================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
Form 10-Q
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-31369
----------
CIT Group Inc.
(Exact name of Registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 CIT Drive, Livingston, New Jersey, 07039
(Address of Registrant's principal executive offices)
(973) 740-5000
(Registrant's telephone
number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No _____
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [X] No _____
As of April 30, 2003, there were 211,573,200 shares of the Registrant's
common stock outstanding.
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CIT GROUP INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Part I--Financial Information:
Item 1 Consolidated Financial Statements (Unaudited) ............... 1
Consolidated Balance Sheets ................................. 1
Consolidated Statements of Income ........................... 2
Consolidated Statements of Stockholders' Equity ............. 3
Consolidated Statements of Cash Flows ....................... 4
Notes to Consolidated Financial Statements .................. 5-17
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Quantitative
and Qualitative Disclosure about Market Risk .............. 18-46
Item 4 Controls and Procedures ..................................... 46
Part II--Other Information:
Item 1 Legal Proceedings ........................................... 48
Item 6 Exhibits and Reports on Form 8-K ............................ 48-49
Signatures .................................................. 50
Certifications .............................................. 51-52
i
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
($ in millions)
March 31, December 31,
2003 2002
--------- --------------
ASSETS
Financing and leasing assets:
Finance receivables ............................. $28,654.6 $27,621.3
Reserve for credit losses ....................... (757.0) (760.8)
--------- ---------
Net finance receivables ......................... 27,897.6 26,860.5
Operating lease equipment, net .................. 6,831.4 6,704.6
Finance receivables held for sale ............... 1,273.0 1,213.4
Cash and cash equivalents .......................... 2,025.4 2,036.6
Goodwill, net ...................................... 384.4 384.4
Other assets ....................................... 4,837.4 4,732.9
--------- ---------
Total Assets .................................... $43,249.2 $41,932.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ................................ $ 4,490.5 $ 4,974.6
Variable-rate bank credit facilities ............ 1,300.0 2,118.0
Variable-rate senior notes ...................... 6,609.2 4,906.9
Fixed-rate senior notes ......................... 20,152.1 19,681.8
--------- ---------
Total debt ......................................... 32,551.8 31,681.3
Credit balances of factoring clients ............... 2,437.9 2,270.0
Accrued liabilities and payables ................... 3,006.1 2,853.2
--------- ---------
Total liabilities ............................... 37,995.8 36,804.5
--------- ---------
Commitments and Contingencies (Note 12)
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely debentures of the
Company .......................................... 256.8 257.2
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 $4.6 and $5.5 .............................. 10,677.0 10,676.2
Accumulated deficit ............................. (5,505.3) (5,606.9)
Accumulated other comprehensive loss ............ (177.2) (200.7)
--------- ---------
Total Stockholders' Equity ...................... 4,996.6 4,870.7
--------- ---------
Total Liabilities and Stockholders' Equity ...... $43,249.2 $41,932.4
========= =========
See Notes to Consolidated Statements (Unaudited).
1
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in millions, except per share data)
For the Quarters
Ended March 31,
---------------------
2003 2002
----- -----
Finance income ........................................ $939.2 $ 1,106.7
Interest expense ...................................... 346.7 348.3
------ ---------
Net finance income .................................... 592.5 758.4
Depreciation on operating lease equipment ............. 278.8 310.2
------ ---------
Net finance margin .................................... 313.7 448.2
Provision for credit losses ........................... 103.0 195.0
------ ---------
Net finance margin after provision for
credit losses ....................................... 210.7 253.2
Other revenue ......................................... 235.5 232.1
------ ---------
Operating margin ...................................... 446.2 485.3
------ ---------
Salaries and general operating expenses ............... 233.6 234.2
Interest expense - TCH ................................ -- 305.0
Goodwill impairment ................................... -- 4,512.7
------ ---------
Operating expenses .................................... 233.6 5,051.9
------ ---------
Income (loss) before provision for income taxes ....... 212.6 (4,566.6)
Provision for income taxes ............................ (82.9) (50.4)
Minority interest in subsidiary trust holding
solely debentures of the Company, after tax ......... (2.7) (2.7)
------ ---------
Net income (loss) ..................................... $127.0 $(4,619.7)
====== =========
Net income (loss) per basic share ..................... $ 0.60 $ (21.84)
====== =========
Net income (loss) per diluted share ................... $ 0.60 $ (21.84)
------ ---------
Dividends per common share ............................ $ 0.12 $ --
====== =========
Note: Per share calculations for the quarter ended March 31, 2002 assume that
common shares as a result of the July 2002 IPO (211.6 million) were outstanding.
See Notes to Consolidated Statements (Unaudited).
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
($ in millions)
Accumulated
Other Total
Common Paid-in Accumulated Comprehensive Stockholders'
Stock Capital Deficit (Loss) Equity
----- ------- ------- ------ ------
December 31, 2002 ............................. $2.1 $10,676.2 $(5,606.9) $(200.7) $4,870.7
Net income .................................... -- -- 127.0 -- 127.0
Foreign currency translation adjustments. ..... -- -- -- 9.0 9.0
Unrealized loss on equity and
securitization investments .................. -- -- -- (11.2) (11.2)
Change in fair values of derivatives
qualifying as cash flow hedges .............. -- -- -- 25.7 25.7
--------
Total comprehensive income .................... 150.5
--------
Cash dividends ................................ -- -- (25.4) -- (25.4)
Restricted common stock grants ................ -- 0.8 -- -- 0.8
---- --------- --------- ------- --------
March 31, 2003 ................................ $2.1 $10,677.0 $(5,505.3) $(177.2) $4,996.6
==== ========= ========= ======= ========
See Notes to Consolidated Statements (Unaudited).
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
For the Quarters
Ended March 31,
----------------------
2003 2002
---------- ----------
Cash Flows From Operations
Net income (loss) ......................................... $ 127.0 $ (4,619.7)
Adjustments to reconcile net income (loss) to net cash
flows from operations:
Goodwill impairment .................................... -- 4,512.7
Provision for credit losses ............................ 103.0 195.0
Depreciation and amortization .......................... 288.8 321.2
Provision for deferred federal income taxes ............ 74.7 50.4
Gains on equipment, receivable and investment sales .... (60.7) (58.7)
(Increase) in other assets ............................. (116.7) (54.5)
Increase (decrease) in accrued liabilities and payables 61.1 (100.1)
Other .................................................. (8.5) (1.3)
---------- ----------
Net cash flows provided by operations ..................... 468.7 245.0
---------- ----------
Cash Flows From Investing Activities
Loans extended ............................................ (12,341.1) (11,639.4)
Collections on loans ...................................... 10,233.4 9,703.8
Proceeds from asset and receivable sales .................. 1,699.2 3,739.6
Purchases of assets to be leased .......................... (333.4) (472.8)
Net decrease in short-term factoring receivables .......... (182.7) (410.9)
Purchase of finance receivable portfolios ................. (360.8) (18.8)
Purchase of investment securities ......................... -- (97.6)
Other ..................................................... (41.4) (19.1)
---------- ----------
Net cash flows (used for) provided by investing activities (1,326.8) 784.8
---------- ----------
Cash Flows From Financing Activities
Repayments of variable and fixed-rate notes ............... (2,997.8) (1,479.4)
Proceeds from the issuance of variable and fixed-rate notes 4,352.4 8,518.4
Net decrease in commercial paper .......................... (484.1) (7,306.2)
Net capitalization from Tyco and Tyco affiliates .......... -- 268.4
Net repayments of non-recourse leveraged lease debt ....... (28.2) (72.6)
Cash dividends paid ....................................... (25.4) --
---------- ----------
Net cash flows provided by (used for) financing activities 816.9 (71.4)
---------- ----------
Net (decrease) increase in cash and cash equivalents ...... (41.2) 958.4
Exchange rate impact on cash .............................. 30.0 (2.1)
Cash and cash equivalents, beginning of period ............ 2,036.6 1,301.5
---------- ----------
Cash and cash equivalents, end of period .................. $ 2,025.4 $ 2,257.8
========== ==========
Supplementary Cash Flow Disclosure
Interest paid ............................................. $ 331.2 $ 380.0
Federal, foreign, state and local income taxes paid, net .. $ 18.9 $ 24.1
See Notes to Consolidated Statements (Unaudited).
4
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 -- Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a 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.
These financial statements, which have been prepared in accordance with
the instructions to Form 10-Q, do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States ("GAAP") and should be read in conjunction with the Company's Annual
Report on Form 10-K for the three-month transition period ended December 31,
2002. These financial statements have not been examined by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of CIT's financial
position and results of operations. Certain 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. On
July 8, 2002, Tyco completed a sale of 100% of CIT's outstanding common stock in
an initial public offering ("IPO"). Immediately prior to the offering, CIT was
merged with its parent Tyco Capital Holding, Inc. ("TCH"), a company used to
acquire CIT. As a result, the historical financial results of TCH are included
in the historical consolidated CIT financial statements.
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 inter-company transactions have been
eliminated.
Variable interest entities (selected entities with related contractual,
ownership, voting or other monetary interests, including special purpose
entities) created after January 1, 2003 are consolidated in the cases where CIT
is the primary beneficiary of the entity as defined by Interpretation No. 46
"Consolidation of Variable Interest Entities."
For guarantees issued or modified subsequent to December 31, 2002,
liabilities are recognized at the estimated fair value of the obligation
undertaken at the inception of the guarantee.
Note 2 -- Acquisition 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
current quarter ($ in millions):
Severance Facilities
------------------ ------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance at December 31, 2002 ... 240 $17.2 22 $12.4 $ 29.6
First quarter fiscal 2003
utilization .................. (47) (9.3) -- (2.0) (11.3)
--- ----- -- ----- ------
Balance at March 31, 2003 ...... 193 $ 7.9 22 $10.4 $ 18.3
=== ===== == ===== ======
5
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The reserves remaining at March 31, 2003 relate largely to the
restructuring of the European operations. The facility reserves relate primarily
to shortfalls in sublease transactions and will be utilized over the remaining
lease terms, generally between 3 and 7 years. Severance reserves also include
amounts payable within the next year to individuals who chose to receive
payments on a periodic basis.
Note 3 -- Consolidating Financial Statements -- Tyco Capital Holdings (TCH)
The March 31, 2002 financial statements include the activity of TCH, which
was a wholly owned subsidiary of a Tyco affiliate and was the holding company
for the acquisition of CIT by Tyco. In its capacity as the acquisition holding
company, TCH's activity 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, the prior activity of TCH (accumulated net deficit) was eliminated
by means of a capital contribution from Tyco. As a result, the consolidated
financial statements of CIT were not impacted by TCH subsequent to June 30,
2002.
For the Quarter Ended
($ in millions) March 31, 2002
-----------------------------------
CIT TCH Consolidated
Finance Income ..................................... $ 1,106.7 $ -- $ 1,106.7
Interest expense ................................... 348.3 -- 348.3
--------- ------- ---------
Net finance income ................................. 758.4 -- 758.4
--------- ------- ---------
Depreciation on operating lease equipment .......... 310.2 -- 310.2
--------- ------- ---------
Net finance margin ................................. 448.2 -- 448.2
Provision for credit losses ........................ 195.0 -- 195.0
--------- ------- ---------
Net finance margin after provision for credit losses 253.2 -- 253.2
Other revenue ...................................... 232.1 -- 232.1
--------- ------- ---------
Operating margin ................................... 485.3 -- 485.3
--------- ------- ---------
Salaries and general operating expenses ............ 226.9 7.3 234.2
Interest expense -- TCH ............................ -- 305.0 305.0
Goodwill impairment ................................ 4,512.7 -- 4,512.7
--------- ------- ---------
Operating expenses ................................. 4,739.6 312.3 5,051.9
--------- ------- ---------
(Loss) before provision for income taxes ........... (4,254.3) (312.3) (4,566.6)
(Provision) benefit for income taxes ............... (98.4) 48.0 (50.4)
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ............ (2.7) -- (2.7)
--------- ------- ---------
Net (loss) ......................................... $(4,355.4) $(264.3) $(4,619.7)
========= ======= =========
Note 4 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that do not have a
dilutive effect (because the exercise price is above the market price) are not
included in the denominator and averaged approximately 17.3 million shares for
the three months ended March 31, 2003.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented for the quarters ended March 31, 2003 and March 31,
2002. The denominator for the quarter ended March 31, 2002 is the number of
shares upon completion of the July 2002 IPO ($ in millions, except per share
amounts, which are in whole dollars; share balances in thousands):
6
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Quarter ended March 31, 2003
Basic:
Income available to common stockholders ........ $ 127.0 211,573 $ 0.60
Effect of Dilutive Securities:
Restricted shares .............................. -- 326 --
Stock options .................................. -- -- --
--------- ------- -------
Diluted ........................................... $ 127.0 211,899 $ 0.60
========= ======= =======
Quarter ended March 31, 2002
Basic:
Income available to common stockholders ........ $(4,619.7) 211,573 $(21.84)
Effect of Dilutive Securities:
Restricted shares .............................. -- -- --
Stock options .................................. -- -- --
--------- ------- -------
Diluted ........................................... $(4,619.7) 211,573 $(21.84)
========= ======= =======
Note 5 -- Derivative Financial Instruments
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows at December 31, 2002
and at March 31, 2003 are presented in the following table ($ in millions):
Adjustment of
Fair Value of Income Tax Net Unrealized
Derivatives Effects Loss (Gain)
------------- ---------- -------------
Balance at December 31, 2002 ......... $190.8 $(72.5) $118.3
Changes in values of derivatives
qualifying as cash flow hedges ..... (39.0) 13.3 (25.7)
------ ------ ------
Balance at March 31, 2003 ............ $151.8 $(59.2) $ 92.6
====== ====== ======
The unrealized loss as of March 31, 2003, 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 March 31, 2003, the ineffective portion of changes in the
fair value of cash flow hedges amounted to $0.4 million and has been recorded as
an increase to interest expense. Assuming no change in interest rates, $57.9
million, net of tax, of Accumulated Other Comprehensive Loss is expected to be
reclassified to earnings over the next twelve months as contractual cash
payments are made. The Accumulated Other Comprehensive Loss (along with the
corresponding swap liability) will be adjusted as market interest rates change
over the remaining life of the swaps.
As part of managing the exposure to changes in market interest rates, CIT,
as an end-user, enters into various interest rate swap transactions, all of
which are transacted in over-the-counter markets with other financial
institutions acting as principal counter-parties. We use derivatives for hedging
purposes only, and do not enter into derivative financial instruments for
trading or speculative purposes. To ensure both appropriate use as a hedge and
hedge accounting treatment, derivatives entered into are designated according to
a hedge objective against a specific liability, including commercial paper, or a
specifically underwritten debt issue. The notional amounts, rates, indices and
maturities of our derivatives are required to closely match the related terms of
our hedged liabilities. CIT exchanges variable-rate interest on certain debt
instruments for fixed-rate amounts. These interest rate swaps are designated as
cash flow hedges. We also exchange fixed-rate interest on certain of our debt
for variable-rate amounts. These interest rate swaps are designated as fair
value hedges.
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position at March 31,
2003 ($ in millions):
Interest Rate Swaps Notional Amount Comments
- ------------------- --------------- --------
Floating to fixed-rate swaps -- Effectively converts the interest rate on an
cash flow hedges ................. $3,668.5 equivalent amount of commercial paper and
variable-rate notes to a fixed rate.
Fixed to floating-rate swaps -- Effectively converts the interest rate on an
fair value hedges ................ 5,332.8 equivalent amount of fixed-rate notes to a
-------- variable rate.
Total interest rate swaps .......... $9,001.3
========
CIT utilizes trusts as part of its ongoing securitization programs. As
part of these related activities, the Company enters into hedge transactions
with the trusts in order to protect the trust against interest rate risk. CIT
insulates its associated risk by entering into offsetting swap transactions with
third parties. The net effect is to protect the trust from interest rate risk,
while also protecting CIT from interest rate risk. The notional amount of these
swaps was $3.9 billion at March 31, 2003.
CIT also utilizes foreign currency exchange forward contracts to hedge
currency risk underlying its net investments in foreign operations and cross
currency interest rate swaps to hedge both foreign currency and interest rate
risk underlying foreign debt. At March 31, 2003, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $2.7 billion
and maturities ranging from 2003 to 2006. CIT was also party to cross currency
interest rate swaps with notional amounts totaling $1.4 billion and maturities
ranging from 2003 to 2027.
Note 6 -- Business Segment Information
Selected financial information by business segment, based upon a fixed
leverage ratio across business units and the allocation of most corporate
expenses is presented below. The business segments' operating margins and net
income for the quarter ended March 31, 2003 included the allocation (from
Corporate and Other) of additional borrowing costs stemming from the 2002
disruption to the Company's funding base and enhanced liquidity levels. These
additional costs were significantly higher in 2003. The additional borrowing and
liquidity costs were included in Corporate and Other in 2002. Corporate and
Other also included the 2002 non-cash goodwill impairment charge.
During the quarter ended March 31, 2003, in order to better align
competencies, we transferred certain small business loans and leases, including
the small business lending unit, totaling $1,078.6 million from Equipment
Financing and Leasing to Specialty Finance. Prior periods have not been restated
to conform to this current presentation ($ in millions).
Equipment Corporate
Financing Specialty Commercial Structured Total and
and Leasing Finance Finance Finance Segments Other Consolidated
----------- ------- ------- ------- -------- ----- ------------
At and for the quarter
ended March 31, 2003
Operating margin ........... $ 69.1 $ 190.5 $ 129.9 $ 28.3 $ 417.8 $ 28.4 $ 446.2
Income taxes ............... 11.7 33.4 34.6 7.8 87.5 (4.6) 82.9
Net income (loss) .......... 18.4 52.2 54.1 12.2 136.9 (9.9) 127.0
Total financing and
leasing assets .......... 13,124.9 11,925.8 8,682.7 3,359.9 37,093.3 -- 37,093.3
Total managed assets ....... 17,102.1 18,336.3 8,682.7 3,359.9 47,481.0 -- 47,481.0
At and for the quarter
ended March 31, 2002
Operating margin ........... $ 149.5 $ 256.1 $ 115.0 $ 33.3 $ 553.9 $ (68.6) $ 485.3
Income taxes ............... 31.9 61.2 30.8 9.2 133.1 (82.7) 50.4
Net income (loss) .......... 62.6 100.0 46.2 16.4 225.2 (4,844.9) (4,619.7)
Total financing and
leasing assets .......... 15,489.2 10,937.4 4,436.7 3,035.7 33,899.0 -- 33,899.0
Total managed assets ....... 19,241.7 17,941.3 7,869.1 3,035.7 48,087.8 -- 48,087.8
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 7 -- Concentrations
The following table presents the geographic and industry compositions of
financing and leasing portfolio assets, based on the location and industry of
the customer, at March 31, 2003 and December 31, 2002 ($ in millions):
At March 31, 2003 At December 31, 2002
--------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
North America:
Northeast ................. $ 7,871.8 21.2% $ 7,833.8 21.8%
West ...................... 6,531.7 17.6 6,223.8 17.4
Midwest ................... 6,128.7 16.5 5,748.3 16.0
Southeast ................. 5,193.5 14.0 4,946.8 13.8
Southwest ................. 3,826.4 10.3 3,691.9 10.3
Canada .................... 1,846.5 5.0 1,804.9 5.0
--------- ----- --------- -----
Total North America .......... 31,398.6 84.6 30,249.5 84.3
Other foreign ................ 5,694.7 15.4 5,625.2 15.7
--------- ----- --------- -----
Total ..................... $37,093.3 100.0% $35,874.7 100.0%
========= ===== ========= =====
At March 31, 2003 At December 31, 2002
------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Manufacturing(1) (no industry
greater than 2.9%) ......... $ 7,231.0 19.5% $ 7,114.3 19.8%
Commercial Airlines (including
regional airlines).......... 4,555.1 12.3 4,570.3 12.7
Retail(2) .................... 4,353.6 11.7 4,053.6 11.3
Transportation(4) ............ 2,675.6 7.2 2,703.9 7.5
Consumer based lending --
non-real estate(3) ......... 2,541.5 6.9 2,435.0 6.8
Consumer based lending --
home mortgage .............. 1,601.3 4.3 1,292.7 3.6
Service industries ........... 1,921.6 5.2 1,571.1 4.4
Communications(5) ............ 1,660.3 4.5 1,662.6 4.6
Construction equipment ....... 1,613.2 4.3 1,712.7 4.8
Wholesaling .................. 1,320.5 3.6 1,305.2 3.6
Automotive services .......... 1,170.5 3.2 1,138.8 3.2
Other (no industry greater
than 3.0%)(6) .............. 6,449.1 17.3 6,314.5 17.7
--------- ----- --------- -----
Total ..................... $37,093.3 100.0% $35,874.7 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (4.9%) and general merchandise (3.1%).
(3) Includes receivables from consumers for products in various industries
such as manufactured housing, recreational vehicles and marine and
computers and related equipment.
(4) Includes rail, over-the-road trucking industries and business aircraft.
(5) Includes $655.3 million and $685.8 million of telecommunication related
assets at March 31, 2003 and December 31, 2002, respectively.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $822.1 million, or 2.2% of
total financing and leasing assets at March 31, 2003. This amount includes
approximately $575 million in project financing and $204 million in rail
cars on lease.
Note 8 -- Accounting Change -- Goodwill
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
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
amortized but instead is assessed for impairment at least annually. As part of
the adoption, the Company allocated its existing goodwill to each of its
reporting units as of October 1, 2001. Under the transition provisions of SFAS
No. 142, there was no goodwill impairment as of October 1, 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
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 $4.513 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 $132.0 million was
required based on reporting unit level valuation data.
There were no changes to the carrying value of goodwill during the quarter
ended March 31, 2003.
Note 9 -- Accumulated Other Comprehensive Loss
The following table details the March 31, 2003 and December 31, 2002
components of accumulated other comprehensive loss, net of tax ($ in millions):
March 31, December 31,
2003 2002
--------- ------------
Changes in fair values of derivatives
qualifying as cash flow hedges .................. $ (92.6) $(118.3)
Foreign currency translation adjustments .......... (66.6) (75.6)
Minimum pension liability adjustments ............. (20.5) (20.5)
Unrealized gain on equity and securitization
investments ..................................... 2.5 13.7
------- -------
Total accumulated other comprehensive loss ..... $(177.2) $(200.7)
======= =======
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 10 -- Summarized Financial Information of Subsidiaries
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. CIT has not presented related financial statements or other
information for these subsidiaries on a stand-alone basis ($ in millions).
CIT CIT
CONSOLIDATING Group Capita Holdings Other
BALANCE SHEETS Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---- ----------- --- ------------ ------------ -----
March 31, 2003
ASSETS
Net finance receivables ............... $ 625.1 $3,656.0 $ 919.7 $22,696.8 $ -- $27,897.6
Operating lease equipment, net ........ -- 686.9 160.0 5,984.5 -- 6,831.4
Assets held for sale .................. -- 60.4 138.9 1,073.7 -- 1,273.0
Cash and cash equivalents ............. 1,416.6 288.5 72.1 248.2 -- 2,025.4
Other assets .......................... 6,533.9 211.7 449.5 3,023.3 (4,996.6) 5,221.8
--------- -------- -------- --------- --------- ---------
Total Assets ....................... $ 8,575.6 $4,903.5 $1,740.2 $33,026.5 $(4,996.6) $43,249.2
========= ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt .................................. $28,849.8 $1,799.3 $1,867.8 $ 34.9 $ -- $32,551.8
Credit balances of factoring clients -- -- -- 2,437.9 -- 2,437.9
Other liabilities ..................... (25,270.8) 2,527.3 (923.3) 26,672.9 -- 3,006.1
--------- -------- -------- --------- --------- ---------
Total Liabilities .................. 3,579.0 4,326.6 944.5 29,145.7 -- 37,995.8
Preferred securities .................. -- -- -- 256.8 -- 256.8
Equity ................................ 4,996.6 576.9 795.7 3,624.0 (4,996.6) 4,996.6
--------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ............... $ 8,575.6 $4,903.5 $1,740.2 $33,026.5 $(4,996.6) $43,249.2
========= ======== ======== ========= ========= =========
December 31, 2002
ASSETS
Net finance receivables ............... $ 633.5 $3,541.4 $ 935.7 $21,749.9 $ -- $26,860.5
Operating lease equipment, net ........ -- 734.6 157.1 5,812.9 -- 6,704.6
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
========= ======== ======== ========= ========= =========
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CIT
CONSOLIDATING Group Capita Holdings Other
STATEMENTS OF INCOME Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---- ----------- --- ------------ ------------ -----
Quarter Ended
March 31, 2003
Finance income ........................ $ 29.7 $202.6 $48.5 $658.4 $ -- $ 939.2
Interest expense ...................... 13.7 88.9 (2.7) 246.8 -- 346.7
--------- ------ ----- ------ ------- ---------
Net finance income .................... 16.0 113.7 51.2 411.6 -- 592.5
Depreciation on operating
lease equipment .................... -- 98.2 20.1 160.5 -- 278.8
--------- ------ ----- ------ ------- ---------
Net finance margin .................... 16.0 15.5 31.1 251.1 -- 313.7
Provision for credit losses ........... 12.7 13.3 2.7 74.3 -- 103.0
--------- ------ ----- ------ ------- ---------
Net finance margin, after provision
for credit losses .................. 3.3 2.2 28.4 176.8 -- 210.7
Equity in net income of subsidiaries .. 125.8 -- -- -- (125.8) --
Other revenue ......................... 0.6 34.0 21.1 179.8 -- 235.5
--------- ------ ----- ------ ------- ---------
Operating margin ...................... 129.7 36.2 49.5 356.6 (125.8) 446.2
Operating expenses .................... (1.9) 40.1 40.0 155.4 -- 233.6
--------- ------ ----- ------ ------- ---------
Income (loss) before provision
for income taxes ................... 131.6 (3.9) 9.5 201.2 (125.8) 212.6
Provision for income taxes ............ 4.6 11.6 7.5 59.2 -- 82.9
Minority interest, after tax .......... -- -- -- (2.7) -- (2.7)
--------- ------ ----- ------ ------- ---------
Net income (loss) ..................... $ 127.0 $(15.5) $ 2.0 $139.3 $(125.8) $ 127.0
========= ====== ===== ====== ======= =========
Quarter Ended
March 31, 2002
Finance income ........................ $ 58.8 $259.3 $61.6 $727.0 $ -- $ 1,106.7
Interest expense ...................... (57.9) 128.4 (4.0) 281.8 -- 348.3
--------- ------ ----- ------ ------- ---------
Net finance income .................... 116.7 130.9 65.6 445.2 -- 758.4
Depreciation on operating
lease equipment .................... -- 122.3 26.0 161.9 -- 310.2
--------- ------ ----- ------ ------- ---------
Net finance margin .................... 116.7 8.6 39.6 283.3 -- 448.2
Provision for credit losses ........... 13.3 111.9 2.3 67.5 -- 195.0
--------- ------ ----- ------ ------- ---------
Net finance margin, after provision
for credit losses .................. 103.4 (103.3) 37.3 215.8 -- 253.2
Equity in net income of subsidiaries .. (159.2) -- -- -- 159.2 --
Other revenue ......................... 2.2 26.9 20.0 183.0 -- 232.1
--------- ------ ----- ------ ------- ---------
Operating margin ...................... (53.6) (76.4) 57.3 398.8 159.2 485.3
Operating expenses .................... 4,528.7 40.6 19.4 463.2 -- 5,051.9
--------- ------ ----- ------ ------- ---------
(Loss) income before provision for
income taxes ....................... (4,582.3) (117.0) 37.9 (64.4) 159.2 (4,566.6)
(Benefit) provision for income taxes .. 37.4 (41.5) 23.0 31.5 -- 50.4
Minority interest, after tax .......... -- -- -- (2.7) -- (2.7)
--------- ------ ----- ------ ------- ---------
Net (loss) income ..................... $(4,619.7) $(75.5) $14.9 $(98.6) $ 159.2 $(4,619.7)
========= ====== ===== ====== ======= =========
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CIT
CONSOLIDATING Group Capita Holdings Other
STATEMENT OF CASH FLOWS Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ----- ----------- --- ------------ ------------ -----
Quarter Ended
March 31, 2003
Cash Flows From
Operating Activities:
Net cash flows provided by (used for)
operations .......................... $ 518.2 $517.0 $ (44.4) $ (522.1) $ -- $ 468.7
-------- ------ ------- ------- ------- --------
Cash Flows From
Investing Activities:
Net decrease in financing and
leasing assets ...................... (3.9) (76.4) (78.9) (1,126.2) -- (1,285.4)
Decrease in inter-company loans
and investments ..................... (1,497.7) -- -- -- 1,497.7 --
Other .................................. -- -- -- (41.4) -- (41.4)
-------- ------ ------- ------- ------- --------
Net cash flows (used for)
investing activities ................ (1,501.6) (76.4) (78.9) (1,167.6) 1,497.7 (1,326.8)
-------- ------ ------- ------- ------- --------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt ........ 1,089.1 (16.4) (249.0) 18.6 -- 842.3
Inter-company financing ................ -- (366.8) 150.7 1,713.8 (1,497.7) --
Cash dividends paid .................... -- -- -- (25.4) -- (25.4)
-------- ------ ------- ------- ------- --------
Net cash flows provided by
(used for) financing activities ..... 1,089.1 (383.2) (98.3) 1,707.0 (1,497.7) 816.9
-------- ------ ------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents .................... 105.7 57.4 (221.6) 17.3 -- (41.2)
Exchange rate impact on cash . ......... -- -- -- 30.0 -- 30.0
Cash and cash equivalents,
beginning of period ................. 1,310.9 231.1 293.7 200.9 -- 2,036.6
-------- ------ ------- ------- ------- --------
Cash and cash equivalents,
end of period ....................... $1,416.6 $288.5 $ 72.1 $ 248.2 $ -- $2,025.4
======== ====== ====== ======= ======= ========
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT CIT
CONSOLIDATING Group Capita Holdings Other
STATEMENT OF CASH FLOWS Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---- ----------- --- ------------ ------------ -----
Quarter Ended
March 31, 2002
Cash Flows From
Operating Activities:
Net cash flows provided by (used for)
operations .......................... $ 176.4 $ 60.1 $(34.0) $ 42.5 $ -- $ 245.0
-------- ------ ------ ------ ----- --------
Cash Flows From
Investing Activities:
Net increase in financing and
leasing assets ...................... 147.9 183.1 56.9 416.0 -- 803.9
Decrease in inter-company loans
and investments ..................... 394.1 -- -- -- (394.1) --
Other .................................. -- -- -- (19.1) -- (19.1)
-------- ------ ------ ------ ----- --------
Net cash flows provided by
(used for) investing activities ..... 542.0 183.1 56.9 396.9 (394.1) 784.8
-------- ------ ------ ------ ----- --------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt ........ 320.7 (585.3) 192.8 0.4 -- (71.4)
Inter-company financing ................ -- 326.8 (98.1) (622.8) 394.1 --
Cash dividends paid .................... -- -- -- -- -- --
-------- ------ ------ ------ ----- --------
Net cash flows provided by
(used for) financing activities ..... 320.7 (258.5) 94.7 (622.4) 394.1 (71.4)
-------- ------ ------ ------ ----- --------
Net increase (decrease) in cash and
cash equivalents .................... 1,039.1 (15.3) 117.6 (183.0) -- 958.4
Exchange rate impact on cash . ......... -- -- -- (2.1) -- (2.1)
Cash and cash equivalents,
beginning of period ................. 833.4 145.1 110.6 212.4 -- 1,301.5
-------- ------ ------ ------ ----- --------
Cash and cash equivalents,
end of period ....................... $1,872.5 $129.8 $228.2 $ 27.3 $ -- $2,257.8
======== ====== ====== ====== ===== ========
Note 11 -- Related Party Transactions
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 arms 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 was satisfied.
As of March 31, 2002, certain subsidiaries of Tyco sold receivables
totaling $360 million to CIT in a factoring transaction. CIT has continued to
purchase receivables from Tyco in similar factoring transactions through March
31, 2003 on an arms-length basis.
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 were satisfied in conjunction with the July 2002 IPO.
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT is a partner with Dell Computer Corporation ("Dell") in Dell Financial
Services L.P. ("DFS"), a joint venture that 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 acquired this relationship in
November 1999, and the current agreement extends until October 2005. CIT
regularly purchases finance receivables from DFS at a premium, portions of which
are typically securitized within 90 days of purchase from DFS. CIT has recourse
back to DFS on defaulted 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
March 31, 2003, financing and leasing assets originated by DFS and purchased by
CIT (included in the CIT Consolidated Balance Sheet) were $2.0 billion and
securitized assets were $1.5 billion. In addition to the owned and securitized
assets acquired from DFS, CIT's maximum exposure to loss with respect to
activities of the joint venture is approximately $290 million pretax at March
31, 2003, which is comprised of the investment in and loans to the joint
venture.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. CIT
acquired this relationship in November 1999. The agreement with Snap-on extends
until January 2007. CIT and Snap-on have 50% ownership interests, 50% board of
directors' representation and share income and losses equally. The Snap-on joint
venture is accounted for under the equity method and is not consolidated in
CIT's financial statements. As of March 31, 2003, the related financing and
leasing assets and securitized assets were $1.0 billion and $0.1 billion,
respectively. In addition to the owned and securitized assets purchased from the
Snap-on joint venture, CIT's maximum exposure to loss with respect to activities
of the joint venture is approximately $15 million pretax at March 31, 2003,
which is comprised of the investment in and loans to the joint venture.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce 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 March
31, 2003, CIT's maximum exposure to loss with respect to activities of the joint
venture is $92 million pretax, which is comprised of the investment in and loans
to the joint venture.
CIT invests in various trusts, partnerships, and limited liability
corporations established in conjunction with structured financing transactions
of equipment, power and infrastructure projects. CIT's interests in certain of
these entities were acquired by CIT in November 1999, with others entered into
in the normal course of business subsequently. At March 31, 2003, other assets
included $46.5 million of investments in non-consolidated entities relating to
such transactions that are accounted for under the equity or cost methods. This
investment is CIT's maximum exposure to loss with respect to these interests as
of March 31, 2003.
Note 12 -- 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.
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. The receivables are not purchased unless the
customer in unable to pay.
As of March 31, 2003, there were no outstanding liabilities for the fair
values relating to these credit-related commitments or guarantees, as amounts
are generally billed and collected on a monthly basis.
The accompanying table summarizes the contractual amounts of
credit-related commitments. The reduction in guarantees outstanding from
December 31, 2002 reflects the transition to on-balance sheet factoring
products, which are included in credit balances of factoring clients in the CIT
consolidated balance sheet. ($ in millions).
At
At March 31, December 31,
2003 2002
------------------------------------ ------------
Due to Expire
---------------------
Within After Total Total
One Year One Year Outstanding Outstanding
--------- -------- ----------- -----------
Unused commitments to extend credit:
Financing and leasing assets ............... $3,160.2 $412.2 $3,572.4 $3,618.9
Letters of credit and acceptances:
Standby letters of credit .................. 520.0 4.7 524.7 519.8
Other letters of credit .................... 557.7 -- 557.7 583.3
Acceptances ................................ 5.7 -- 5.7 5.6
Guarantees ................................... 81.7 -- 81.7 745.8
Venture capital fund commitments ............. -- 158.1 158.1 164.9
As of March 31, 2003, commitments to purchase commercial aircraft from
both Airbus Industrie and The Boeing Company totaled 75 units through 2007 at an
approximate value of $3.6 billion as detailed below ($ in billions):
Calendar Year: Amount Number
- ------------- ------- -------
2003 .................................................... $0.7 17
2004 .................................................... 0.8 17
2005 .................................................... 1.3 27
2006 .................................................... 0.7 13
2007 .................................................... 0.1 1
---- --
Total ................................................... $3.6 75
==== ==
The order amounts are based on current appraised values in 2002 base
dollars and exclude CIT's options to purchase additional aircraft. Eleven 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 $280.6 million at March 31, 2003. In addition, CIT is
party to a railcar sale-leaseback transaction under which it is obligated to pay
a remaining total of $495 million, approximately $28 million per year through
2010 and declining thereafter through 2024, which is more than offset by CIT's
re-lease of the assets, contingent on its ability to maintain railcar usage.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
10 -- 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 and included in the consolidated financial
statements. 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 March 31, 2003.
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 13 -- Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contains allegations that the
registration statement and prospectus prepared and filed in connection with the
IPO were materially false and misleading, principally with respect to the
adequacy of CIT's telecommunications-related loan loss reserves at the time. The
lawsuit purports to be brought on behalf of all those who purchased CIT common
stock in or traceable to the IPO, and seeks, among other relief, unspecified
damages or rescission for those alleged class members who still hold CIT stock
and unspecified damages for other alleged class members. Additional similar
lawsuits have also been filed, including, in one case, as defendants, some of
the underwriters and former directors of CIT. CIT believes that the allegations
in each of these actions are without merit and that its disclosures were proper,
complete and accurate. CIT intends to vigorously defend itself against these
actions.
In addition, 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, including the class action suit
above, will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of CIT.
Note 14 -- 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. The following table
presents the pro forma information required by SFAS 123 as if CIT had accounted
for stock options granted under the fair value method of SFAS 123 ($ in
millions, except per share data):
Quarters Ended March 31,
------------------------
2003 2002
------- ---------
Net income as reported ................................ $127.0 $(4,619.7)
Stock-based compensation expense -- fair
value method ........................................ (6.7) --
------ --------
Pro forma net income .................................. $120.3 $(4,619.7)
====== =========
Basic earnings per share as reported .................. $ 0.60 $ (21.84)
====== =========
Basic earnings per share pro forma .................... $ 0.57 $ (21.84)
====== =========
Diluted earnings per share as reported ................ $ 0.60 $ (21.84)
====== =========
Diluted earnings per share pro forma .................. $ 0.57 $ (21.84)
====== =========
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Quantitative and Qualitative Disclosure about Market
Risk
Overview
The accompanying Consolidated Financial Statements include our
consolidated accounts. 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, our predecessor, CIT Group Inc., a Nevada corporation, was merged
with and into its parent, 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 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 income
statements for CIT, TCH and CIT consolidated for the quarter ended March 31,
2002 are displayed in Item 1. Consolidating Financial Statements and
Supplementary Data, Note 3.
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 March 31, 2003
constitutes the first quarter of our calendar 2003 results.
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 a 1999 acquisition, which significantly increased our 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, this initiative 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, and we ceased originating new business in these areas.
Severance and other costs associated 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 $900 million of additional capital to
CIT from June through December of 2001. We also decided to cease making new
venture capital investments and to run-off our existing venture capital
portfolio.
18
The balance of each of these non-strategic/liquidating portfolios are
presented in the following table ($ in millions):
Balance Outstanding at Balance Outstanding at
Portfolio March 31, 2003(1) December 31, 2002(1)
-------- --------------------- --------------------
Manufactured housing ................... $ 613 $ 624
Franchise finance ...................... 316 322
Owner-operator trucking ................ 184 218
Recreational marine .................... 114 123
Recreational vehicle ................... 51 34
Wholesale inventory finance ............ 4 18
------ ------
Sub total -- liquidating portfolios .. 1,282 1,339
Venture capital ........................ 334 335
------ ------
Total ................................ $1,616 $1,674
====== ======
- --------------------------------------------------------------------------------
(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 bondholder protections, to re-access
the commercial paper and term debt markets and to strengthen our balance sheet.
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. We also 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, Tyco sold its entire investment in CIT in our 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 backstop
liquidity to fully cover all outstanding commercial paper.
We demonstrated successful access to the term debt markets as well. Since
the IPO, we have issued an aggregate $8.4 billion in term debt in the
institutional debt markets, comprised of $4.7 billion in fixed-rate debt and
$3.7 billion in floating-rate debt. These totals include $1.5 billion issued
through a retail note program, which was initiated in October 2002. 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.
19
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 the 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:
March 31, December 31, September 30, September 30, December 31,
2003 2002 2002 2001 2000
--------- ------------ ------------ ------------ ------------
Average spread over
U.S. Treasuries ........ 215 302 313 147 154
The average spread over U.S. Treasuries for the month of April 2003
improved to 196 basis points. On May 8, 2003, we issued $500 million of 5-year
senior notes at 138 basis points over U.S. Treasuries, a significant improvement
from prior period spread levels.
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 strengthen our balance
sheet. While charge-offs remained high during the three months ended March 31,
2003, the levels of delinquencies and non-performing assets, which we consider
to be leading indicators of possible future charge-off activity, have improved
in the last two consecutive quarters.
Management's principal focus continues to be on improving the credit
quality of our portfolio, lowering our borrowing spreads to decrease our cost of
funds, 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
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 March 31, 2002 quarter was a non-cash charge and did
not impact our tangible capital.
20
The TCH results relate to a Tyco acquisition company that had temporary status
with respect to Tyco's acquisition of CIT. For these reasons, we believe that
this table, in addition to the GAAP results, aids in the analysis of the
significant trends in our business over the periods presented ($ in millions):
Quarters Ended
March 31,
---------------------
2003 2002
----- -----
Net income (loss)-- GAAP basis .................... $127.0 $(4,619.7)
Charges included in net income (loss):
Goodwill impairment ............................ -- 4,512.7
TCH losses ..................................... -- 264.3
------ ---------
Net income -- before charges ...................... $127.0 $ 157.3
====== =========
The reduction in net income for the three months ended March 31, 2003 from
the prior year quarter resulted from the combination of lower interest margin
due to a lower asset base, higher borrowing costs, as well as higher
charge-offs.
Managed assets totaled $47.5 billion at March 31, 2003, versus $46.4
billion at December 31, 2002 and $48.1 billion at March 31, 2002. Financing and
leasing portfolio assets totaled $37.1 billion at March 31, 2003, versus $35.9
billion at December 31, 2002, and $33.9 billion at March 31, 2002. The portfolio
growth for the current quarter was primarily in the Commercial Finance segment
as customers increased their borrowing levels under existing credit facilities.
Home equity receivables also grew in the Specialty Finance segment. The decrease
in managed assets in relation to the prior year quarter reflects the factors
discussed in the "Key Business Initiatives and Trends" section, namely lower
origination volume brought upon by the slow economic conditions, growth
constraints caused by the disruption to our funding base in 2002, which
increased our funding costs (see "Net Finance Margin" and "Liquidity" sections
for further discussion), and the sales and continued liquidation of several
product line portfolios. Portfolio assets at March 31, 2002 excluded short-term
trade (factoring) receivables securitized during the quarter ended March 31,
2002 for liquidity purposes, but subsequently repurchased in the quarter ended
June 30, 2002.
Net Finance Margin
A comparison of finance income and net finance margin is set forth below
($ in millions):
Quarters Ended
March 31,
--------------------------
2003 2002
--------- ---------
Finance income .................................... $ 939.2 $ 1,106.7
Interest expense .................................. 346.7 348.3
--------- ---------
Net finance income .............................. 592.5 758.4
Depreciation on operating lease equipment ......... 278.8 310.2
--------- ---------
Net finance margin .............................. $ 313.7 $ 448.2
========= =========
Average earning assets ("AEA") .................... $34,600.6 $36,006.6
========= =========
As a % of AEA:
Finance income .................................... 10.86% 12.29%
Interest expense .................................. 4.01 3.86
--------- ---------
Net finance income .............................. 6.85 8.43
Depreciation on operating lease equipment ......... 3.22 3.45
--------- ---------
Net finance margin as a % of AEA .................. 3.63% 4.98%
========= =========
The growth constraint and debt quality spread factors discussed previously
in the "Key Business Initiatives and Trends" section adversely impacted interest
margin in relation to the quarter ended March 31, 2002. Finance income reflected
the decline in market interest rates from March 2002. However, 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 2003 and
higher levels of excess cash maintained for liquidity purposes.
21
Finance income (interest on loans and lease rentals) for the three months
ended March 31, 2003 decreased by $167.5 million to $939.2 million from the same
period in 2002, reflecting a decline of 3.9% in AEA and the impact of lower
market interest rates. This trend also reflected a 14% reduction in operating
lease rentals primarily resulting from lower rentals on the aerospace portfolio
due to the commercial airline industry down turn.
Although down modestly in dollar amount, interest expense for the three
months ended March 31, 2003 increased as a percentage of AEA in comparison to
the three months ended March 31, 2002, in spite of declining market interest
rates. Cost of funds as a percentage of AEA averaged 4.01% for the three months
ended March 31, 2003 compared to 3.86% for the three months ended March 31,
2002, reflecting the replacement of floating interest rate funding sources with
term funding and higher borrowing spreads. At March 31, 2003, CIT had $4.5
billion in outstanding commercial paper and $1.3 billion in drawn bank
facilities. As of March 31, 2002 and December 31, 2001, commercial paper
outstanding was $710 million and $8.0 billion, respectively, while drawn
commercial bank lines were $8.5 billion and zero, respectively. We continue to
pay down drawn bank loans, while maintaining backstop liquidity to fully cover
all outstanding commercial paper.
The operating lease equipment portfolio was $6.8 billion at March 31,
2003, compared to $6.7 billion at December 31, 2002 and $6.6 billion at March
31, 2002. The table below summarizes operating lease margin as a percentage of
average operating lease equipment for the respective periods.
Quarters Ended
March 31,
---------------------
2003 2002
---- ----
As a % of Average Operating Lease Equipment:
Rental income ......................................... 22.7% 27.0%
Depreciation expense .................................. 16.6 19.0
---- ----
Operating lease margin ............................. 6.1% 8.0%
==== ====
In addition to the previously mentioned reduction in aerospace rentals,
the declines in both rental income and depreciation expense for the three months
ended March 31, 2003 from the prior year reflects a greater proportion of
longer-term aircraft and rail assets in the current period (as opposed to
smaller-ticket vendor finance assets).
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 March 31, 2003 declined by $42.5
million (16.8%) to $210.7 million from $253.2 million for the comparable period
of 2002. These amounts equated to risk adjusted margin of 2.44% and 2.81% as a
percentage of AEA for the three months ended March 31, 2003 and 2002. These risk
adjusted net margin comparisons, although unfavorable, were better than the net
finance margin trends discussed previously as the provision for credit losses
for the quarter ended March 31, 2002 included $95.0 million (1.06% as a
percentage of AEA) related to the devaluation of the Argentine peso resulting
from economic reforms instituted by the Argentine government.
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 flow
projections to monitor portfolio performance to determine whether scheduled
accretion should be modified. The positive impact on risk-adjusted margin due to
purchase accounting fair value adjustments related to the liquidating portfolios
for the quarter ended March 31, 2003 and the quarter ended March 31, 2002 were
five and six basis points, respectively.
The positive impact on risk adjusted margin due to fair value adjustments
to mark receivables and debt to market remaining from the Tyco acquisition was
19 and 43 basis points for the quarter ended March 31, 2003 and 2002.
22
Other Revenue
For the three months ended March 31, 2003, other revenue increased 1.5% to
$235.5 million from $232.1 million in the comparable period in 2002. Losses on
venture capital investments were recorded as reductions to other revenue. Other
revenue for the quarters ended March 31, 2003 and 2002 was 2.72% and 2.58% as a
percentage of AEA. The components of other revenue are set forth in the
following table ($ in millions):
Quarters Ended March 31,
-------------------------
2003 2002
------ ------
Fees and other income ............................... $144.7 $160.9
Factoring commissions ............................... 46.9 37.5
Gains on securitizations ............................ 30.7 34.7
Gains on sales of leasing equipment ................. 17.6 4.3
(Losses) on venture capital investments ............. (4.4) (5.3)
------ ------
Total Other Revunue ............................... $235.5 $232.1
====== ======
For the three months ended March 31, 2003, fees and other income, which
includes servicing fees, miscellaneous fees, syndication fees and gains from
asset sales, declined 10.1% from the comparable period of 2002. The reduction
was driven primarily by lower gains from asset sales and fee income in the
Specialty Finance segment. Factoring commissions increased approximately 25%
from the quarter ended March 31, 2002 to $46.9 million, continuing the
year-over-year trend of last quarter in higher factoring volume coupled with
stronger commission rates. Gains from the sales of leasing equipment were up
primarily in the Specialty Finance segment, reflecting the sale of communication
equipment at the end of lease.
The following table presents information regarding securitization gains
included in the table above ($ in millions):
Quarters Ended
March 31,
---------------------
2003 2002
---- ----
Volume securitized(1) .............................. $1,237.4 $2,725.9
Gains .............................................. 30.7 34.7
Gains as a percentage of volume securitized ........ 2.48% 1.27%
- --------------------------------------------------------------------------------
(1) Excludes short-term trade receivables securitized for liquidity purposes.
During the three months ended March 31, 2003, we securitized $0.4 billion
of home equity loans, versus $1.7 billion during the prior year quarter. The
2002 securitization volume was securitized at lower gain percentages in
comparison to 2003, and was done primarily to meet funding and liquidity needs.
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are two metrics that management uses
to monitor productivity and are set forth in the following table. The efficiency
ratio measures the level of expenses in relation to revenue earned, whereas the
AMA relationship measures expenses in relation to our managed asset base ($ in
millions).
Quarters Ended
March 31,
--------------------
2003 2002
---- ----
Efficiency ratio(1) .................................. 42.5% 33.4%
Salaries and general operating expenses as
a percentage of AMA(2) ............................. 2.08% 1.93%
Salaries and general operating expenses .............. $233.6 $226.9
- --------------------------------------------------------------------------------
(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.
Salaries and general operating expenses for the quarter ended March 31,
2003 increased 3.0% from the prior year quarter to $233.6 million. The increase
was primarily due to expenses relating to our return to public and independent
company status, which include investor relations, advertising, public company
regulatory compliance,
23
corporate governance, increased insurance premiums, and costs associated with
rebuilding our income tax function. These expenses are expected to continue.
Personnel decreased to approximately 5,845 at March 31, 2003 from 6,230 at March
31, 2002, largely reflecting lower headcount in our Specialty Finance segment.
In addition to higher expenses, the deterioration in the efficiency ratio
for the quarter ended March 31, 2003 to 42.5% from 33.4% for the comparable
period of 2002 is also the result of lower net finance margin in 2003.
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 under 2.00%,
as we have the existing capacity to grow assets without significant additional
expense.
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.
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 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 $4.513 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.
There were no changes to the carrying value of goodwill during the quarter
ended March 31, 2003.
Provision for Credit Losses
The provision for credit losses was $103.0 million for the three months
ended March 31, 2003 versus $195.0 million for the same period last year. The
2002 provision included a $95.0 million charge relating to the economic reforms
instituted by the Argentine government that resulted in the mandatory conversion
of dollar-denominated receivables into the peso.
24
Our provision for credit losses and reserve for credit losses are
presented in the following table ($ in millions):
Quarters Ended
March 31,
-----------------------
2003 2002
------ ------
Balance beginning of period ......................... $760.8 $496.4
------ ------
Provision for credit losses ......................... 103.0 100.0
Provision for credit losses -- specific
reserving actions Argentine exposure ............. -- 95.0
Reserves relating to securitization of
factoring receivables(1) ......................... -- (25.8)
Reserves relating to dispositions,
acquisitions, other .............................. 7.5 1.7
------ ------
Additions to reserve for credit losses ........... 110.5 170.9
------ ------
Net credit losses:
Equipment Financing and Leasing ..................... 39.9 61.1
Specialty Finance -- commercial ..................... 31.0 19.6
Commercial Finance .................................. 16.6 20.2
Structured Finance .................................. 13.8 0.1
Specialty Finance -- consumer ....................... 13.0 11.4
------ ------
Total net credit losses .......................... 114.3 112.4
------ ------
Balance end of period ............................... $757.0 $554.9
====== ======
Reserve for credit losses as a percentage
of finance Receivables(2) ........................ 2.64% 2.11%
------ ------
Reserve for credit losses as a percentage
of past due receivables (sixty days or more)(2) .. 77.9% 47.9%
------ ------
- --------------------------------------------------------------------------------
(1) During the March 2002 quarter, certain factoring receivables were
securitized to enhance our liquidity position. The $25.8 million reserve
was related to those receivables.
(2) The reserve for credit losses excluding the impact of telecommunication
and Argentine reserves as a percentage of finance receivables was 1.74% at
March 31, 2003 and 1.64% at March 31, 2002. The reserve for credit losses
excluding the impact of telecommunication and Argentine reserves and
delinquencies as a percentage of past due receivables (sixty days or more)
was 49.6% at March 31, 2003.
The following table sets forth our net charge-off experience in amount and
as a percent of average finance receivables on an annualized basis by business
segment ($ in millions):
Quarters Ended March 31,
-----------------------------------
2003 2002
--------------- --------------
Equipment Financing and Leasing ........ $ 39.9 2.07% $ 61.1 2.26%
Specialty Finance -- commercial ........ 31.0 1.73% 19.6 1.21%
Commercial Finance ..................... 16.6 0.80% 20.2 1.36%
Structured Finance ..................... 13.8 1.90% 0.1 0.01%
------ ------
Total Commercial Segments ........... 101.3 1.55% 101.0 1.59%
Specialty Finance-consumer ............. 13.0 2.36% 11.4 1.51%
------ ------
Total ............................... $114.3 1.61% $112.4 1.58%
====== ======
Two factors are responsible for the decline in the Equipment Financing and
Leasing segment charge-offs. First, certain small business loans and leases were
transferred from Equipment Financing and Leasing to Specialty Finance --
commercial during the current quarter (prior period amounts have not been
restated). Charge-offs during the March 2003 quarter for these transferred
portfolios totaled $11.1 million, versus $3.7 million during the quarter ended
March 31, 2002. The remaining decline is due to lower charge-off rates
associated with receivables in liquidation status, which include owner-operator
trucking and franchise offset by continued weakness in other portfolios.
Excluding the transferred portfolios, charge-offs were flat for the quarter in
the Specialty Finance -- commercial unit. The increase in the Structured Finance
segment relates entirely to charge-offs in the telecommunications sector.
Total charge-offs during the quarter ended March 31, 2003 were $114.3
million (1.61%), including $13.8 million of telecommunication loan charge-offs,
compared to $112.4 million (1.58%) for the quarter ended March 31, 2002. The
tables that follow detail charge-offs for the quarters ended March 2003 and 2002
by segment,
25
both in amount and as a percentage of average finance receivables. In addition
to total amounts, charge-offs relating to the liquidating and telecommunications
portfolios are presented to provide enhanced analysis ($ in millions):
Quarter Ended March 31, 2003
------------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
----------------- ------------------ ------------------
Equipment Financing and Leasing .......... $ 39.9 2.07% $ 31.5 1.76% $ 8.4 6.48%
Specialty Finance--commercial ............ 31.0 1.73% 30.6 1.71% 0.4 8.65%
Commercial Finance ....................... 16.6 0.80% 16.6 0.80% -- --
Structured Finance ....................... 13.8 1.90% -- -- 13.8 8.23%
------ ------ ------
Total Commercial Segments ............. 101.3 1.55% 78.7 1.27% 22.6 7.48%
Specialty Finance--consumer .............. 13.0 2.36% 6.6 1.92% 6.4 3.09%
------ ------ ------
Total ................................. $114.3 1.61% $ 85.3 1.30% $ 29.0 5.70%
====== ====== ======
Quarter Ended March 31, 2002
------------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
----------------- ------------------ ------------------
Equipment Financing and Leasing .......... $ 61.1 2.26% $ 32.4 1.34% $ 28.7 9.57%
Specialty Finance--commercial ............ 19.6 1.21% 16.8 1.08% 2.8 5.36%
Commercial Finance ....................... 20.2 1.36% 20.2 1.36% -- --
Structured Finance ....................... 0.1 0.01% 0.1 0.01% -- --
------ ------ ------
Total Commercial Segments ............. 101.0 1.59% 69.5 1.15% 31.5 8.94%
Specialty Finance--consumer .............. 11.4 1.51% 5.7 0.95% 5.7 3.65%
------ ------ ------
Total ................................. $112.4 1.58% $ 75.2 1.13% $ 37.2 7.32%
====== ====== ======
Reserve for Credit Losses
The reserve for credit losses was $757.0 million or 2.64% of finance
receivables at March 31, 2003 compared to $760.8 million (2.75%) at December 31,
2002 and $554.9 million (2.11%) at March 31, 2002. The decrease from December
2002 relates to $13.8 million of telecommunication charge-offs which were
applied to the specific telecommunications reserve established in 2002,
partially offset by reserves associated with loan growth during the quarter. The
increase in the reserve over last year, both on a dollar basis and as a
percentage of finance receivables, is primarily due to two specific reserving
actions. First, in light of the continued deterioration in the
telecommunications sector, particularly with respect to our competitive local
exchange carrier ("CLEC") portfolio, we added $200.0 million to the reserve for
credit losses as at 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 $40 million during the quarter ended June
30, 2002). The current balances for the specific reserves are detailed below.
The following table presents the specific components of the reserve for
credit losses, both in amount and as a percentage of corresponding finance
receivables ($ in millions):
At March 31, 2003 At December 31, 2002 At March 31, 2002(3)
----------------- ------------------- -------------------
Finance receivables .......... $482.2 1.74% $472.2 1.77% $485.7 1.64%
Telecommunications ........... 139.8 21.33%(1) 153.6 22.40%(1) -- --
Argentina .................... 135.0 72.50%(2) 135.0 73.11%(2) 95.0 52.78%(2)
------ ------ ------
Total ........................ $757.0 2.64% $760.8 2.75% $580.7 1.95%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentages of telecommunications portfolio finance receivables.
(2) Percentages of finance receivables in Argentina.
(3) On a pro forma basis to include trade receivables securitized and the
applicable reserve balance ($25.8 million).
26
The reserve includes specific amounts relating to SFAS 114 impaired loans
(excluding telecommunications and Argentina) of $52.8 million at March 31, 2003,
compared to $52.9 million at December 31, 2002, and $131.4 million at March 31,
2002. 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 $678.7 million and $238.0 million at March 31, 2003,
compared to $710.1 million and $262.3 million at December 31, 2002. As stated
previously, during the current quarter, specific telecommunications charge-offs
were $13.8 million, versus $15.5 million during the prior quarter.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral, among other things. Therefore, changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the consolidated reserve for credit
losses.
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets (finance receivables on
non-accrual status and assets received in satisfaction of loans) and the related
percentages of finance receivables at March 31, 2003, December 31, 2002 and
March 31, 2002 ($ in millions):
At March 31, At December 31, At March 31,
2003 2002 2002
---------------- -------------- ------------------
Finance receivables, past due 60 days or more:
Equipment Financing and Leasing ............. $ 366.5 4.91% $ 444.8 5.12% $ 463.0 4.39%
Specialty Finance -- commercial ............ 264.7 3.68% 182.9 3.07% 287.3 4.55%
Commercial Finance .......................... 152.8 1.76% 172.3 2.14% 224.7 2.86%(1)
Structured Finance .......................... 55.2 1.89% 67.6 2.31% 39.0 1.49%
-------- -------- --------
Total Commercial Segments ................... 839.2 3.19% 867.6 3.39% 1,014.0 3.71%(1)
Specialty Finance -- consumer ............... 132.0 5.53% 133.7 6.66% 144.1 5.96%
-------- -------- --------
Total ....................................... $ 971.2 3.39% $1,001.3 3.63% $1,158.1 3.90%(1)
======== ======== ========
Non-performing assets:
Equipment Financing and Leasing ............. $ 425.4 5.70% $ 558.4 6.42% $ 472.3 4.48%
Specialty Finance -- commercial ............. 160.4 2.23% 98.2 1.65% 140.1 2.22%
Commercial Finance .......................... 128.0 1.47% 136.2 1.69% 138.5 1.76%(1)
Structured Finance .......................... 143.4 4.91% 151.6 5.19% 81.8 3.12%
-------- -------- --------
Total Commercial Segments ................... 857.2 3.26% 944.4 3.69% 832.7 3.05%(1)
Specialty Finance -- consumer ............... 149.2 6.25% 141.4 7.04% 155.7 6.44%
-------- -------- --------
Total ....................................... $1,006.4 3.51% $1,085.8 3.93% $ 988.4 3.32%(1)
======== ======== ========
Non accrual loans .............................. $ 851.3 $ 946.4 $ 840.1
Repossessed assets ............................. 155.1 139.4 148.3
-------- -------- -------
Total non-performing assets ................. $1,006.4 $1,085.8 $ 988.4
======== ======== ========
- --------------------------------------------------------------------------------
(1) For comparison, the securitized trade receivables, which were repurchased
in June 2002, are included in the calculation.
Past due loans continued a declining trend, down $30.1 million from
December 31, 2002, ending the quarter at 3.39% of finance receivables, versus
3.63% last quarter. The fluctuations in the Equipment Financing and Leasing and
Specialty Finance -- commercial segments, primarily reflect the previously
mentioned transfer of small business loans and leases from Equipment Financing
and Leasing to Specialty Finance -- commercial. Past due accounts related to
these transferred portfolios approximated $77 million and $79 million at March
2003 and December 2002, respectively. Excluding the transferred accounts, past
dues in Equipment Financing and Leasing and Specialty Finance -- commercial were
essentially unchanged quarter over quarter. Commercial Finance declined due to
improvements in the Commercial Services (factoring) unit, while regional
aerospace and CLEC accounts within the Structured Finance segment accounted for
most of the decline from December 2002.
27
Similar to past due loans, non-performing assets declined for the second
consecutive quarter at March 31, 2003. Excluding the impact of the portfolio
transfers, the reduction for the quarter was primarily in the commercial
aerospace portfolio, as aircraft securing United Airlines receivables on
non-accrual at December 31, 2002 were placed on short-term operating leases and
payments were received during the quarter to bring the account to current
status. This reduction was in part offset by the placement of Air Canada assets
on non-accrual status following its bankruptcy announcement.
Managed past due loans, which also include securitized loans, decreased to
3.38% of managed financial assets (managed assets less operating leases and
venture capital investments) at March 31, 2003 from 3.55% and 4.09% at December
31, 2002 and March 31, 2002, respectively, as shown in the table below ($ in
millions):
March 31, 2003 December 31, 2002 March 31, 2002
----------------- ----------------- ----------------
Managed Financial Assets, past
due 60 days or more:
Equipment Financing and Leasing ....... $ 540.7 4.66% $ 631.2 4.95% $ 778.5 5.40%
Specialty Finance -- commercial ....... 343.0 3.04% 265.1 2.62% 401.0 3.66%
Commercial Finance .................... 152.8 1.76% 172.3 2.14% 224.7 2.86%
Structured Finance .................... 55.2 1.89% 67.6 2.31% 39.0 1.49%
-------- -------- --------
Total Commercial ...................... 1,091.7 3.16% 1,136.2 3.36% 1,443.2 4.02%
Specialty Finance-consumer ............ 269.6 4.64% 259.4 4.71% 237.0 4.51%
-------- -------- --------
Total ................................. $1,361.3 3.38% $1,395.6 3.55% $1,680.2 4.09%
======== ======== ========
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 March 31, 2003
amounts.
Income Taxes
The effective tax rates for the three months ended March 31, 2003 and 2002
were 39.0% and (1.1)%, respectively. The provision for income taxes totaled
$82.9 million and $50.4 million for the respective periods. The effective tax
rate for the prior year quarter, excluding the impact of TCH and the non-cash
goodwill impairment charge, was 38.1%.
As of March 31, 2003, we had approximately $1,559.0 million of tax loss
carry-forwards, primarily related to U.S. federal and state jurisdictions, which
expire at various dates beginning in 2010. These loss carry-forwards are
available to offset current federal income tax liabilities, subject to certain
limitations.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO and separation from Tyco we have made strides in rebuilding our tax
functions, including hiring personnel, and rebuilding systems and processes.
28
Results by Business Segment
The table that follows summarizes selected financial information by
business segment, based upon a fixed leverage ratio across business units and
the allocation of most corporate expenses ($ in millions):
Quarters Ended
-------------------------------------
March 31, December 31, March 31,
2003 2002 2002
--------- ------------ ---------
Net Income
Equipment Financing and Leasing ........ $ 18.4 $ 36.2 $ 62.6
Specialty Finance ...................... 52.2 73.7 100.0
Commercial Finance ..................... 54.1 63.4 46.2
Structured Finance ..................... 12.2 13.9 16.4
------ ------ ---------
Total Segments ...................... 136.9 187.2 225.2
Corporate, including certain charges ... (9.9) (45.9) (4,844.9)
------ ------ ---------
Total ............................... $127.0 $141.3 $(4,619.7)
====== ====== =========
Return on AEA
Equipment Financing and Leasing ........ 0.55% 1.02% 1.58%
Specialty Finance ...................... 1.75% 2.86% 3.20%
Commercial Finance ..................... 3.58% 5.18% 3.72%
Structured Finance ..................... 1.63% 1.96% 2.51%
Total Segments ...................... 1.60% 2.32% 2.70%
Corporate, including certain charges ... (0.13)% (0.59)% (53.83)%
Total ............................... 1.47% 1.73% (51.32)%
Corporate and Other included the following items in the quarter ended
March 31, 2002: (1) goodwill impairment of $4,512.7 million, (2) TCH expenses of
$312.3 million ($264.3 million after tax), (3) specific loan loss reserves of
$95.0 million ($58.9 million after tax) relating to economic reforms instituted
by the Argentine government which resulted in the mandatory conversion of
dollar-denominated receivables into pesos, (4) venture capital operating losses
of $13.7 million ($8.6 million after tax). Corporate and Other included $14.5
million ($8.9 million after tax) of venture capital operating losses in the
quarter ended March 31, 2003. Excluding these items, after tax unallocated
corporate expenses and funding costs were $0.5 million and $0.4 million during
the quarters ended March 31, 2003 and March 31, 2002, respectively.
Return on AEA was down across all segments for 2003 in relation to the
2002 periods reflecting margin compression and charge-offs (before liquidating
and telecommunication portfolios) above the year ago quarter levels. The
business segments' risk adjusted margins for the quarter ended March 31, 2003
were further dampened by the allocation (from Corporate) of additional borrowing
costs stemming from the 2002 disruption to the Company's funding base and
enhanced liquidity levels. These additional costs were significantly higher in
2003. The additional borrowing and liquidity costs were included in Corporate in
2002.
The unfavorable variance in Equipment Financing and Leasing included lower
aerospace profitability as well as reduced returns in the construction and
industrial businesses within the Equipment Financing unit. In addition to lower
risk adjusted margins, the Specialty Finance comparisons with the prior year
reflected higher levels of securitization activity during the quarter ended
March 31, 2002 done primarily for liquidity purposes. The Specialty Finance
returns were also dampened by the transferred portfolios, which had a modest
loss for the current quarter.
During the quarter ended March 31, 2003, in order to better align
competencies, we transferred certain small business loans and leases, including
the small business lending unit, totaling $1,078.6 million, from Equipment
Financing and Leasing to Specialty Finance -- commercial. At March 31, 2003,
finance receivables past due 60 days or more and non-performing assets relating
to these portfolios were $77 million and $70 million versus $79 million and $73
million at December 31, 2002. Prior periods have not been restated to conform to
this current presentation.
Financing and Leasing Assets
Managed assets, comprised of financing and leasing assets and finance
receivables previously securitized that we continue to manage, totaled $47.5
billion at March 31, 2003, up from $46.4 billion at December 31, 2002. Owned
financing and leasing portfolio assets totaled $37.1 billion at March 31, 2003,
up from $35.9 billion at
29
December 31, 2002. Our portfolio assets grew during the quarter in most business
units. During the quarter, certain asset portfolios totaling approximately $1
billion were transferred from Equipment Financing to Specialty Finance. The
remaining growth in the Specialty Finance -- commercial segment was due to
seasonality of certain portfolios and complementary portfolio purchases. The
Specialty Finance-consumer home equity growth was attributed to opportunistic
bulk purchases made during the quarter. Commercial Finance growth reflected
increased borrowings by customers under existing credit facilities. Total
origination volume was down 12% from the prior quarter and 5% from the prior
year quarter. Specialty Finance had the most notable improvement, as its volumes
were up over both periods.
As of March 31, 2003, the net investment in leveraged leases totaled $1.2
billion, or 4.2% of finance receivables. The major components of this amount are
as follows: commercial aerospace of $470 million, including $216 million of
tax-optimization leveraged leases, which generally have increased risk for
lessors in relation to conventional lease structures due to additional leverage
in the transactions; $304 million of project finance transactions, primarily in
the power and utility sector; and $281 million in rail transactions.
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions):
At At Change
March 31, December 31, ------------------------
2003 2002 $ %
---------- ----------- ---------- ----------
Equipment Financing and Leasing:
Equipment Financing
Finance receivables(1) ................... $ 6,400.8 $ 7,476.9 $(1,076.1) (14.4)%
Operating lease equipment, net ........... 527.4 668.3 (140.9) (21.1)
--------- --------- --------
Total .................................. 6,928.2 8,145.2 (1,217.0) (14.9)
--------- --------- --------
Capital Finance
Finance receivables ...................... 1,223.7 1,335.8 (112.1) (8.4)
Operating lease equipment, net ........... 4,973.0 4,719.9 253.1 5.4
--------- --------- --------
Total .................................. 6,196.7 6,055.7 141.0 2.3
--------- --------- --------
Total Equipment Financing and
Leasing Segment ........................ 13,124.9 14,200.9 (1,076.0) (7.6)
--------- --------- --------
Specialty Finance:
Commercial
Finance receivables(1) ................... 8,101.1 6,722.4 1,378.7 20.5
Operating lease equipment, net ........... 1,227.6 1,257.3 (29.7) (2.4)
--------- --------- --------
Total commercial ....................... 9,328.7 7,979.7 1,349.0 16.9
--------- --------- --------
Consumer
Home equity .............................. 1,601.3 1,292.7 308.6 23.9
Other .................................... 995.8 1,044.4 (48.6) (4.7)
--------- --------- --------
Total consumer ......................... 2,597.1 2,337.1 260.0 11.1
--------- --------- --------
Total Specialty Finance Segment ........ 11,925.8 10,316.8 1,609.0 15.6
--------- --------- --------
Commercial Services ......................... 4,726.1 4,392.5 333.6 7.6
Business Credit ............................. 3,956.6 3,649.1 307.5 8.4
--------- --------- --------
Total Commercial Finance Segment ....... 8,682.7 8,041.6 641.1 8.0
--------- --------- --------
Structured Finance:
Finance receivables ...................... 2,922.2 2,920.9 1.3 --
Operating lease equipment, net ........... 103.4 59.1 44.3 75.0
Equity investments .......................... 334.3 335.4 (1.1) (0.3)
--------- --------- --------
Total Structured Finance Segment ....... 3,359.9 3,315.4 44.5 1.3
--------- --------- --------
TOTAL FINANCING AND LEASING
PORTFOLIO ASSETS ..................... 37,093.3 35,874.7 1,218.6 3.4
--------- --------- --------
Finance receivables securitized:
Equipment Financing ......................... 3,977.2 3,936.2 41.0 1.0
Specialty Finance--commercial ............... 3,191.7 3,377.4 (185.7) (5.5)
Specialty Finance--consumer ................. 3,218.8 3,168.8 50.0 1.6
--------- --------- --------
Total .................................. 10,387.7 10,482.4 (94.7) (0.9)
--------- --------- --------
TOTAL MANAGED ASSETS(2) ................ $47,481.0 $46,357.1 $1,123.9 2.4%
========= ========= ========
- --------------------------------------------------------------------------------
(1) During the quarter, certain owned finance receivables totaling $1,078.6
million were transferred from Equipment Financing to Specialty Finance --
commercial, principally representing small business loans. Prior periods
have not been restated to conform to the current presentation.
(2) Managed assets are compromised of financing and leasing assets and finance
receivables previously securitized that we continue to manage.
30
Concentrations
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.0% of our total financing and leasing assets at both March 31,
2003 (with the largest account representing less than 1.0%) and December 31,
2002. All ten accounts at each period of time were commercial accounts and were
secured by equipment, accounts receivable or inventory.
Our strategic relationships with industry-leading equipment vendors are a
significant origination channel for our financing and leasing activities. These
vendor alliances include traditional vendor finance programs, joint ventures and
profit sharing structures. Our vendor programs with Dell Computer Corporation
("Dell"), Snap-on Incorporated ("Snap-on") and Avaya Inc. ("Avaya") are among
our largest alliances. The joint venture agreements with Dell and Snap-on extend
until October 2005 and January 2007, respectively. The Avaya agreement, which
runs until September 2003, extends automatically for three years if not
terminated by either party. No notice of termination has been given by either
party, and we are currently negotiating the terms of an extension with Avaya.
At March 31, 2003, our financing and leasing assets included $2,930
million, $1,008 million and $1,079 million related to the Dell, Snap-on and
Avaya programs, respectively. These amounts include receivables originated
directly by CIT as well as receivables purchased from joint venture entities.
Securitized assets included $1,553 million, $88 million and $857 million from
the Dell, Snap-on and Avaya origination sources, respectively, at March 31,
2003. Any significant reduction in origination volumes from any of these
alliances could have a material impact on our asset levels. For additional
information regarding certain of our joint venture activities, see Note 11 --
Related Party Transactions.
Geographic Composition
The following table summarizes state concentrations greater than 5.0% and
foreign concentrations in excess of 1.0% of our owned financing and leasing
portfolio assets at March 31, 2003 and December 31, 2002. In each period, our
managed asset geographic composition did not differ significantly from our owned
asset geographic composition.
March 31, December 31,
2003 2002
--------- ------------
State
California ......................................... 9.7% 9.8%
New York ........................................... 7.5% 7.9%
Texas .............................................. 6.9% 7.0%
Total U.S. ......................................... 79.6% 79.3%
Country
Canada ............................................. 5.0% 5.0%
England ............................................ 3.3% 3.2%
Australia .......................................... 1.3% 1.3%
China .............................................. 1.2% 1.2%
Germany ............................................ 1.0% 1.1%
Brazil ............................................. 1.0% 1.1%
France ............................................. 1.0% 1.0%
Total Outside U.S. ................................. 20.4% 20.7%
- --------------------------------------------------------------------------------
(1) The applicable balances are less than 1.0%.
Industry Composition
At March 31, 2003, our commercial aerospace portfolio in the Capital
Finance business unit consisted of financing and leasing assets of $4,179.7
million covering 195 aircraft, with an average age of approximately 7 years. The
portfolio was spread over 74 accounts, with the majority placed with major
airlines around the world. The commercial aerospace portfolio at December 31,
2002 was $4,072.8 million of financing and leasing assets, which covered 194
aircraft spread over 78 accounts, with an average age of approximately 7 years.
The commercial aircraft all comply with stage III noise regulations.
31
The following table summarizes the composition of the commercial aerospace
portfolio as of March 31, 2003 and December 31, 2002 ($ in millions):
At March 31, 2003 At December 31, 2002
------------------------ -------------------------
Net Number of Net Number of
Investment Aircraft Investment Aircraft
---------- ---------- ---------- ----------
By Geography:
Europe .............. $1,537.4 51 $1,506.5 51
North America(1) .... 1,110.1 78 1,042.2 75
Asia Pacific ........ 886.5 36 853.6 35
Latin America ....... 572.5 26 595.9 29
Africa/Middle East .. 73.2 4 74.6 4
-------- --- -------- ---
Total .................. $4,179.7 195 $4,072.8 194
======== === ======== ===
By Manufacturer:
Boeing .............. $2,514.2 138 $2,388.1 135
Airbus .............. 1,640.8 42 1,647.9 42
Other ............... 24.7 15 36.8 17
-------- --- -------- ---
Total .................. $4,179.7 195 $4,072.8 194
======== === ======== ===
By Body Type(2):
Narrow .............. $2,909.8 144 $2,799.4 142
Intermediate ........ 871.6 18 859.2 17
Wide ................ 373.6 18 377.4 18
Other ............... 24.7 15 36.8 17
-------- --- -------- ---
Total .................. $4,179.7 195 $4,072.8 194
======== === ======== ===
- --------------------------------------------------------------------------------
(1) Comprised of net investments in the U.S. and Canada of $902.0 million (72
aircraft) and $208.1 (6 aircraft) at March 31, 2003 and $832.7 million (69
aircraft) and $209.5 million (6 aircraft) at December 31, 2002.
(2) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglas DC10
series aircraft.
As of March 31, 2003, operating leases represented approximately 81% 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 comparison to our other lease and leveraged
lease structures, were approximately $216 million at March 31, 2003. Total
leveraged leases, including the tax optimization structures described above,
were $469 million or 11% of the aerospace portfolio at March 31, 2003. Of the
195 aircraft, 7 are off-lease, 4 of which have been remarketed with leases
pending as of March 31, 2003.
The regional aircraft portfolio at March 31, 2003 consisted of 115 planes
and a net investment of $309.1 million, primarily in the Structured Finance
segment. The planes are primarily located in North America and Europe. Operating
leases accounted for about 32% of the portfolio at March 31, 2003, with the rest
being capital leases or loans. There are 5 aircraft in this portfolio that are
off-lease. At December 31, 2002, the regional aircraft portfolio consisted of
117 planes and a net investment of $344.0 million.
The following is a list of CIT's exposure to various carriers and current
status of related aircraft.
o U.S. Airways -- On August 11, 2002, U.S. Airways announced its
Chapter 11 bankruptcy filing. On March 31, 2003, U.S. Airways
emerged from its bankruptcy filing and currently leases five
narrow-body 737's owned by CIT (classified as operating leases) with
a net book value of $57.0 million.
o National Airways -- On November 6, 2002, National Airways, 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 $39.3 million, and are remarketing the aircraft.
o UAL Corp. -- On December 9, 2002, UAL Corp., the parent of United
Airlines, announced its Chapter 11 bankruptcy filing. Under existing
agreements, United Airlines leases four CIT-owned aircraft narrow
body (2 Boeing 757 aircraft and 2 Boeing 737 aircraft) with a net
book value of $92.3 million. These
32
leases were converted from single investor capital leases to
short-term operating leases during the quarter ended March 31, 2003.
In conjunction with this conversion, we recorded a $1.8 million
impairment charge to reflect current fair values.
o Avianca Airlines -- Avianca Airlines filed voluntary petitions for
re-organization under Chapter 11 of the U.S. Bankruptcy Code on
Friday, March 21, 2003. Under existing agreements, CIT has operating
leases with Avianca whereby it is the lessee of one MD 80 and one
Boeing 757 aircraft, the latter of which is scheduled to come off
lease in May. The net book value of the two aircraft was $40.8
million at March 31, 2003.
o Air Canada -- Air Canada filed for protection from creditors on
April 1, 2003 under the Companies' Creditors Arrangement Act, the
Canadian reorganization law. CIT's exposure in aircraft to Air
Canada is approximately USD$80 million, primarily relating to two
Boeing 767 aircraft. One aircraft is scheduled to come off-lease on
June 1, 2003 for which CIT has a signed commitment in place to
re-lease the aircraft to another carrier. On the second 767, CIT has
an investment in a leveraged lease (not a tax-optimized structure),
with a remaining term of six years.
Additionally, CIT holds $36.7 million and $5.3 million in Senior A tranche
Enhanced Equipment Trust Certificates (EETCs) issued by United Airlines and U.S.
Airways, respectively, which are debt instruments collateralized by aircraft
operated by the airlines. 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 $102 million. This debtor-in-possession
facility, with an outstanding balance of $32.0 million at March 31, 2003, 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.
The top five commercial aerospace exposures totaled $977.7 million at
March 31, 2003, the largest of which was $242.6 million. The top three of these
exposures are to European carriers and all are to carriers outside of the U.S.
The largest exposure to a U.S. carrier at March 31, 2003 was $144.9 million.
Our aerospace assets include both operating leases and capital leases.
Management monitors economic conditions affecting equipment values, trends in
equipment values, and periodically obtains third party appraisals of commercial
aerospace equipment, which include projected rental rates. We adjust the
depreciation schedules of commercial aerospace equipment on operating leases or
residual values underlying capital leases, when required. Aerospace assets are
reviewed for impairment annually, or more often when events or circumstances
warrant. An aerospace asset is considered impaired when the expected
undiscounted cash flow over its expected remaining life is less than its book
value. Both historical information and current economic trends are factored into
the assumptions and analyses used when determining the expected undiscounted
cash flow. Included among these assumptions are the following:
o Lease terms
o Remaining life of the asset
o Lease rates supplied by independent appraisers
o Remarketing
o Maintenance
An impairment loss is recognized if the asset book value exceeds the
estimated fair value determined under the aforementioned cash flow analysis. As
discussed previously, during the quarter ended March 31, 2003, we recorded an
impairment charge of $1.8 million related to the United Airlines exposure.
Impairment charges related to commercial aerospace assets have not been
significant.
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 $678.7 million at March 31,
2003, or approximately 1.8% of total financing and leasing assets. The portfolio
consists of 53 accounts with an average balance of approximately $12.8 million.
The 10 largest accounts in the portfolio aggregate $265.6 million with the
largest single account totaling $33.4 million. Non-performing accounts totaled
$85.5 million (9 accounts) or 12.6% of this portfolio. The telecommunications
portfolio includes CLECs, wireless, and towers, with the largest group being
CLEC accounts, which totaled $238.0 million, or 35.1% of the telecommunications
portfolio at March 31, 2003. At December 31, 2002, the portfolio totaled $710.1
million (approximately 2.0% of total financing and
33
leasing assets) and consisted of 52 accounts with an average balance of
approximately $13.7 million. The 10 largest accounts in the portfolio aggregated
$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. Total CLEC exposure amounted to $262.3 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," $139.8 million of
previously recorded reserves remain for telecommunication exposures. As
management continues monitoring and workout 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.
The portfolio of direct and private fund venture capital equity
investments totaled $334.3 million at March 31, 2003 and $335.4 million at
December 31, 2002. At March 31, 2003, this portfolio was comprised of direct
investments of approximately $179.6 million in 57 companies and $154.7 million
in 52 private equity funds. Our direct investments totaled $188.8 million (57
companies) and our investment in private equity funds amounted to $146.6 million
(52 funds) as of December 31, 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 $153.7 million at March 31, 2003 and $164.9 million at
December 31, 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 the performance of the underlying companies,
and public and private market valuations of these companies.
At March 31, 2003, we had approximately $186.2 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 is currently taking measures to
mitigate currency risk by converting peso collections to dollars as legally
permitted.
Management strives to maximize the profitability of the operating lease
equipment portfolio by balancing equipment utilization levels with market rental
rates and lease terms. Substantially all such equipment was subject to lease
agreements throughout the first quarter of 2003 and 2002. Total equipment not
subject to lease agreements was $360.6 million and $385.9 million at March 31,
2003 and December 31, 2002, respectively. The current weakness in the commercial
airline industry and the slower economy could adversely impact both rental and
utilization rates prospectively.
See Note 7 -- Concentrations of Item 1. Consolidated Financial Statements
for further discussion on concentrations.
Other Assets
Other assets totaled $4.8 billion at March 31, 2003 and $4.7 billion at
December 31, 2002, as both the total balance and the underlying components were
essentially unchanged. Other assets primarily consisted of the following at
March 31, 2003: securitization assets, including interest-only strips, retained
subordinated securities, cash reserve accounts and servicing assets of $1.4
billion, investments in and receivables from and related to non-consolidated
subsidiaries of $0.8 billion, accrued interest and receivables from derivative
counterparties of $0.7 billion, deposits on commercial aerospace flight
equipment of $0.3 billion, direct and private fund equity investments of $0.3
billion, repossessed assets 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 2002 IPO.
34
Net income for the quarter ended March 31, 2003 was $127.0 million, or
$0.60 per diluted share, compared to $141.3 million, or $0.67 per diluted share
for the quarter ended December 31, 2002. The table that follows presents results
for the quarters ended March 31, 2003 and December 31, 2002, both in amount and
as a percentage of average earning assets ("AEA") ($ in millions):
Quarter ended Quarter ended
March 31, 2003 December 31, 2002
------------------ -------------------
Amount % AEA Amount % AEA
--------- ----- --------- -----
Finance income ................................................. $ 939.2 10.86% $ 971.7 11.89%
Interest expense ............................................... 346.7 4.01 340.0 4.16
--------- ----- --------- -----
Net finance income ............................................. 592.5 6.85 631.7 7.73
Depreciation on operating lease equipment ...................... 278.8 3.22 277.3 3.39
--------- ----- --------- -----
Net finance margin ............................................. 313.7 3.63 354.4 4.34
Provision for credit losses .................................... 103.0 1.19 133.4 1.64
--------- ----- --------- -----
Net finance margin after provision for credit losses ........... 210.7 2.44 221.0 2.70
Other revenue .................................................. 235.5 2.72 257.1 3.15
--------- ----- --------- -----
Operating margin ............................................... 446.2 5.16 478.1 5.85
Salaries and general operating expenses ........................ 233.6 2.70 242.1 2.96
--------- ----- --------- -----
Income before provision for income taxes ....................... 212.6 2.46 236.0 2.89
Provision for income taxes ..................................... (82.9) (0.96) (92.0) (1.13)
Minority interest in subsidiary trust holding solely
debentures of the Company, after tax ........................ (2.7) (0.03) (2.7) (0.03)
--------- ----- --------- -----
Net income ..................................................... $ 127.0 1.47% $ 141.3 1.73%
========= ===== ========= =====
Net income per share--basic and diluted ........................ $ 0.60 $ 0.67
========= =========
Average Earning Assets (AEA) ................................... $34,600.6 $32,693.2
========= =========
The reduction in net income from the prior quarter reflected lower
interest margin and other revenue, the effects of which were partially mitigated
by lower charge-offs and reduced operating expenses.
Net finance margin, at 3.63% of average earning assets for the current
quarter, declined from 4.34% during the prior quarter. The decline primarily
reflects the following factors: the continuation of higher funding costs
associated with our term funding initiatives and liquidity position, coupled
with lower cost debt maturities and including the impact of fair value
adjustments in conjunction with the Tyco acquisition (26 basis points); lower
fees due to reduced volume (15 basis points); lower yields on the liquidating
portfolios (14 basis points) and reduced rental rates on the aerospace portfolio
(7 basis points). Risk adjusted margin (net finance margin after provision for
credit losses) declined to $210.7 million or 2.44%, from $221.0 million or 2.70%
last quarter, as the decline in net finance margin was in part offset by reduced
charge-offs.
The positive impact on risk adjusted margin due to fair value adjustments
to mark finance receivables and debt to market remaining from the Tyco
acquisition was 19 and 38 basis points for the quarters ended March 31, 2003 and
December 31, 2002, respectively.
Operating lease equipment increased modestly ($126.8 million) over last
quarter, primarily due to large-ticket equipment in the Capital Finance unit. As
a result, depreciation expense was flat in relation to the prior quarter. 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 6.1% during the quarter
ended March 31, 2003 versus 6.8% during the prior quarter, reflecting pressure
on aerospace rental rates.
Total charge-offs during the March quarter were $114.3 million (1.61%),
including $13.8 million of telecommunication loan charge-offs, compared to
$154.5 million (2.32%) during the prior quarter. The tables that follow detail
charge-offs for the current and prior quarters by segment, both in amount and as
a percentage of average finance receivables. In addition to total amounts,
charge-offs relating to the liquidating and telecommunications portfolios are
also presented to provide enhanced analysis ($ in millions):
35
Net Charge-offs: Quarter Ended March 31, 2003
------------------------------------------------------------
Before Liquidating and
Total Liquidating/Telecom Telecommunications
----------------- ------------------ ------------------
Equipment Financing and Leasing ............... $ 39.9 2.07% $31.5 1.76% $ 8.4 6.48%
Specialty Finance -- commercial ............... 31.0 1.73% 30.6 1.71% 0.4 8.65%
Commercial Finance ............................ 16.6 0.80% 16.6 0.80% --- --
Structured Finance ............................ 13.8 1.90% -- -- 13.8 8.23%
------ ----- -----
Total Commercial Segments ................... 101.3 1.55% 78.7 1.27% 22.6 7.48%
Specialty Finance -- consumer ................. 13.0 2.36% 6.6 1.92% 6.4 3.09%
------ ----- -----
Total ....................................... $114.3 1.61% $85.3 1.30% $29.0 5.70%
====== ===== =====
Net Charge-offs: Quarter Ended December 31, 2002
------------------------------------------------------------
Before Liquidating and
Total Liquidating/Telecom Telecommunications
----------------- ------------------ ------------------
Equipment Financing and Leasing ............... $ 71.1 3.23% $ 57.8 2.81% $13.3 9.25%
Specialty Finance -- commercial ............... 23.2 1.55% 21.2 1.42% 2.0 36.36%
Commercial Finance ............................ 33.5 1.92% 33.5 1.92% -- --
Structured Finance ............................ 15.5 2.24% -- -- 15.5 8.75%
------ ------ -----
Total Commercial Segments .................. 143.3 2.33% 112.5 1.93% 30.8 9.44%
Specialty Finance -- consumer ................. 11.2 2.24% 6.1 2.11% 5.1 2.42%
------ ------ -----
Total ...................................... $154.5 2.32% $118.6 1.94% $35.9 6.68%
====== ====== =====
Total telecommunication and liquidating charge-offs were down $6.9 million
from last quarter, largely in the trucking and franchise portfolios. Before
liquidating portfolio charge-offs and telecommunication charge-offs covered by
specific 2002 reserving actions, charge-offs were $85.3 million (1.30% of
average finance receivables) for the current quarter, down from $118.6 million
(1.94%) last quarter. The improvement from last quarter primarily reflects
declines in both the Equipment Financing and Business Credit units, partially
offset by higher Specialty Finance -- commercial charge-offs this quarter, which
included higher losses in the small business loan and leasing units. These small
business loan and leasing units were transferred from Equipment Financing to
Specialty Finance during the quarter. The Equipment Financing trend reflected
lower charge-offs in the construction and industrial equipment businesses, while
the Business Credit improvement followed a number of large write-offs during the
prior quarter in connection with concluding several loan workouts.
For the quarter ended March 31, 2003, other revenue totaled $235.5
million, down from $257.1 million for the quarter ended December 31, 2002,
reflecting lower fee income and factoring revenues on lower volumes, partially
offset by a modest increase in equipment gains, primarily in the Specialty
Finance -- commercial unit. Securitization gains during the current quarter
totaled $30.7 million, 14.4% of pretax income, on volume of $1,237 million,
compared to $30.5 million, 12.9% of pretax income, on volume of $1,189 million
during the prior quarter. The components of other revenue are set forth in the
following table ($ in millions):
Quarter Ended
---------------------------
March 31, December 31,
2003 2002
--------- ------------
Fees and other income ........................... $144.7 $169.2
Factoring commissions ........................... 46.9 55.1
Gains on securitizations ........................ 30.7 30.5
Gains on sales of leasing equipment ............. 17.6 8.7
Loss on venture capital investments ............. (4.4) (6.4)
------ ------
Total ......................................... $235.5 $257.1
====== ======
Salaries and general operating expenses were $233.6 million for the
current quarter, compared to $242.1 million reported for the December 31, 2002
quarter. The decrease from last quarter included lower legal, repossession and
collection expenses. Salaries and general operating expenses were 2.08% of
average managed assets during the quarter, versus 2.18% 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 42.5% as
compared to 39.6% in the prior quarter, as the decline in our margin and other
revenue negatively impacted the ratio. Headcount was 5,845 at March 31, 2003
compared to 5,835 at December 31, 2002.
36
Risk Management
We performed additional risk management procedures in 2002 and into 2003
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 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 2002 and into 2003, performance,
profitability and residual values relating to aerospace assets were reviewed
more frequently with the Executive Credit Committee.
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 workout 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, approves 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 Corporate Credit Risk
Management group also includes an independent credit audit function.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These guidelines set forth risk
acceptance criteria for:
o acceptable maximum credit lines;
o selected target markets and products;
o creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow, financial performance and quality
of management; and
o the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
37
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 (other than small ticket leasing
transactions) 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.
Consumer and Small Ticket Leasing
For consumer transactions and small ticket leasing transactions, we employ
proprietary automated credit scoring models by loan type that include both
customer demographics and credit bureau characteristics. 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 and the small ticket
leasing portfolio using past due, vintage curve and other statistical tools to
analyze trends and credit performance by loan type, including analysis of
specific credit characteristics and other selected subsets of the portfolios.
Adjustments to credit scorecards and lending programs are made when deemed
appropriate. Individual underwriters are assigned credit authority based upon
their experience, performance and understanding of the underwriting policies and
procedures of our consumer and small-ticket leasing operations. A credit
approval hierarchy also exists to ensure that an underwriter with the
appropriate level of authority reviews all applications. 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.
38
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 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 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.
We target to match the basis of assets with that of our liabilities (i.e.
fixed rate assets funded with fixed rate liabilities and floating rate assets
funded with floating rate liabilities), while also targeting to preserve the
economic returns of our assets through duration matching. Interest rate swaps
are an effective means of achieving our target matched funding objectives by
converting debt to the desired basis and duration.
Interest rate swaps with notional principal amounts of $9.0 billion at
March 31, 2003 and $7.8 billion at December 31, 2002 were designated as hedges
against outstanding debt. The increase in notional principal amounts of interest
rate swaps during the current quarter consisted of a $843 million increase in
fixed to floating-rate swaps (fair value hedges) and a $388 million increase in
floating to fixed-rate swaps (cash flow hedges). This trend reflects a higher
level and proportion of variable-rate assets, as well as management's strategy
to better match the duration of assets and liabilities, as funding actions of
last year resulted in a lengthening of liability duration.
The following table summarizes the composition of our assets and
liabilities before and after swaps at March 31, 2003:
Before Swaps After Swaps
-------------------------- --------------------------
Fixed Rate Floating Rate Fixed Rate Floating Rate
---------- ------------- ---------- -------------
Assets ............ 51% 49% 51% 49%
Liabilies ......... 62% 38% 55% 45%
39
A comparative analysis of the weighted average principal outstanding and
interest rates on our debt before and after the effect of interest rate swaps is
shown in the following table ($ in millions):
Quarter Ended March 31, 2003
-----------------------------------------
Before Swaps After Swaps
----------------- -------------------
Commercial paper and variable rate
senior notes and bank credit
facilities ........................ $12,704.5 1.94% $14,751.9 2.80%
Fixed rate senior and subordinated
notes ............................. 19,695.7 6.32% 17,648.3 6.10%
--------- ---------
Composite ........................... $32,400.2 4.61% $32,400.2 4.60%
========= =========
Quarter Ended December 31, 2002
-----------------------------------------
Before Swaps After Swaps
----------------- -------------------
Commercial paper and variable rate
senior notes and bank credit
facilities ........................ $12,344.2 2.09% $13,103.1 2.82%
Fixed rate senior and subordinated
notes ............................. 18,055.3 6.20% 17,296.4 5.87%
--------- ---------
Composite ........................... $30,399.5 4.54% $30,399.5 4.56%
========= =========
Quarter Ended March 31, 2002
-----------------------------------------
Before Swaps After Swaps
----------------- -------------------
Commercial paper and variable rate
senior notes and bank credit
facilities ........................ $19,300.1 2.15% $16,034.9 2.26%
Fixed rate senior and subordinated
notes ............................. 15,832.2 5.58% 19,097.4 5.66%
--------- ---------
Composite ........................... $35,132.3 3.69% $35,132.3 4.11%
========= =========
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 5 -- Derivative Financial
Instruments to the Consolidated Financial Statements.
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.
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 increase in the yield curve on
April 1, 2003 would have reduced net income by an estimated $15 million after
tax over the next twelve months, while a decrease in the yield curve would have
increased net income by a like amount. A 100 basis point parallel increase in
the yield curve on January 1, 2003 would have reduced net income by an estimated
$16 million after-tax over the following twelve months, with a decrease in the
yield curve having caused an increase in net income of 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.
40
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 March 31, 2003, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $2.7 billion
and maturities ranging from 2003 to 2006. CIT was also party to cross currency
interest rate swaps with notional amounts totaling $1.4 billion and maturities
ranging from 2003 to 2027. At December 31, 2002, CIT was party to foreign
currency exchange forward contracts with notional amounts totaling $3.0 billion.
CIT was also party to cross currency interest rate swaps with notional amounts
totaling $1.5 billion. At March 31, 2002, CIT was party to $3.4 billion in
notional principal amount of foreign currency exchange forward contracts and
$2.4 billion in notional principal amount of cross currency swaps that 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 counterparty credit
risk, liquidity risk, systemic risk, legal risk and market risk. Internal risk
relates to those operational risks within the management oversight structure and
includes actions taken in contravention of CIT policy.
The primary external risk of derivative instruments is counterparty credit
exposure, which is defined as the ability of a counterparty to perform its
financial obligations under a derivative contract. We control the credit risk of
our derivative agreements through counterparty credit approvals, pre-established
exposure limits and monitoring procedures.
The Capital Committee approves each counterparty and establishes exposure
limits based on credit analysis and market value. All derivative agreements are
entered into with major money center financial institutions rated investment
grade by nationally recognized rating agencies, with the majority of our
counterparties rated "AA" or better. Credit exposures are measured based on the
market value of outstanding derivative instruments. Exposures are calculated for
each derivative contract to monitor counterparty 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. and International) and asset-backed securities
(U.S. and Canada). 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 backstop support of commercial paper
borrowings and local bank lines to support our international operations.
Additional sources of liquidity are loan and lease payments from customers,
whole loan asset sales and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability. 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
The commercial paper program closed the quarter at $4.5 billion, down from
$5.0 billion at December 31, 2002. The drop in outstanding balance from December
corresponded with the emphasis on term funding during the quarter. Our targeted
program size remains at $5 billion and our goal is to maintain at least 100%
back-up liquidity.
During the quarter, existing bank facilities were paid down further,
maintaining backstop liquidity to fully cover all outstanding commercial paper.
At March 31, 2003, we had total bank credit facilities of $7,035 million, of
which $1,300 million was drawn (down from drawn facilities of $2,118 million at
December 31, 2002). Accordingly, undrawn backstop liquidity coverage of
outstanding commercial paper was approximately 128% at March 31, 2003. The
quarterly activity included repayment and retirement of a C$500 million ($340
million)
41
364-day bank facility. In April 2003, a $765 million undrawn facility expired
and was not renewed, but our coverage remains in excess of 100% of outstanding
commercial paper. Our remaining facilities include a $3,720 million facility,
undrawn and available, which expires March 2005, and two other facilities
expiring 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 March 31, 2003, we had $3.8
billion of registered, but unissued, debt securities available under a shelf
registration statement. Term-debt issued during the quarter consisted of a $1.0
billion three-year, fixed-rate global issue and $2.6 billion in variable-rate
medium-term notes. In November 2002, we introduced a retail note program, in
which we offer senior, unsecured notes utilizing numerous broker-dealers for
placement to retail accounts. During the quarter, we issued $752 million under
this program. As of March 31, 2003, we had issued $1.5 billion of notes 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 March 31, 2003, we had approximately $2.3 billion of availability
in our committed asset-backed facilities and $3.4 billion of registered, but
unissued, securities available under public shelf registration statements
relating to our asset-backed securitization program. Securitization volume was
$1.2 billion, unchanged from the prior quarter.
Our credit ratings are shown for March 31, 2003, December 31, 2002, and
March 31, 2002 in the following table:
At March 31, 2003 At December 31, 2002 At March 31, 2002
----------------------- ----------------------- -----------------------
Short Term Long Term Short Term Long Term Short Term Long Term
---------- ---------- ---------- ---------- ---------- ----------
Moody's ................. P-1 A2 P-1 A2 P-1 A2
Standard & Poor's ....... A-1 A A-1 A A-2 A-
Fitch ................... F1 A F1 A F2 A-
- --------------------------------------------------------------------------------
The credit ratings stated above are not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
We have some material covenants within our legal documents that govern our
funding sources. The most significant covenant in CIT's indentures and credit
agreements is a negative pledge provision, which limits granting or permitting
liens on our assets, but provides for exceptions for certain ordinary course
liens needed to operate our business. During the quarter ended March 31, 2003,
we successfully completed a consent solicitation to amend the negative pledge
provision in our 1994 debt indenture. This action conforms the 1994 debt
indenture to our other agreements and provides flexibility in structuring our
securitizations as accounting sales or secured financings. Various credit
agreements also contain a minimum net worth test of $3.75 billion.
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of March 31, 2003.
Projected proceeds from the sale of operating lease equipment, interest revenue
from finance receivables, debt interest expense and other items are excluded ($
in millions):
Payments and Collections by Period
---------------------------------------------------------------
Remaining After
Contractual Obligations Total 2003 2004 2005 2006 2006
-------- -------- --------- --------- ------- --------
Commercial paper ............................ $4,490.5 $4,490.5 $ -- $ -- $ -- $ --
Bank credit facilities ...................... 1,300.0 1,300.0 -- -- -- --
Variable-rate term debt ..................... 6,609.2 3,006.8 2,527.4 829.1 31.0 214.9
Fixed-rate term debt ........................ 20,152.1 3,188.4 3,520.9 3,378.0 2,311.1 7,753.7
Lease rental expense ........................ 209.4 48.5 47.5 38.5 27.4 47.5
-------- -------- --------- --------- ------- --------
Total contractual obligations ............... 32,761.2 12,034.2 6,095.8 4,245.6 2,369.5 8,016.1
-------- -------- --------- --------- ------- --------
Finance receivables(1) ...................... 28,654.6 11,780.6 3,900.3 2,770.3 1,757.9 8,445.5
Operating lease rental income ............... 3,279.1 1,052.0 755.2 471.1 303.3 697.5
Finance receivables held for sale(2) ........ 1,273.0 1,273.0 -- -- -- --
Cash - current balance ...................... 2,025.4 2,025.4 -- -- -- --
-------- -------- --------- --------- ------- --------
Total projected cash availability ........... 35,232.1 16,131.0 4,655.5 3,241.4 2,061.2 9,143.0
-------- -------- --------- --------- ------- --------
Net projected cash inflow
(outflow) ................................ $2,470.9 $4,096.8 $(1,440.3) $(1,004.2) $(308.3) $1,126.9
======== ======== ========= ========= ======= ========
- --------------------------------------------------------------------------------
(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.
42
Commitment Expiration by Period
---------------------------------------------------------------
Remaining After
Contractual Commitments Total 2003 2004 2005 2006 2006
- ------------------------ --------- --------- -------- -------- -------- --------
Aircraft purchases ............... $3,590.0 $ 700.0 $839.0 $1,248.0 $711.0 $ 92.0
Credit extensions ................ 3,572.4 3,160.2 78.4 28.7 53.0 252.1
Letters of credit ................ 1,082.4 1,077.7 4.7 -- -- --
Sale-leaseback payments .......... 494.6 8.3 28.5 28.5 28.5 400.8
Manufacturer purchase
commitments ................... 280.6 280.6 -- -- -- --
Venture capital funds ............ 158.1 -- 2.5 0.4 -- 155.2
Guarantees ....................... 81.7 81.7 -- -- -- --
Acceptances ...................... 5.7 5.7 -- -- -- --
-------- -------- ------ -------- ------ ------
Total Commitments ................ $9,265.5 $5,314.2 $953.1 $1,305.6 $792.5 $900.1
======== ======== ====== ======== ====== ======
See the "-- Overview" and "-- Net Finance Margin" sections for information
regarding the impact of our liquidity and capitalization plan on results of
operations.
Capitalization
The following table presents information regarding our capital structure
($ in millions):
March 31, December 31,
2003 2002
--------- ------------
Commercial paper .......................................................... $ 4,490.5 $ 4,974.6
Bank credit facilities .................................................... 1,300.0 2,118.0
Term debt ................................................................. 26,761.3 24,588.7
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company
("Preferred Capital Securities") ........................................ 256.8 257.2
Stockholders' equity(1) ................................................... 5,076.7 4,968.5
--------- ---------
Total capitalization ...................................................... 37,885.3 36,907.0
Goodwill .................................................................. (384.4) (384.4)
--------- ---------
Total tangible capitalization ............................................. $37,500.9 $36,522.6
========= =========
Total tangible stockholders' equity ....................................... $ 4,692.3 $ 4,584.1
========= =========
Tangible stockholders' equity(1) and Preferred Capital Securities
to managed assets ....................................................... 10.42% 10.44%
Total debt (excluding overnight deposits) to tangible stockholders'
equity(1) and Preferred Capital Securities .............................. 6.29x 6.22x
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes accumulated other comprehensive loss
relating to derivative financial instruments and unrealized gains on
equity and securitization investments of $80.1 million and $97.8 million
at March 31, 2003 and December 31, 2002, respectively, as these losses are
not necessarily indicative of amounts which will be realized.
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 of 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 SPE. CIT retains
the servicing rights and participates in certain cash flows of the pools. The
present value of expected net cash flows that exceeds the estimated cost of
servicing is recorded in other assets as a "retained interest." Assets
securitized are shown in our managed assets
43
and our capitalization ratios on managed assets. Under the recently issued rules
relating to consolidation and SPE's, 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. As part of these
related activities, the Company enters into hedge transactions with the trusts
(SPE) in order to protect the trust against interest rate risk. CIT insulates
its associated risk by entering into offsetting swap transactions with third
parties. The net effect is to protect the trust from interest rate risk, while
also protecting CIT from interest rate risk. The notional amount of these swaps
was $3.9 billion at March 31, 2003. During the quarter ended March 31, 2003, we
successfully completed a consent solicitation to amend the negative pledge
provision in our 1994 debt indenture. This action conforms the 1994 debt
indenture to our other agreements and provides flexibility in structuring our
securitizations as accounting sales or secured financings.
Joint Ventures -- We utilize joint ventures to conduct financing
activities with certain strategic vendor partners. Receivables are originated by
the joint venture and purchased by CIT. The vendor partner and CIT jointly own
these distinct legal entities, and there is no third-party debt involved. These
arrangements are accounted for using the equity method, with profits and losses
distributed according to the joint venture agreement. See related Financial
Accounting Standards Board ("FASB") Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" discussion in "Accounting and
Technical Pronouncements" and disclosure in Note 11 -- 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 March 31, 2003, the balance
of venture capital equity investments was $334.3 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 -- 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 set and recorded based on the development
of three key components (1) specific reserves for collateral dependent loans
which are impaired under SFAS 114, (2) reserves for estimated losses inherent in
the portfolio based upon historical credit trends and, (3) general reserves for
estimation risk. As of March 31, 2003, the reserve for credit losses was $757.0
million or 2.64% of finance receivables and 77.9% of past due receivables. A
$10.0 million change in the reserve for credit losses equates to the following
variances: 3
44
basis points (0.03%) in the percentage of reserves to finance receivables; 103
basis points (1.03%) 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.
Lease Residual Values -- Operating lease equipment is carried at cost less
accumulated depreciation and is depreciated to estimated residual value using
the straight-line method over the lease term or projected economic life of the
asset. Direct financing leases are recorded at the aggregated future minimum
lease payments plus estimated residual values less unearned finance income.
Management performs periodic reviews of the estimated residual values, with
impairment, other than temporary, recognized in the current period. As of March
31, 2003, our direct financing lease residual balance was $2,520 million and our
operating lease equipment balance was $6,831 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" for a discussion of our impairment analysis. Goodwill was
$384.4 million at March 31, 2003. A 10% fluctuation in the value of goodwill
equates to $0.18 in earnings per share.
Accounting and Technical Pronouncements
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 No. 148 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 March 31, 2003 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. The expanded disclosure
requirements are included in our March 31, 2003 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 applied immediately to variable interest
entities created after January 31, 2003, and applies 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 March 31, 2003 financial statements and notes
thereto.
On April 30, 2003, the FASB issued SFAS No. 149 "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This pronouncement amends
and clarifies financial accounting and reporting for certain derivative
instruments, including certain derivative instruments embedded in other
contracts. This pronouncement is effective for all contracts entered into or
modified after June 30, 2003. We are currently assessing the impact of SFAS 149.
45
Statistical Data
The following table presents components of net income as a percent of AEA,
along with other selected financial data ($ in millions):
Quarters Ended
March 31,
-----------------------
2003 2002
--------- ---------
Finance income ..................................... 10.86% 12.29%
Interest expense ................................... 4.01 3.86
--------- ---------
Net finance income ............................... 6.85 8.43
Depreciation on operating lease equipment .......... 3.22 3.45
--------- ---------
Net finance margin ............................... 3.63 4.98
Provision for credit losses ........................ 1.19 2.17
--------- ---------
Net finance margin, after provision for
credit losses .................................... 2.44 2.81
Other revenue ...................................... 2.72 2.58
--------- ---------
Operating margin ................................... 5.16 5.39
--------- ---------
Salaries and general operating expenses ............ 2.70 2.60
Goodwill impairment ................................ -- 50.13
Interest expense -- TCH ............................ -- 3.39
--------- ---------
Operating expenses ................................. 2.70 56.12
--------- ---------
Income (loss) before income taxes .................. 2.46 (50.73)
Provision for income taxes ......................... (0.96) (0.56)
Minority interest in subsidiary trust holding
solely debentures of the Company ................. (0.03) (0.03)
--------- ---------
Net income (loss) ................................ 1.47% (51.32)%
========= =========
Average earning assets ............................. $34,600.6 $36,006.6
========= =========
Item 4. 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 of 1934 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 design of processes and controls to address this deficiency. The
development phase is ongoing, will include process and control refinements, and
the project is progressing according to the project plan. The completion of this
project is anticipated in 2003.
46
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements contained herein, in
press releases, written statements or other documents filed with the Securities
and Exchange Commission or in communications and discussions with investors and
analysts in the normal course of business through meetings, webcasts, phone
calls and conference calls, concerning our operations, economic performance and
financial condition are subject to known and unknown risks, uncertainties and
contingencies. Forward-looking statements are included, for example, in the
discussions about:
o our liquidity risk management,
o our credit risk management,
o our asset/liability risk management,
o our 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.
47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contains allegations that the
registration statement and prospectus prepared and filed in connection with the
IPO were materially false and misleading, principally with respect to the
adequacy of CIT's telecommunications-related loan loss reserves at the time. The
lawsuit purports to be brought on behalf of all those who purchased CIT common
stock in or traceable to the IPO, and seeks, among other relief, unspecified
damages or rescission for those alleged class members who still hold CIT stock
and unspecified damages for other alleged class members. Additional similar
lawsuits have also been filed, including, in one case, as defendants, some of
the underwriters and former directors of CIT. CIT believes that the allegations
in each of these actions are without merit and that its disclosures were proper,
complete and accurate. CIT intends to vigorously defend itself against these
actions.
In addition, 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, including the class action suit
above, will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of CIT.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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).
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 Indenture dated as of August 26, 2002 by and among CIT Group
Inc., Bank One Trust Company, N.A., as Trustee and Bank One
NA, London Branch, as London Paying Agent and London
Calculation Agent, for the issuance of unsecured and
unsubordinated debt securities (incorporated by reference to
Exhibit 4.18 to Form 10-K filed by CIT on February 26, 2003).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
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.
(b) Reports on Form 8-K
Current Report on Form 8-K, dated January 21, 2003, reporting
that the Board of Directors (i) declared a quarterly dividend
of $0.12 per share and (ii) expanded the Board of Directors to
eight members and appointed two new members.
Current report on Form 8-K, dated January 23, 2003, reporting
CIT's financial results as of and for the quarter ended
December 31, 2002.
48
Current Report on Form 8-K, dated February 18, 2003,
announcing the commencement of a consent solicitation to amend
the indenture under which CIT's $250,000,000 in principal
amount of 6.625% Senior Debt Securities due 2005 were issued.
Current Report on Form 8-K, dated February 18, 2003,
announcing that CIT had received the consent from more that 66
2/3% in aggregate principal amount of the holders of its
$250,000,000 in principal amount of 6.625% Senior Debt
Securities due 2005 to amend the indenture under which such
debt securities were issued.
Current report on Form 8-K, dated March 5, 2003, filing slides
from a presentation by management to investors at CIT's
Investor Day conference on March 5, 2003.
Current report on Form 8-K, dated March 25, 2003, reporting
the financing relationship of CIT with Avianca Airlines.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ JOSEPH M. LEONE
..........................................
Joseph M. Leone
Executive Vice President, Chief Financial
Officer and Principal Accounting Officer
May 13, 2003
50
CERTIFICATIONS
I, Albert R. Gamper, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CIT Group Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer and I have indicated in this
quarterly report whether or not 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: May 13, 2003
/s/ Albert R. Gamper, Jr.
...............................................
Albert R. Gamper, Jr.
Chairman, President and Chief Executive Officer
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I, Joseph M. Leone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CIT Group Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 officer and I have indicated in this
quarterly report whether or not 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: May 13, 2003
/s/ JOSEPH M. LEONE
....................................................
Joseph M. Leone
Executive Vice President and Chief Financial Officer
52