) $(42.8) $(15.5)
======= ====== ====== ======
Amounts Recognized in the Consolidated
Balance Sheets
Prepaid benefit cost ................................... $ -- $ -- $ -- $ 2.3
Accrued benefit liability .............................. (79.2) (75.0) (42.8) (24.0)
Intangible asset ....................................... -- -- -- 3.5
Accumulated other comprehensive income ................. 33.6 34.9 -- 2.7
------- ------ ------ ------
Net amount recognized .................................. $ (45.6) $(40.1) $(42.8) $(15.5)
======= ====== ====== ======
Weighted-average Assumptions
Discount rate .......................................... 6.45% 6.68% 7.40% 7.40%
Rate of compensation increase .......................... 4.24% 4.22% 4.70% 4.56%
Expected return on plan assets ......................... 7.92% 7.90% 9.93% 9.93%
Components of Net Periodic Benefit Cost
Service cost ........................................... $ 4.0 $ 12.6 $ 4.2 $ 5.5
Interest cost .......................................... 3.5 13.0 4.3 5.1
Expected return on plan assets ......................... (2.3) (11.9) (4.6) (5.7)
Amortization of losses (gains) ......................... 0.8 0.3 -- 0.4
Amortization of prior service cost ..................... -- -- -- 0.4
------- ------ ------ ------
Total net periodic expense ............................. $ 6.0 $ 14.0 $ 3.9 $ 5.7
======= ====== ====== ======
75
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $211.3 million, $180.3 million and $117.7 million,
respectively, at December 31, 2002. The projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets for U.S. pension
plans with accumulated benefit obligations in excess of plan assets were $202.0
million, $172.7 million and $114.6 million, respectively, at September 30, 2002.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $13.8 million, $12.7 million and $5.4
million, respectively, at December 31, 2002. The projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets for non-U.S.
pension plans with accumulated benefit obligations in excess of plan assets were
$12.4 million, $11.9 million and $5.0 million, respectively, at September 30,
2002.
Postretirement Benefits
-----------------------------------------------------------
Three Months Year June 2 January 1
Ended Ended through through
December 31, September 30, September 30, June 1,
2002 2002 2001 2001
------------ ------------- ------------- ------------
(successor) (successor) (successor) (predecessor)
Change in Benefit Obligation
Benefit obligation at beginning of period ............... $ 46.7 $ 39.5 $ 37.0 $ 36.3
Service cost ............................................ 0.3 1.2 0.4 0.5
Interest cost ........................................... 0.8 2.9 0.9 1.1
Actuarial loss .......................................... 0.8 5.3 2.1 0.1
Net benefits paid ....................................... (0.5) (2.2) (0.9) (1.0)
Plan amendments ......................................... -- -- -- --
------ ------ ------ ------
Benefit obligation at end of period ..................... $ 48.1 $ 46.7 $ 39.5 $ 37.0
====== ====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period ........ $ -- $ -- $ -- $ --
Net benefits paid ....................................... (0.5) (2.2) (0.9) (1.0)
Employer contributions .................................. 0.5 2.2 0.9 1.0
------ ------ ------ ------
Fair value of plan assets at end of period .............. $ -- $ -- $ -- $ --
====== ====== ====== ======
Reconciliation of Funded Status
Funded status ........................................... $(48.1) $(46.7) $(39.5) $(37.0)
Unrecognized net loss (gain) ............................ 6.0 5.2 -- (2.9)
Unrecognized net transition obligation .................. -- -- -- 11.4
------ ------ ------ ------
Prepaid (accrued) benefit cost .......................... $(42.1) $(41.5) $(39.5) $(28.5)
====== ====== ====== ======
Weighted-average Assumptions
Discount rate ........................................... 6.50% 6.75% 7.50% 7.50%
Rate of compensation increase ........................... 4.25% 4.25% 4.50% 4.50%
Components of Net Periodic Benefit Cost
Service cost ............................................ $ 0.3 $ 1.2 $ 0.4 $ 0.5
Interest cost ........................................... 0.8 2.9 0.9 1.1
Amortization of transition obligation ................... -- -- -- 0.4
Amortization of gains ................................... -- 0.1 -- --
------ ------ ------ ------
Total net periodic expense .............................. $ 1.1 $ 4.2 $ 1.3 $ 2.0
====== ====== ====== ======
For the period ended December 31, 2002, the assumed health care cost trend
rates decline for all retires to an ultimate level of 5.00% in 2008; for the
period ended September 30, 2002, 5.00% in 2008; for the period ended September
30, 2001, 5.00% in 2008; and for the period ended June 1, 2001, 5.25% in 2006.
76
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 effects ($ in
millions).
Postretirement Benefits
-----------------------------------------------------------
Three Months Year June 2 January 1
Ended Ended through through
December 31, September 30, September 30, June 1,
2002 2002 2001 2001
------------ ------------- ------------- ------------
(successor) (successor) (successor) (predecessor)
Effect of One-percentage Point
Increase on:
Period end benefit obligation .................... $ 2.3 $ 2.2 $ 1.2 $ 1.4
Total of service and interest
cost components ................................ $ -- $ 0.1 $ 0.1 $ 0.2
Effect of One-percentage Point
Decrease on:
Period end benefit obligation .................... $(2.2) $(2.1) $(1.1) $(1.3)
Total of service and interest
cost components ................................ $ -- $(0.1) $(0.1) $(0.1)
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 Savings Incentive Plan, which
qualifies under section 401(k) of the Internal Revenue Code and accounts for 84%
of CIT's total Savings Incentive Plan expense for three months ended December
31, 2002. CIT's expense is based on specific percentages of employee
contributions and plan administrative costs and aggregated $4.0 million, $14.5
million and $13.7 million for the three months ended December 31, 2002, the year
ended September 30, 2002 and the combined nine month period ended September 30,
2001, respectively.
Corporate Annual Bonus Plan
The CIT Group Bonus Plan ("Bonus Plan") is an annual bonus plan covering
certain executive officers and other employees. The amount of awards depend 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. For the three month period
ending December 31, 2002, no corporate bonuses were paid. A corporate bonus of
$20.1 million for the six month performance period from July 1, 2002 to December
31, 2002 was paid in early February 2003. For the fiscal year ended September
30, 2002, $25.1 million in corporate bonuses were paid related to the nine month
performance period ended June 30, 2002. Certain senior executive officers
received all of their corporate bonus for the nine month period ended June 30,
2002 in the form of restricted stock based on the closing price of CIT shares on
the date of approval. Such restricted shares vest over a one-year period. Prior
to the IPO, cash bonuses were also paid under a quarterly corporate bonus plan
that was discontinued.
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 26,000,000 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. Common stock issued under the ECP may be either authorized but unissued
shares, treasury shares or any combination thereof. All options granted have
10-year terms from the original grant dates and are issued with exercise prices
equal to the market value of the common stock on the date of grant. Options
granted in 2002 as part of the IPO have a one-to-four year vesting schedule
(subject to acceleration in the case of death or disability), depending on the
level of the recipient in the organization.
77
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Data for the stock option plans is summarized as follows.
Three Months Ended Year Ended
December 31, 2002 September 30, 2002
-------------------------------- -------------------------------
Weighted Weighted
Average Option Average Option
Shares Price Per Share Shares Price Per Share
------------ --------------- ---------- ----------------
Outstanding at beginning of period .......... 15,494,009 $33.15 -- --
Converted Tyco Options ...................... -- -- 4,808,585 $56.20
Granted -- IPO .............................. -- -- 10,823,631 $23.00
Granted -- other ............................ 27,500 $20.14 52,258 $22.20
Exercised ................................... -- -- -- --
Forfeited ................................... (186,254) $32.16 (190,465) $35.50
---------- ----------
Outstanding at end of period ................ 15,335,255 $33.13 15,494,009 $33.15
========== ==========
Options exercisable at end of period ........ 3,960,926 $59.19 4,020,790 $59.06
========== ========== ======
The 27,500 in options granted during the three months ended December 31,
2002 were for new hires and IPO grants for employees returning from leaves of
absence. In July, 2002, 10,823,631 IPO options were granted to all employees as
part of a broad-based incentive program. In addition, 4,808,585 CIT options were
granted in replacement of Tyco options forfeited upon the date of the CIT IPO.
The conversion formula was such that the intrinsic values of the CIT options and
the former Tyco options were converted at equal value as of the IPO. The CIT
options that were granted to replace Tyco options will become vested and
exercisable in accordance with the original grant schedules.
The weighted average fair value of new options granted during the three
month period ended December 31, 2002 was $4.74. The fair value of new options
granted was determined at the date of grant using the Black-Scholes
option-pricing model, which assumed the following. Due to limited Company
history, no forfeiture rate was used.
Option Expected Average Expected Risk Free
Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
-------- ----------------- -------------- ---------------- -------------------
July, 2002 (Tyco replacement) ....... 3.6-5.6 years 2.09% 32.3%-33.2% 3.43%-4.11%
July, 2002 (IPO) .................... 3-6 years 2.09% 32.3%-33.2% 3.24%-4.22%
July, 2002 (other) .................. 10 years 2.09% 27.8% 5.21%
August, 2002 (other) ................ 3-5 years 2.09% 32.5%-33.2% 2.47%-3.19%
August, 2002 (other) ................ 10 years 2.16% 27.8% 4.57%
November, 2002 (other) .............. 3-5 years 2.40% 32.4%-33.4% 2.26%-3.95%
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 2002.
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------- -------------- ----------- --------------
$ 19.25 - $ 33.30 10,654,783 9.5 $ 25.66 4,019 $ 23.00
$ 33.31 - $ 49.96 1,691,276 8.3 $ 37.02 967,711 $ 34.89
$ 49.97 - $ 74.95 2,763,934 5.8 $ 62.86 2,763,934 $ 62.86
$ 74.96 - $112.44 61,152 6.2 $ 88.37 61,152 $ 88.37
$112.45 - $168.67 164,110 5.1 $130.64 164,110 $130.64
---------- ---------
Totals 15,335,255 3,960,926
========== =========
78
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Restricted Stock
The holder of restricted stock generally has the rights of a stockholder
of CIT, including the right to vote and to receive cash dividends at the same
rate applicable to all other issues and outstanding shares. Restricted stock of
525,047 shares was outstanding December 31, 2002 and will vest according to the
following schedule: 68,462 June 2003, 208,745 August 2003 and 247,840 June 2004.
In August 2002, CIT issued 204,617 restricted shares in lieu of a cash
payment to certain senior executives in connection with the Bonus Plan. In
addition, two outside members of the Board of Directors, who elected to receive
shares in lieu of cash compensation for their retainer, were each granted 2,064
shares. All shares were issued at a fair market value of $22.20. These
restricted shares vest on the first anniversary of the grant (August 2003).
On July 2, 2002, CIT issued 316,302 restricted shares in replacement of
forfeited Tyco shares. The shares were issued at market value equivalent to the
canceled shares based on the closing price of Tyco shares on the day prior to
the IPO ($13.75 per share). All restricted shares under this grant vest 50% on
each of the second and third anniversary of the June 1, 2001 grant date, except
for 179,348 shares, which vest 100% on the third anniversary date of the June 1,
2001 grant date.
Accounting for Stock-Based Compensation Plans
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) 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. As required by SFAS
123, CIT has determined the pro forma information as if CIT had accounted for
stock options granted under the fair value method of SFAS 123. Had the
compensation cost of CIT's stock-based compensation plans been determined based
on the operational provisions of SFAS 123, CIT's net income and net income per
diluted share for the three months ended December 31, 2002 would have been
$135.6 million and $0.64 per share, compared to $141.3 million and $0.67 per
share, as reported. Net loss and net loss per share for the twelve months ended
September 30, 2002 would have been $(6,704.4) million and $(31.69) per share,
compared to $(6,698.7) million and $(31.66) per share, as reported.
79
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at December 31, 2002 ($ in
millions).
Years Ended December 31, Amount
- ------------------------ --------
2003 ......................................................... $ 68.1
2004 ......................................................... 57.2
2005 ......................................................... 48.3
2006 ......................................................... 37.5
2007 ......................................................... 32.3
Thereafter ................................................... 30.8
------
Total ...................................................... $274.2
======
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 $54.2 million due in the future under noncancellable
subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
Three Twelve June 2 January 1 Year
Months Ended Months Ended through through Ended
December 31, September 30, September 30, June 1, December 31,
2002 2002 2001 2001 2000
------------ ------------ ------------ ----------- ------------
(successor) (successor) (successor) (predecessor) (predecessor)
Premises ........................ $ 9.2 $38.4 $14.8 $19.0 $47.7
Equipment ....................... 2.1 8.4 3.0 3.7 11.1
Less sublease income ............ (1.8) (9.0) (2.7) (3.4) (5.7)
----- ----- ----- ----- -----
Total ......................... $ 9.5 $37.8 $15.1 $19.3 $53.1
===== ===== ===== ===== =====
CIT is currently in negotiations to purchase the Livingston facility
during 2003 at a price that results in expense levels that are comparable to the
current lease expenses.
Note 21 -- Legal Proceedings
In the ordinary course of business, there are various legal proceedings
pending against CIT. Management believes that the aggregate liabilities, if any,
arising from such actions will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Note 22 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including standby letters of
credit, which obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the Consolidated Balance Sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees. As of December 31, 2002, there was no
outstanding liability related to credit-related commitments or guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for their trade
receivables without actually purchasing the receivable. The trade terms are
generally sixty days or less. The receivable is not purchased unless the
customer in unable to pay. There are no liabilities recorded at December 31,
2002 for these guarantees.
80
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accompanying table summarizes the contractual amounts of
credit-related commitments ($ in millions).
At At
September 30, September 30,
At September 30, 2002 2002 2001
------------------------------------- ------------ -------------
Due to Expire
---------------------
Within After Total Total Total
One Year One Year Outstanding Outstanding Outstanding
-------- -------- ----------- ------------ ------------
Unused commitments to extend credit:
Financing and leasing assets .................... $3,254.3 $364.6 $3,618.9 $3,075.8 $2,386.8
Letters of credit and acceptances:
Standby letters of credit ....................... 517.9 1.9 519.8 469.0 196.5
Other letters of credit ......................... 583.3 -- 583.3 641.8 437.8
Acceptances ..................................... 5.6 -- 5.6 8.4 9.1
Guarantees ...................................... 745.8 -- 745.8 724.5 714.5
Venture capital funds ........................... -- 164.9 164.9 176.6 225.2
As of December 31, 2002, commitments to purchase commercial aircraft from
both Airbus Industrie and The Boeing Company totaled 79 units through 2007 at an
approximate value of $3,796.0 million as detailed below ($ in millions).
Calendar Year: Amount Number
- ------------- -------- ------
2003 ........................................ $ 828.0 19
2004 ........................................ 1,043.0 22
2005 ........................................ 1,248.0 27
2006 ........................................ 585.0 10
2007 ........................................ 92.0 1
-------- ---
Total ....................................... $3,796.0 79
======== ===
The order amounts are based on current appraised values in 2002 base
dollars and exclude CIT's options to purchase additional aircraft. Twelve of the
2003 units and two of the 2004 units have lessees in place.
Outstanding commitments to purchase equipment, other than the aircraft
detailed above, totaled $304.5 million at December 31, 2002. CIT is party to a
railcar sale-leaseback transaction under which it is obligated to pay a
remaining total of $515 million, approximately $28 million per year through 2010
and declining thereafter through 2024, which is more than offset by CIT's
re-lease of the assets, contingent on its ability to maintaining 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
26 -- 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,
which are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies. In addition, CIT has guaranteed, on behalf of certain
non-consolidated subsidiaries, $8 million of third party debt, which is not
reflected in the consolidated balance sheet at December 31, 2002.
Note 23 -- 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
81
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 22 -- "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.
82
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments at December 31, 2002, September 30,
2002 and September 30, 2001 are set forth below ($ in millions).
December 31, 2002 September 30, 2002 September 30, 2001
Asset/(Liability) Asset/(Liability) Asset/(Liability)
--------------------------- -------------------------- --------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
----------- ----------- ----------- ----------- ----------- -----------
(successor) (successor) (successor)
Finance receivables-loans(1) ......... $19,308.0 $19,465.1 $19,934.4 $20,087.1 $23,226.2 $23,683.9
Finance receivables
held for sale .................... 1,213.4 1,213.4 1,019.5 1,019.5 2,014.9 2,014.9
Other assets(2) ...................... 2,773.8 2,803.1 2,747.8 2,768.8 2,474.8 2,474.8
Commercial paper(3) .................. (4,974.6) (4,974.6) (4,654.2) (4,654.2) (8,869.2) (8,869.2)
Fixed-rate senior notes and
subordinated fixed-rate
notes(4) ......................... (19,952.5) (20,621.3) (18,718.8) (18,844.7) (17,471.4) (17,937.9)
Variable-rate bank credit
facilities(4) .................... (2,118.0) (2,118.0) (4,040.0) (4,040.0) -- --
Variable-rate senior notes(4) ........ (4,917.6) (4,893.1) (5,392.4) (5,361.5) (9,672.9) (9,658.5)
Credit balances of factoring
clients and other
liabilities(4)(5) ................ (4,586.9) (4,586.9) (4,682.1) (4,682.1) (4,024.4) (4,024.4)
Company-obligated mandatorily
redeemable preferred
securities of subsidiary
trust holding solely
debentures of the
Company(6) ....................... (257.2) (273.4) (257.7) (262.7) (260.0) (260.0)
Derivative financial
instruments:(7)
Interest rate swaps, net ............. (60.5) (60.5) (16.3) (16.3) (243.5) (243.5)
Cross-currency swaps, net ............ 145.8 145.8 142.2 142.2 93.0 93.0
Foreign exchange
forwards, net .................... (95.4) (95.4) (43.3) (43.3) 111.8 111.8
- --------------------------------------------------------------------------------
(1) The fair value of performing fixed-rate loans was estimated based upon a
present value discounted cash flow analysis, using interest rates that
were being offered at the end of the year for loans with similar terms to
borrowers of similar credit quality. Discount rates used in the present
value calculation range from 4.78% to 7.75% for December 31, 2002, 4.91%
to 7.52% for September 30, 2002 and 7.26% to 8.57% for September 30, 2001.
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 $7.6 billion at December 31, 2002, $8.3
billion at September 30, 2002, and $8.2 billion at September 30, 2001.
(2) Other assets subject to fair value disclosure include accrued interest
receivable, retained interests in securitizations and investment
securities. The carrying amount of accrued interest receivable
approximates fair value. Investment securities actively traded in a
secondary market were valued using quoted available market prices.
Investments not actively traded in a secondary market include our venture
capital portfolio, with a book value that reflects both realized losses
and unrealized losses that are other than temporary. The carrying value of
other assets not subject to fair value disclosure totaled $1,959.1 million
at December 31, 2002, $2,035.8 million at September 30, 2002, and $1,352.1
million at September 30, 2001.
(3) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(4) The carrying value of fixed-rate senior notes and subordinated fixed-rate
notes includes $270.6 million, $333.4 million and $257.5 million of
accrued interest at December 31, 2002, September 30, 2002, and September
30, 2001, respectively. The carrying value of variable-rate bank credit
facilities include $2.6 million of accrued interest at September 30, 2002
and was negligible at December 31, 2002. The variable-rate senior notes
include $10.7 million, $13.4 million and $58.3 million of accrued interest
at December 31, 2002, September 30, 2002 and September 30, 2001,
respectively. These amounts are excluded from the other liabilities
balances in this table. Fixed-rate notes were valued using a present value
discounted cash flow analysis with a discount rate approximating current
market rates for issuances by CIT of similar term debt at the end of the
year. Discount rates used in the present value calculation ranged from
1.65% to 6.02% at December 31, 2002; 2.23% to 7.61% at September 30, 2002;
and 2.59% to 5.89% at September 30, 2001.
(5) 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 $255.0
million, $207.5 million and $86.5 million at December 31, 2002, September
30, 2002, and September 30, 2001, respectively.
83
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Company-obligated mandatorily redeemable preferred capital securities of
subsidiary trust holding solely debentures of the Company 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) CIT enters into derivative financial instruments for hedging purposes
only. The estimated fair values are obtained from dealer quotes and
represent the net amount receivable or payable to terminate the agreement,
taking into account current market interest rates and counter-party credit
risk. See Note 11 -- "Derivative Financial Instruments" for notional
principal amounts associated with the instruments.
Note 24 -- Certain Relationships and Related Transactions
As of December 31, 2002, certain subsidiaries of Tyco sold receivables
totaling $350.0 million to CIT in a factoring transaction. At various times
during Tyco's ownership of CIT, CIT and Tyco engaged in similar factoring
transactions, the highest amount of which was $384.4 million.
CIT has entered into a number of equipment loans and leases with
affiliates of Tyco. Lease terms generally range from 3 to 12 years. Tyco has
guaranteed payment and performance obligations under each loan and lease
agreement. At December 31, 2002, the aggregate amount outstanding under these
equipment loans and leases was approximately $28.9 million.
On May 1, 2002, CIT assumed a third-party corporate aircraft lease
obligation from Tyco. The assumed lease obligation is approximately $16.0
million and extends for 134 months beginning on May 1, 2002. Prior to Tyco's
acquisition of the Company, CIT had an agreement to purchase this aircraft
directly from the previous owner.
On September 30, 2001, CIT sold at net book value certain international
subsidiaries to a non-U.S. subsidiary of Tyco. As a result of this sale, there
were receivables from affiliates totaling $1,440.9 million, representing the
debt investment in these subsidiaries. CIT charged arm's length, market-based
interest rates on these receivables, and recorded $19.0 million of interest
income, as an offset to interest expense, related to those notes for the quarter
ended December 31, 2001. A note receivable issued at the time of this
transaction of approximately $295 million was collected. Following Tyco's
announcement on January 22, 2002 that it planned to separate into four
independent, publicly traded companies, CIT repurchased at net book value the
international subsidiaries on February 11, 2002. In conjunction with this
repurchase, the receivables from affiliates of $1,588.1 million at December 31,
2001 were satisfied.
While CIT was an indirect subsidiary of Tyco, certain of CIT's expenses,
such as third party consulting and legal fees, were paid by Tyco and billed to
CIT. The payables have been satisfied as of December 31, 2002.
CIT is a partner with Dell Computer Corporation ("Dell") in Dell Financial
Services L.P. ("DFS"), a joint venture which offers Dell customers financing
services. The joint venture provides Dell with financing and leasing
capabilities that are complementary to its product offerings and provides CIT
with a steady source of new financings. CIT entered into this relationship in
November 1999 in conjunction with the Newcourt acquisition, and the current
agreement extends until October 2005. CIT regularly purchases finance
receivables from DFS at a premium, a portion of which are typically securitized
within 90 days of purchase from DFS. CIT has recourse back to DFS on delinquent
contracts. In accordance with the joint venture agreement, net income generated
by DFS is allocated 70% to Dell and 30% to CIT, after CIT has recovered any
cumulative losses. The DFS board of directors voting representation is evenly
split among CIT, Dell and an independent third party. Any losses generated by
DFS are allocated to CIT. DFS is not consolidated in CIT's financial statements
and is accounted for under the equity method. At December 31, 2002, financing
and leasing assets originated by DFS and purchased by CIT (included in the CIT
Consolidated Balance Sheet) were $1.7 billion and securitized assets were $1.7
billion. CIT's maximum exposure to loss with respect to activities of the joint
venture is approximately $280 million pretax at December 31, 2002, which is
comprised of the investment in and loans to the joint venture.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on delinquent receivables. CIT
entered into this relationship in connection with the November 1999 acquisition
of Newcourt. The agreement with Snap-on extends until January 2007. CIT and
Snap-on have 50% ownership interests, 50% board of directors
84
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
representation and share income and losses equally. The Snap-on joint venture is
accounted for under the equity method and is not consolidated in CIT's financial
statements. As of December 31, 2002, the related financing and leasing assets
and securitized assets were $1.0 billion and $0.1 billion, respectively. CIT's
maximum exposure to loss with respect to activities of the joint venture is
approximately $15 million pretax at December 31, 2002, which is comprised of the
investment in and loans to the joint venture.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce in an entity that is engaged in asset-based lending in
Canada. Both CIT and the Bank 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, 2002, CIT's maximum exposure to loss related to activities of the
joint venture is $76 million pretax, which equates to 50% of the entity's total
assets.
CIT has equity or variable return interests in various trusts,
partnerships, and limited liability corporations established in conjunction with
structured financing transactions of communication, equipment, power and
infrastructure projects. CIT's interests in certain of these entities were
acquired by CIT in conjunction with the Newcourt acquisition in November 1999,
with others entered into in the normal course of business. At December 31, 2002
in conjunction with these transactions, other assets included $41.3 million of
investments in non-consolidated entities that are accounted for under the equity
or cost methods. This investment is CIT's maximum exposure to loss with respect
to these interests as of December 31, 2002.
Note 25 -- 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 commonality of their products,
customers, distribution methods, operations and servicing, and the nature of
their regulatory environment.
Types of Products and Services
CIT has four reportable segments: Equipment Financing and Leasing,
Specialty Finance, Commercial Finance and Structured Finance. Equipment
Financing and Leasing, Specialty Finance and Structured Finance offer secured
lending and leasing products to midsize and larger companies across a variety of
industries, including aerospace, construction, rail, machine tool, business
aircraft, technology, manufacturing and transportation. The Commercial Finance
segment offers secured lending and receivables collection as well as other
financial products to small and midsize companies. These include secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing and factoring, debtor-in-possession and
turnaround financing. The Specialty Finance segment also offers home equity
products to consumers primarily through a network of brokers and correspondents.
The Specialty Finance segment resulted from the combination of the former Vendor
Technology Finance and Consumer segments in fiscal 2001, consistent with how
activities are reported internally to management since June 30, 2001. CIT has
reclassified comparative prior period information to reflect this change. Also
in fiscal 2001, CIT transferred financing and leasing assets from Equipment
Financing to Specialty Finance. Prior year segment balances have not been
restated to conform to the current year asset transfers as it is impractical to
do so.
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.
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated managed assets total at or for the three months
85
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 2002, the twelve months ended September 30, 2002, the
combined nine months ending September 30, 2001, and the year ended December 31,
2000. The results presented are based upon a fixed leverage ratio across the
segments and the allocation of most corporate expenses.
The Corporate segment included the following items in the year ended
September 30, 2002: (1) goodwill impairment of $6,511.7 million, (2) provision
for telecommunications of $200.0 million ($124.0 million after tax), (3)
Argentine provision of $135.0 million ($83.7 million after tax), (4) funding
costs of $85.9 million ($53.2 million after tax), and (5) unallocated corporate
operating items totaling $7.2 million pre-tax (income) or $3.9 million after
tax. For the other periods shown in the table, the corporate segment included
funding costs and unallocated corporate operating expenses. Corporate segment
funding costs increased significantly in 2002 from 2001, reflecting management's
decision to not allocate to the business units the incremental costs of
borrowing and liquidity relating to the disruption to our funding base and
credit downgrades. Such 2002 additional costs included higher debt quality
spreads, use of bank line versus commercial paper borrowings, incremental cost
of liquidity facilities, and excess cash held to enhance liquidity. Although
management chose to not allocate these incremental costs because they were
viewed as relating to temporary conditions, costs will be allocated beginning
January 1, 2003. For all periods shown, Corporate includes the results of the
venture capital business.
Equipment Corporate
Financing and Specialty Commercial Structured Total and
($ in millions) Leasing Finance Finance Finance Segments Other Consolidated
------------- --------- ---------- ---------- -------- ---------- ------------
Three Months Ended
December 31, 2002
(successor)
Operating margin ...................... $ 116.9 $ 216.8 $ 148.0 $ 29.8 $ 511.5 $ (33.4) $ 478.1
Income taxes .......................... 23.2 47.1 40.5 8.9 119.7 (27.7) 92.0
Net income ............................ 36.2 73.7 63.4 13.9 187.2 (45.9) 141.3
Total financing and leasing assets .... 14,200.9 10,316.8 8,041.6 3,315.4 35,874.7 -- 35,874.7
Total managed assets .................. 18,137.1 16,863.0 8,041.6 3,315.4 46,357.1 -- 46,357.1
Twelve Months Ended
September 30, 2002
(successor)
Operating margin ...................... $ 563.6 $ 932.1 $ 474.9 $ 132.8 $ 2,103.4 $ (296.9) $ 1,806.5
Income taxes .......................... 123.9 214.4 121.9 40.0 500.2 (126.2) 374.0
Net income ............................ 202.0 349.8 198.9 65.2 815.9 (7,514.6) (6,698.7)
Total financing and leasing assets .... 14,267.2 10,119.4 8,910.2 3,090.8 36,387.6 -- 36,387.6
Total managed assets .................. 18,651.3 16,970.0 8,910.2 3,090.8 47,622.3 -- 47,622.3
Nine Months Ended
September 30, 2001
(combined)
Operating margin ...................... $ 552.3 $ 649.4 $ 343.2 $ 36.0 $ 1,580.9 $ (22.0) $ 1,558.9
Income taxes .......................... 111.1 119.7 86.3 26.0 343.1 (100.9) 242.2
Net income ............................ 215.1 196.7 134.8 45.8 592.4 (329.1) 263.3
Total financing and leasing assets .... 16,109.1 12,791.1 8,657.1 3,171.9 40,729.2 -- 40,729.2
Total managed assets .................. 20,573.9 18,474.2 8,657.1 3,171.9 50,877.1 -- 50,877.1
Year Ended December 31, 2000
(predecessor)
Operating margin ...................... $ 897.7 $ 668.3 $ 449.8 $ 128.8 $ 2,144.6 $ (18.4) $ 2,126.2
Income taxes .......................... 147.3 139.9 109.2 35.9 432.3 (51.1) 381.2
Net income ............................ 287.8 222.2 161.8 65.4 737.2 (125.6) 611.6
Total financing and leasing assets .... 20,078.0 13,321.0 7,693.7 2,691.9 43,784.6 -- 43,784.6
Total managed assets .................. 26,465.2 18,050.1 7,693.7 2,691.9 54,900.9 -- 54,900.9
Finance income and other revenues derived from United States based
financing and leasing assets were $977.1 million, $4,284.8 million, $3,718.7
million and $5,215.6 million for the three months ended December 31, 2002, the
twelve months ended September 30, 2002, the nine months ending September 30,
2001, and the year ended December 31, 2000, respectively. Finance income and
other revenues derived from foreign based financing and leasing assets, were
$251.7 million, $990.3 million, $829.2 million and $944.8 million for the three
months ended December 31, 2002, the twelve months ended September 30, 2002, the
nine months ending September 30, 2001, and the year ended December 31, 2000,
respectively.
86
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 26 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented related financial statements or
other information for these subsidiaries on a stand-alone basis. ($ in
millions).
CONSOLIDATING BALANCE SHEET
December 31, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- --- ------------ ------------ -----
($ in millions)
ASSETS
Net finance receivables ............................ $ 633.5 $3,541.4 $ 935.7 $ 21,749.9 $ -- $26,860.5
Operating lease equipment, net ..................... -- 734.6 157.1 5,812.9 -- 6,704.6
Assets held for sale ............................... -- 159.1 62.8 991.5 -- 1,213.4
Cash and cash equivalents .......................... 1,310.9 231.1 293.7 200.9 -- 2,036.6
Other assets ....................................... 6,532.9 283.3 391.6 2,780.2 (4,870.7) 5,117.3
---------- -------- --------- ----------- --------- ---------
Total Assets ..................................... $ 8,477.3 $4,949.5 $ 1,840.9 $ 31,535.4 $(4,870.7) $41,932.4
========== ======== ========= =========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................................... $ 27,760.7 $1,815.7 $ 2,116.8 $ (11.9) $ -- $31,681.3
Credit balances of factoring clients ............... -- -- -- 2,270.0 -- 2,270.0
Other liabilities .................................. (24,154.1) 2,551.5 (1,396.1) 25,851.9 -- 2,853.2
---------- -------- --------- ----------- --------- ---------
Total Liabilities ................................ 3,606.6 4,367.2 720.7 28,110.0 -- 36,804.5
Preferred securities ............................... -- -- -- 257.2 -- 257.2
Equity ............................................. 4,870.7 582.3 1,120.2 3,168.2 (4,870.7) 4,870.7
---------- -------- --------- ----------- --------- ---------
Total Liabilities and
Stockholders' Equity ............................. $ 8,477.3 $4,949.5 $ 1,840.9 $ 31,535.4 $(4,870.7) $41,932.4
========== ======== ========= =========== ========= =========
87
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING BALANCE SHEET
September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- --------- ------------ ------------ ---------
($ in millions)
ASSETS
Net finance receivables ................. $ 864.3 $2,504.8 $ 893.5 $23,418.6 $ -- $27,681.2
Operating lease equipment, net .......... -- 797.2 185.3 5,584.9 -- 6,567.4
Assets held for sale .................... -- 156.7 47.7 815.1 -- 1,019.5
Cash and cash equivalents ............... 1,737.8 225.8 330.3 (19.5) -- 2,274.4
Other assets ............................ 4,855.0 444.4 452.5 4,173.9 (4,757.8) 5,168.0
---------- -------- --------- --------- --------- ---------
Total Assets .......................... $ 7,457.1 $4,128.9 $ 1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt .................................... $ 28,409.3 $1,858.0 $ 2,147.6 $ 41.1 $ -- $32,456.0
Credit balances of factoring clients .... -- -- -- 2,513.8 -- 2,513.8
Other liabilities ....................... (25,710.0) 1,785.1 (1,342.5) 27,992.6 -- 2,725.2
---------- -------- --------- --------- --------- ---------
Total Liabilities ..................... 2,699.3 3,643.1 805.1 30,547.5 -- 37,695.0
Preferred securities .................... -- -- -- 257.7 -- 257.7
Equity .................................. 4,757.8 485.8 1,104.2 3,167.8 (4,757.8) 4,757.8
---------- -------- --------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity .................. $ 7,457.1 $4,128.9 $ 1,909.3 $33,973.0 $(4,757.8) $42,710.5
========== ======== ========= ========= ========= =========
88
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF INCOME
Three Months Ended December 31, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ----------- -------
($ in millions)
Finance income .......................... $ 32.9 $224.5 $50.6 $663.7 $ -- $971.7
Interest expense ........................ 41.3 73.9 (1.1) 225.9 -- 340.0
------ ------ ----- ------ ------ ------
Net finance income ...................... (8.4) 150.6 51.7 437.8 -- 631.7
Depreciation on operating lease equipment -- 105.0 21.6 150.7 -- 277.3
------ ------ ----- ------ ------ ------
Net finance margin ...................... (8.4) 45.6 30.1 287.1 -- 354.4
Provision for credit losses ............. 18.8 8.9 2.4 103.3 -- 133.4
------ ------ ----- ------ ------ ------
Net finance margin, after provision for
credit losses ......................... (27.2) 36.7 27.7 183.8 -- 221.0
Equity in net income of subsidiaries .... 164.7 -- -- -- (164.7) --
Other revenue ........................... 4.1 46.1 23.5 183.4 -- 257.1
------ ------ ----- ------ ------ ------
Operating margin ........................ 141.6 82.8 51.2 367.2 (164.7) 478.1
Operating expenses ...................... 16.4 35.1 24.7 165.9 -- 242.1
------ ------ ----- ------ ------ ------
Income before provision for income taxes 125.2 47.7 26.5 201.3 (164.7) 236.0
(Benefit) provision for income taxes .... (16.1) 10.4 12.8 84.9 -- 92.0
Minority interest, after tax ............ -- -- -- (2.7) -- (2.7)
------ ------ ----- ------ ------ ------
Net income .............................. $141.3 $ 37.3 $13.7 $113.7 $(164.7) $141.3
====== ====== ===== ====== ======= ======
89
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF INCOME
Year Ended September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- --------- ------------ ------------ ---------
($ in millions)
Finance income ......................... $ 200.4 $1,050.1 $233.2 $2,859.1 $ -- $ 4,342.8
Interest expense ....................... (3.7) 401.3 4.8 1,036.9 -- 1,439.3
--------- -------- ------ -------- ----- ---------
Net finance income ..................... 204.1 648.8 228.4 1,822.2 -- 2,903.5
Depreciation on operating
lease equipment ...................... -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ -------- ----- ---------
Net finance margin ..................... 204.1 145.8 122.9 1,189.7 -- 1,662.5
Provision for credit losses ............ 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ -------- ----- ---------
Net finance margin, after provision
for credit losses .................... (104.2) (52.1) 98.0 932.5 -- 874.2
Equity in net income of subsidiaries ... (77.8) -- -- -- 77.8 --
Other revenue .......................... 20.7 124.0 93.0 694.6 -- 932.3
--------- -------- ------ -------- ----- ---------
Operating margin ....................... (161.3) 71.9 191.0 1,627.1 77.8 1,806.5
Operating expenses ..................... 6,588.0 188.7 65.9 1,278.1 -- 8,120.7
--------- -------- ------ -------- ----- ---------
(Loss) income before provision for
income taxes ......................... (6,749.3) (116.8) 125.1 349.0 77.8 (6,314.2)
(Benefit) provision for income taxes ... (50.6) (60.0) 54.4 430.2 -- 374.0
Minority interest, after tax ........... -- -- -- (10.5) -- (10.5)
--------- -------- ------ -------- ----- ---------
Net (loss) income ...................... $(6,698.7) $ (56.8) $ 70.7 $ (91.7) $77.8 $(6,698.7)
========= ======== ====== ======== ===== =========
90
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 2001
(combined)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- --------- ----------- ------------ --------
($ in millions)
Finance income ................................. $226.4 $998.0 $219.1 $2,531.8 $ -- $3,975.3
Interest expense ............................... 178.9 305.4 23.1 1,112.4 -- 1,619.8
------ ------ ----- ------- ------ --------
Net finance income ............................. 47.5 692.6 196.0 1,419.4 -- 2,355.5
Depreciation on operating lease equipment ...... -- 460.5 103.4 472.8 -- 1,036.7
------ ------ ----- ------- ------ --------
Net finance margin ............................. 47.5 232.1 92.6 946.6 -- 1,318.8
Provision for credit losses .................... 54.7 88.9 15.1 173.8 -- 332.5
------ ------ ----- ------- ------ --------
Net finance margin, after provision for
credit losses ................................ (7.2) 143.2 77.5 772.8 -- 986.3
Equity in net income of subsidiaries ........... 527.8 -- -- -- (527.8) --
Other revenue .................................. (80.6) 67.6 68.1 517.5 -- 572.6
------ ------ ----- ------- ------ --------
Operating margin ............................... 440.0 210.8 145.6 1,290.3 (527.8) 1,558.9
Operating expenses ............................. 216.9 160.0 78.4 589.6 -- 1,044.9
------ ------ ----- ------- ------ --------
Income before provision for income taxes ....... 223.1 50.8 67.2 700.7 (527.8) 514.0
(Benefit) provision for income taxes ........... (40.2) 19.3 25.5 237.6 -- 242.2
Minority interest, after tax ................... -- -- -- (8.5) -- (8.5)
------ ------ ----- ------- ------ --------
Net income ..................................... $263.3 $ 31.5 $ 41.7 $ 454.6 $(527.8) $ 263.3
====== ====== ====== ======== ======= ========
91
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended December 31, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc Corporation LLC Subsidiaries Eliminations Total
---------- ----------- --------- ------------ ------------ ---------
($ in millions)
Cash Flows From Operating Activities:
Net cash flows (used for)
provided by operations ...................... $(1,783.5) $ 123.3 $ 52.9 $ 2,195.1 $ -- $ 587.8
--------- --------- ------ --------- --------- --------
Cash Flows From Investing Activities:
Net increase (decrease) in financing
and leasing assets .......................... 212.8 (1,062.8) (43.6) 882.8 -- (10.8)
Decrease in intercompany loans
and investments ............................. 1,792.4 -- -- -- (1,792.4) --
Other ......................................... -- -- -- (4.3) -- (4.3)
--------- --------- ------ --------- --------- --------
Net cash flows provided by
(used for) investing activities ............. 2,005.2 (1,062.8) (43.6) 878.5 (1,792.4) (15.1)
--------- --------- ------ --------- --------- --------
Cash Flows From Financing Activities:
Net decrease in debt .......................... (648.6) (42.3) (30.8) (88.0) -- (809.7)
Intercompany financing ........................ -- 987.1 (15.1) (2,764.4) 1,792.4 --
Cash dividends paid ........................... -- -- -- (25.4) -- (25.4)
--------- --------- ------ --------- --------- --------
Net cash flows (used for) provided by
financing activities ........................ (648.6) 944.8 (45.9) (2,877.8) 1,792.4 (835.1)
--------- --------- ------ --------- --------- --------
Net (decrease) increase in cash and
cash equivalents ............................ (426.9) 5.3 (36.6) 195.8 -- (262.4)
Exchange rate impact on cash .................. -- -- -- 24.6 -- 24.6
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 $ -- $2,036.6
========= ========= ====== ========= ========= ========
92
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended September 30, 2002
(successor)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ ---------
($ in millions)
Cash Flows From Operating Activities:
Net cash flows provided by
(used for) operations ..................... $ 401.0 $ (283.7) $(693.8) $ 1,936.1 $ -- $ 1,359.6
--------- --------- ------- --------- ------- ---------
Cash Flows From Investing Activities:
Net increase in financing
and leasing assets ........................ 662.0 211.9 721.3 779.0 -- 2,374.2
Decrease in intercompany loans and
investments ............................... 865.4 -- -- -- (865.4) --
Other ........................................ -- -- -- (52.5) -- (52.5)
--------- --------- ------- --------- ------- ---------
Net cash flows provided by
investing activities ...................... 1,527.4 211.9 721.3 726.5 (865.4) 2,321.7
--------- --------- ------- --------- ------- ---------
Cash Flows From Financing Activities:
Net (decrease) increase in debt .............. (1,808.7) (1,021.2) 175.3 (774.7) -- (3,429.3)
Intercompany financing ....................... -- 1,211.8 123.3 (2,200.5) 865.4 --
Capital contributions from Tyco .............. 923.5 -- -- -- -- 923.5
Cash dividends paid .......................... -- -- -- -- -- --
Issuance of common stock ..................... 254.6 -- -- -- -- 254.6
--------- --------- ------- --------- ------- ---------
Net cash flows (used for) provided by
financing activities ...................... (630.6) 190.6 298.6 (2,975.2) 865.4 (2,251.2)
--------- --------- ------- --------- ------- ---------
Net increase (decrease) in cash and
cash equivalents .......................... 1,297.8 118.8 326.1 (312.6) -- 1,430.1
Exchange rate impact on cash ................. -- -- -- 36.3 -- 36.3
Cash and cash equivalents,
beginning of period ....................... 440.0 107.0 4.2 256.8 -- 808.0
--------- --------- ------- --------- ------- ---------
Cash and cash equivalents, end of period ..... $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
========= ========= ======= ========= ======= =========
93
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2001
(combined)
CIT
CIT Capita Holdings Other
Group Inc. Corporation LLC Subsidiaries Eliminations Total
---------- ----------- -------- ------------ ------------ ---------
($ in millions)
Cash Flows From Operating Activities:
Net cash flows (used for) provided by
operations .............................. $ (48.9) $ 275.1 $ 128.4 $ 672.5 $ -- $ 1,027.1
--------- --------- ------- -------- --------- ---------
Cash Flows From Investing Activities:
Net increase (decrease) in financing and
leasing assets .......................... 335.0 440.4 (36.7) 275.5 -- 1,014.2
Decrease in intercompany loans and
investments ............................. (2,228.2) -- -- -- 2,228.2 --
Other ...................................... -- -- -- (21.2) -- (21.2)
--------- --------- ------- -------- --------- ---------
Net cash flows (used for) provided by
investing activities .................... (1,893.2) 440.4 (36.7) 254.3 2,228.2 993.0
--------- --------- ------- -------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ............ 586.6 (2,872.5) (247.4) (213.3) -- (2,746.6)
Intercompany financing ..................... -- 2,134.7 240.6 (147.1) (2,228.2) --
Capital contributions from Tyco ............ 675.0 -- -- 70.5 -- 745.5
Cash dividends paid ........................ -- -- -- (52.9) -- (52.9)
Issuance of treasury stock ................. -- -- -- 27.6 -- 27.6
--------- --------- ------- -------- --------- ---------
Net cash flows provided by (used for)
financing activities .................... 1,261.6 (737.8) (6.8) (315.2) (2,228.2) (2,026.4)
--------- --------- ------- -------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ........................ (680.5) (22.3) 84.9 611.6 -- (6.3)
Exchange rate impact on cash ............... -- -- -- 2.2 -- 2.2
Cash and cash equivalents, beginning
of period ............................... 1,120.5 129.3 (80.7) (357.0) -- 812.1
--------- --------- ------- -------- --------- ---------
Cash and cash equivalents, end of period ... $ 440.0 $ 107.0 $ 4.2 $ 256.8 $ -- $ 808.0
========= ========= ======= ======== ========= =========
94
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 27 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below. The second
quarter of 2001 includes predecessor operations through June 1, 2001 and
successor operations for June 2 through June 30, 2001 ($ in millions, except per
share data).
Year Ended September 30, 2002
---------------------------------------------
Three Months
Ended
December 31, First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
------------ ------- ------- ------- -------
Net finance margin .......................................... $354.4 $487.5 $ 448.2 $ 356.0 $370.8
Provision for credit losses ................................. 133.4 112.9 195.0 357.7 122.7
Other revenue ............................................... 257.1 245.1 232.1 246.1 209.0
Salaries and general operating expenses ..................... 242.1 238.7 234.2 237.9 235.6
Interest expense -- TCH ..................................... -- 76.3 305.0 281.3 --
Goodwill impairment ......................................... -- -- 4,512.7 1,999.0 --
Provision for income taxes .................................. 92.0 118.2 50.4 121.3 84.1
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax .............. 2.7 2.4 2.7 2.7 2.7
Net income (loss) ........................................... 141.3 $184.1 $(4,619.7) $(2,397.8) $134.7
Net income (loss) per diluted share (1) ..................... $ 0.67 $ 0.87 $ (21.84) $ (11.33) $ 0.64
Nine Months Ended September 30, 2001
----------------------------------------
First Second Third
Quarter Quarter Quarter
------------ --------- ----------
(predecessor) (combined) (successor)
Net finance margin ................................................ $404.7 $429.4 $484.7
Provision for credit losses ....................................... 68.3 166.7 97.5
Other revenue ..................................................... 211.6 121.8 239.2
Salaries and general operating expenses ........................... 263.5 267.9 263.1
Goodwill amortization ............................................. 22.5 29.7 45.4
Interest expense -- TCH ........................................... -- 25.0 73.8
Acquisition-related costs ......................................... -- 54.0 --
Provision for income taxes ........................................ 99.0 30.5 112.7
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ........................... 2.9 2.8 2.8
Net income (loss) ................................................. $160.1 $(25.4) $128.6
Net income (loss) per diluted share (1) ........................... $ 0.75 $(0.12) $ 0.61
- ----------
(1) Per share calculations assume that common shares outstanding as a result
of the July 2002 IPO (211.7 million) were outstanding for all periods
preceding the quarter ended September 30, 2002.
95
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Prior to Tyco's acquisition of CIT, the independent auditor for CIT Group
Inc. (formerly The CIT Group, Inc.) was KPMG LLP. The independent accountants
for Tyco were PricewaterhouseCoopers LLP ("PwC"). On June 1, 2001, in connection
with the acquisition, Tyco and CIT jointly determined that CIT would terminate
its audit engagement with KPMG LLP and enter into an audit engagement with PwC,
in order to facilitate the auditing of Tyco's Consolidated Financial Statements.
CIT's Board of Directors approved the appointment of PwC as the independent
accountants for CIT.
In connection with the audit of the year ended December 31, 2000, and the
subsequent interim period through June 1, 2001, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit report of KPMG LLP on the Consolidated Financial Statements of
CIT Group Inc. and subsidiaries as of and for the year ended December 31, 2000,
did not contain any adverse opinion or disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
96
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors" and "Election of
Directors -- Executive Officers" in our Proxy Statement for our 2003 annual
meeting of stockholders.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Compensation of Directors and Executive
Officers" in our Proxy Statement for our 2003 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Principal Shareholders" in our Proxy
Statement for our 2003 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement for our 2003 annual meeting of
stockholders.
Item 14. Controls and Procedures.
Within 90 days before filing this report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
ensure that the information that the Company must disclose in its reports filed
under the Securities Exchange Act is communicated and processed in a timely
manner. Albert R. Gamper Jr. Chairman, President and Chief Executive Officer,
and Joseph M. Leone, Executive Vice President and Chief Financial Officer,
participated in this evaluation.
Based on this evaluation, Messrs. Gamper and Leone concluded that, as of
the date of their evaluation, the Company's disclosure controls and procedures
were effective, except as noted in the next paragraph. Since the date of the
evaluation described above, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls.
During our fiscal 2002 financial reporting process, management, in
consultation with the Company's independent accountants, identified a deficiency
in our tax financial reporting process relating to the calculation of deferred
tax assets and liabilities which constitutes a "Reportable Condition" under
standards established by the American Institute of Certified Public Accountants.
Management believes that this matter has not had any material impact on our
financial statements. Management has established a project plan and has
completed the initial design of processes and controls to address this
deficiency. Development is ongoing and implementation/completion of this project
is anticipated in 2003.
97
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report (see Item 8):
1. The following financial statements of CIT and Subsidiaries:
Reports of Independent Accountants
Consolidated Balance Sheets-December 31, 2002, September 30,
2001, and December 31, 2000.
Consolidated Statements of Income for the three months ended
December 31, 2002, for the fiscal year ended September 30,
2002, for the period from June 2 through September 30, 2001,
for the period January 1 through June 1, 2001 and for the year
ended December 31, 2000.
Consolidated Statements of Shareholders' Equity for the three
months ended December 31, 2002, for the fiscal year ended
September 30, 2002, for the period from June 2 through
September 30, 2001, for the period January 1 through June 1,
2001 and for the year ended December 31, 2000.
Consolidated Statements of Cash Flows for the three months
ended December 31, 2002, for the fiscal year ended September
30, 2002, for the period from June 2 through September 30,
2001, for the period January 1 through June 1, 2001 and for
the year ended December 31, 2000.
Notes to Consolidated Financial Statements
2. All schedules are omitted because they are not applicable or
because the required information appears in the Consolidated
Financial Statements or the notes thereto.
(b) Current Report on Form 8-K, dated October 17, 2002, reporting that CIT
had entered into a new 364 bank credit facility and amended its outstanding 5
year bank credit facilities.
Current Report on Form 8-K, dated October 28, 2002, reporting
that reporting that CIT's Board of Directors declared a
dividend of $.12 per share.
Current Report on Form 8-K, dated October 29, 2002, reporting
CIT's financial results as of an for the quarter and twelve
month periods ended September 30, 2002.
Current Report on Form 8-K, dated October 31, 2002, attaching
as an exhibit certain historical quarterly financial
information.
Current Report on Form 8-K, dated November 1, 2002, reporting
that CIT entered into a Selling Agent Agreement in connection
with the establishment of a program for the offering of up to
$2,000,000,000 aggregate principal amount of CIT InterNotes.
Current Report on Form 8-K, dated November 5, 2002, reporting
that CIT's Board of Directors approved the change of its
fiscal year-end from September 30 to December 31.
Current Report on Form 8-K, dated December 9, 2002, reporting
the financing relationship of CIT and its subsidiaries with
UAL Corp. and its subsidiary, United Airlines, Inc.
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of July 2, 2002,
by and between Tyco Capital Holding, Inc., a Nevada
corporation, and CIT Group Inc., a Nevada corporation
(incorporated by reference to Exhibit 2.1 to Form 8-K
filed by CIT on July 10, 2002).
2.2 Agreement and Plan of Merger, dated as of July 2, 2002,
by and between CIT Group Inc. (Del), a Delaware
corporation, and Tyco Capital Holding, Inc., a Nevada
corporation (incorporated by reference to Exhibit 2.2 to
Form 8-K filed by CIT on July 10, 2002).
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Form 8-K
filed by CIT on July 10, 2002).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company (incorporated by reference
to Exhibit 3.2 to Form 8-K filed by CIT on July 10,
2002).
98
3.3 Certificate of Ownership and Merger merging Tyco Capital
Holding, Inc. and CIT Group Inc. (Del) (incorporated by
reference to Exhibit 3.3 to Form 8-K filed by CIT on
July 10, 2002).
3.4 By-laws of the Company (incorporated by reference to
Exhibit 3.4 to Form 8-K filed by CIT on July 10, 2002).
4.1 Form of Certificate of Common Stock of CIT (incorporated
by reference to Exhibit 4.1 to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 26, 2002).
4.2 Indenture dated as of September 24, 1998 by and between
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and The Bank of New York, as trustee, for
the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to an Exhibit to
Form S-3 filed by CIT on September 24, 1998).
4.3 First Supplemental Indenture dated as of June 1, 2001
among CIT (formerly known as Tyco Capital Corporation
and Tyco Acquisition Corp. XX (NV) and successor to The
CIT Group, Inc.), CIT Holdings (NV) Inc. and The Bank of
New York, as trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by
reference to Exhibit 4.2g to Amendment No. 1 to Form S-3
filed by CIT on August 8, 2001).
4.4 Second Supplemental Indenture dated as of February 14,
2002 to an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of June 1, 2001, by and between CIT Group Inc.
(formerly know as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and The Bank of New York, as trustee, for
the issuance of unsecured and unsubordinated debt
securities (Incorporated by reference to Exhibit 4.1 to
Form 8-K filed by CIT on February 22, 2002).
4.5 Indenture dated as of September 24, 1998 by and between
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and Bank One Trust Company, N.A., as
trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by
reference to an Exhibit to Form S-3 filed by CIT on
September 24, 1998).
4.6 First Supplemental Indenture dated as of May 9, 2001
among CIT (formerly known as Tyco Capital Corporation
and Tyco Acquisition Corp. XX (NV) and successor to The
CIT Group, Inc.), Bank One Trust Company, N.A., as
trustee, and Bank One NA, London Branch, as London
Paying Agent and London Calculation Agent (Incorporated
by reference to Exhibit 4.2d to Post-Effective Amendment
No. 1 to Form S-3 filed by CIT on May 11, 2001).
4.7 Second Supplemental Indenture dated as of June 1, 2001
among CIT (formerly known as Tyco Capital Corporation
and Tyco Acquisition Corp. XX (NV) and successor to The
CIT Group, Inc.), CIT Holdings (NV) Inc. and Bank One
Trust Company, N.A., as trustee (Incorporated by
reference to Exhibit 4.2e to Form S-3 filed by CIT on
June 7, 2001).
4.8 Third Supplemental Indenture dated as of February 14,
2002 to an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of May 9, 2001 and the Second Supplemental Indenture
dated as of June 1, 2001, by and between CIT Group Inc.
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and Bank One Trust Company, N.A., as
trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by
reference to Exhibit 4.2 to Form 8-K filed by CIT on
February 22, 2002).
4.9 Fourth Supplemental Indenture dated as of July 2, 2002
to an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of May 9, 2001 and the Second Supplemental Indenture
dated as of June 1, 2001 and the Third Supplemental
Indenture dated as of February 14, 2002, by and between
CIT Group Inc. (formerly known as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and Bank One Trust
Company, N.A., as trustee, for the issuance of unsecured
and unsubordinated debt securities (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed by CIT on
July 10, 2002).
99
4.10 Indenture dated as of September 24, 1998 by and between
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and The Bank of New York, as trustee, for
the issuance of unsecured and senior subordinated debt
securities (Incorporated by reference to an Exhibit to
Form S-3 filed by CIT September 24, 1998).
4.11 First Supplemental Indenture dated as of June 1, 2001
among CIT (formerly known as Tyco Capital Corporation
and Tyco Acquisition Corp. XX (NV) and successor to The
CIT Group, Inc.), CIT Holdings (NV) Inc. and The Bank of
New York, as trustee, for the issuance of unsecured and
senior subordinated debt securities (Incorporated by
reference to Exhibit 4.2f to Form S-3 filed by CIT on
June 7, 2001).
4.12 Second Supplemental Indenture dated as of February 14,
2002 to an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of June 1, 2001, by and between CIT Group Inc.
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and The Bank of New York, as trustee, for
the issuance of unsecured senior subordinated debt
securities (Incorporated by reference to Exhibit 4.3 to
Form 8-K filed by CIT on February 22, 2002).
4.13 Third Supplemental Indenture dated as of July 2, 2002 to
an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of June 1, 2001 and the Second Supplemental Indenture
dated as of February 14, 2002, by and between CIT Group
Inc. (formerly known as Tyco Capital Corporation and
Tyco Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and The Bank of New York, as trustee, for
the issuance of unsecured senior subordinated debt
securities (Incorporated by reference to Exhibit 4.2 to
Form 8-K filed by CIT on July 10, 2002).
4.14 Indenture dated as of September 24, 1998 by and between
CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and BNY Midwestern Trust Company (as
successor trustee to Harris Trust and Savings Bank) as
trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by
reference to an Exhibit to Form S-3 filed by CIT on
September 24, 1998).
4.15 First Supplemental Indenture dated as of June 1, 2001
among CIT (formerly known as Tyco Capital Corporation
and Tyco Acquisition Corp. XX (NV) and successor to The
CIT Group, Inc.), CIT Holdings (NV) Inc. and BNY
Midwestern Trust Company (as successor trustee to Harris
Trust and Savings Bank) as trustee (Incorporated by
reference to Exhibit 4.2e to Form S-3 filed by CIT on
June 7, 2001).
4.16 Second Supplemental Indenture dated as of February 14,
2002 to an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of May 9, 2001 and the Second Supplemental Indenture
dated as of June 1, 2001, by and between CIT Group Inc.
(formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT
Group, Inc.) and BNY Midwestern Trust Company (as
successor trustee to Harris Trust and Savings Bank) as
trustee, for the issuance of unsecured and
unsubordinated debt securities (Incorporated by
reference to Exhibit 4.2 to Form 8-K filed by CIT on
February 22, 2002).
4.17 Third Supplemental Indenture dated as of July 2, 2002 to
an Indenture dated as of September 24, 1998, as
supplemented by the First Supplemental Indenture dated
as of May 9, 2001 and the Second Supplemental Indenture
dated as of June 1, 2001 and the Third Supplemental
Indenture dated as of February 14, 2002, by and between
CIT Group Inc. (formerly known as Tyco Capital
Corporation and Tyco Acquisition Corp. XX (NV) and
successor to The CIT Group, Inc.) and BNY Midwestern
Trust Company (as successor trustee to Harris Trust and
Savings Bank) as trustee, for the issuance of unsecured
and unsubordinated debt securities (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed by CIT on
July 10, 2002).
100
4.18 Indenture dated as of August 26, 2002 by and among CIT
Group Inc., Bank One Trust Company, N.A., as Trustee and
Bank One N.A., London Branch, as London Paying Agent and
London Calculation Agent, for the issuance of unsecured
and unsubordinated debt securities.
4.19 Certain instruments defining the rights of holders of
CIT's long-term debt, none of which authorize a total
amount of indebtedness in excess of 10% of the total
amounts outstanding of CIT and its subsidiaries on a
consolidated basis have not been filed as exhibits. CIT
agrees to furnish a copy of these agreements to the
Commission upon request.
10.1 Agreement dated as of June 1, 2001 between CIT Holdings
(NV) Inc., a wholly-owned subsidiary of Tyco
International Ltd., and CIT (formerly known as Tyco
Capital Corporation and Tyco Acquisition Corp. XX (NV)
and successor to The CIT Group, Inc.), a Nevada
corporation, regarding transactions between CIT Holdings
and CIT (incorporated by reference to Exhibit 10.1 to
Amendment No. 3 to the Registration Statement on Form
S-3 filed June 7, 2002).
10.2 Form of Separation Agreement by and between Tyco
International Ltd. and CIT (incorporated by reference to
Exhibit 10.2 to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
10.3 Form of Financial Services Cooperation Agreement by and
between Tyco International Ltd. and CIT (incorporated by
reference to Exhibit [10.3] to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 12, 2002).
10.4 364-Day Credit Agreement, dated as of October 15, 2002,
among CIT Group Inc., the banks and other financial
institutions from time to time parties thereto, J.P.
Morgan Securities, Inc., as sole lead arranger and
bookrunner, JP Morgan Chase Bank, as administrative
agent, and Barclays Bank PLC, Bank of America, N.A. and
Citibank, as syndication agents (Incorporated by
reference to Exhibit 99.2 to Form 8-K filed by CIT on
October 24, 2002).
10.5 5-Year Credit Agreement, dated as of March 28, 2000,
among CIT Group Inc. (formerly known as Tyco Capital
Corporation and The CIT Group, Inc.), the banks party
thereto, J.P. Morgan Securities Inc. (formerly known as
Chase Securities Inc.), as Arranger, Barclays Bank PLC,
Bank of America, N.A., Citibank, N.A. and The Dai-Ichi
Kangyo Bank, Limited, as Syndication Agents, and JP
Morgan Chase Bank (formerly known as The Chase Manhattan
Bank), as Administrative Agent ("5 Year Credit
Agreement") (Incorporated by reference to Exhibit 10.6
to Form 10-Q filed by CIT on February 14, 2002).
10.6 First Amendment to 5 Year Credit Agreement, dated as of
October 7, 2002 (Incorporated by reference to Exhibit
99.3 to Form 8-K filed by CIT on October 24, 2002).
10.7 Assumption Agreement, dated as of June 1, 2001, to 5
Year Credit Agreement (Incorporated by reference to
Exhibit 10.7 to Form 10-Q filed by CIT on February 14,
2002).
10.8 Additional Bank Agreement, dated as of August 1, 2000,
to 5 Year Credit Agreement (Incorporated by reference to
Exhibit 10.8 to Form 10-Q filed by CIT on February 14,
2002).
10.9 $765,000,000 Credit Agreement, dated as of April 13,
1998, among Capita Corporation (formerly known as AT&T
Capital Corporation), as Borrower, CIT Group Inc.
(formerly known as Tyco Capital Corporation and The CIT
Group, Inc.), as Guarantor, the banks party thereto (the
"Banks"), JP Morgan Chase Bank (formerly known as Morgan
Guaranty Trust Company of New York), as Administrative
Agent, Canadian Imperial Bank of Commerce, as
Syndication Agent, JP Morgan Chase Bank (formerly known
as The Chase Manhattan Bank) and Deutsche Bank AG, New
York Branch, as Co-Documentation Agents, and J.P. Morgan
Securities Inc. and CIBC Oppenheimer Corp., as Arrangers
("Capita Corporation Credit Agreement") (Incorporated by
reference to Exhibit 10.9 to Form 10-Q filed by CIT on
February 14, 2002).
10.10 Amendment No. 1 to Capita Corporation Credit Agreement,
dated as of April 9, 1999 (Incorporated by reference to
Exhibit 10.10 to Form 10-Q filed by CIT on February 14,
2002).
101
10.11 Amendment No. 2 to Capita Corporation Credit Agreement,
dated as of November 15, 1999 (Incorporated by reference
to Exhibit 10.11 to Form 10-Q filed by CIT on February
14, 2002).
10.12 Amendment No. 3 to Capita Corporation Credit Agreement,
dated as of May 30, 2001 (Incorporated by reference to
Exhibit 10.12 to Form 10-Q filed by CIT on February 14,
2002).
10.13 Fourth Amendment to Capita Corporation Credit Agreement,
dated as of October 7, 2002 (Incorporated by reference
to Exhibit 99.4 to Form 8-K filed by CIT on October 24,
2002).
10.14 Assumption Agreement, dated as of June 1, 2001, to
Capita Corporation Credit Agreement (Incorporated by
reference to Exhibit 10.13 to Form 10-Q filed by CIT on
February 14, 2002).
10.15 Guaranty by CIT Group Inc., dated as of November 15,
1999, of Capita Corporation Credit Agreement
(Incorporated by reference to Exhibit 10.14 to Form 10-Q
filed by CIT on February 14, 2002).
10.16 364-Day Credit Agreement, dated as of March 27, 2001,
among CIT Financial Ltd., the banks party thereto, as
lenders, Royal Bank of Canada, as Administrative Agent,
and Canadian Imperial Bank of Commerce and The Chase
Manhattan Bank of Canada, as Syndication Agents
("Canadian 364-Day Credit Agreement") (Incorporated by
reference to Exhibit 10.15 to Form 10-Q filed by CIT on
February 14, 2002).
10.17 Guaranty of CIT Group Inc., dated as of March 27, 2001,
of Canadian 364-Day Credit Agreement (Incorporated by
reference to Exhibit 10.16 to Form 10-Q filed by CIT on
February 14, 2002).
10.18 Employment Agreement for Albert R. Gamper, Jr., dated as
of January 1, 2003.
10.19 Employment Agreement for Joseph M. Leone dated as of
January 1, 2003.
10.20 Employment Agreement for Thomas B. Hallman dated as of
January 1, 2003.
10.21 Employment Agreement for Lawrence A. Marsiello dated as
of January 1, 2003.
10.22 Employment Agreement for Nikita Zdanow dated as of
January 1, 2003.
10.23 Executive Severance Plan (incorporated by reference to
Exhibit [10.24] to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
10.24 Long-Term Equity Compensation Plan (incorporated by
reference to Exhibit [10.25] to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 26, 2002).
10.25 Form of Indemnification Agreement (incorporated by
reference to Exhibit [10.26] to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 26, 2002).
10.26 Form of Tax Agreement by and between Tyco International
Ltd. and CIT (incorporated by reference to Exhibit
[10.27] to Amendment No. 3 to the Registration Statement
on Form S-3 filed June 26, 2002).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings
to Fixed Charges.
21.1 Subsidiaries of CIT.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of KPMG LLP.
24.1 Powers of Attorney.
99.1 Certification of Albert R. Gamper, Jr. pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Joseph M. Leone pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ ROBERT J. INGATO
-------------------------------------
Robert J. Ingato
Executive Vice President, General Counsel
and Secretary
February 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on February 26, 2003 in
the capacities indicated below.
Name Date
------ ----
/s/ ALBERT R. GAMPER, JR.
- -------------------------------------------------
Albert R. Gamper Jr.
Chairman, President, Chief Executive Officer
and Director
(principal executive officer)
JOHN S. CHEN*
- -------------------------------------------------
John S. Chen
Director
WILLIAM A. FARLINGER*
- -------------------------------------------------
William A. Farlinger
Director
THOMAS H. KEAN*
- -------------------------------------------------
Thomas H. Kean
Director
EDWARD J. KELLY, III*
- -------------------------------------------------
Edward J. Kelly, III
Director
MARIANNE MILLER PARRS*
- -------------------------------------------------
Marianne Miller Parrs
Director
PETER J. TOBIN*
- -------------------------------------------------
Peter J. Tobin
Director
LOIS M. VAN DEUSEN*
- -------------------------------------------------
Lois M. Van Deusen
Director
/s/ JOSEPH M. LEONE
- -------------------------------------------------
Joseph M. Leone
Executive Vice President and
Chief Financial Officer
(principal accounting officer)
*By: /s/ ROBERT J. INGATO
- -------------------------------------------------
Robert J. Ingato
Executive Vice President and General Counsel
Original powers of attorney authorizing Robert Ingato, and James P.
Shanahan and each of them to sign on behalf of the above-mentioned directors are
held by the Corporation and available for examination by the Securities and
Exchange Commission pursuant to Item 302(b) of Regulation S-T.
103
CERTIFICATIONS
I, Albert R. Gamper, Jr., certify that:
1. I have reviewed this transition report on Form 10-K of CIT Group Inc.;
2. Based on my knowledge, this transition report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
transition report;
3. Based on my knowledge, the financial statements, and other financial
information included in this transition report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this transition report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this transition report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this transition report (the "Evaluation Date"); and
c) presented in this transition report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
transition report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 26, 2003
/s/ ALBERT R. GAMPER, JR.
--------------------------------------------
Albert R. Gamper, Jr.
Chairman, President, Chief Executive Officer
and Director
104
CERTIFICATIONS
I, Joseph M. Leone, certify that:
1. I have reviewed this transition report on Form 10-K of CIT Group Inc.;
2. Based on my knowledge, this transition report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
transition report;
3. Based on my knowledge, the financial statements, and other financial
information included in this transition report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this transition report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this transition report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this transition report (the "Evaluation Date"); and
c) presented in this transition report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
transition report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 26, 2003
/S/ JOSEPH M. LEONE
----------------------------------------------------
Joseph M. Leone
Executive Vice President and Chief Financial Officer
105
Where You Can Find More Information
A copy of the Transition Report on Form 10-K, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington D.C. 20549. Information on the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested parties can electronically access the Transition Report on Form 10-K,
including the exhibits and schedules thereto.
The Transition Report on Form 10-K, including the exhibits and schedules
thereto, and other SEC filings, are available free of charge on the Company's
Internet site at http://www.cit.com as soon as reasonably practicable after such
material is electronically filed with the SEC.