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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31369
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CIT Group Inc.
(Exact name of Registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 CIT Drive, Livingston, New Jersey, 07039
(Address of Registrant's principal executive offices)
(973) 740-5000
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes X No ___
As of April 30, 2004, there were 211,725,186 shares of the Registrant's
common stock outstanding.
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CIT GROUP INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Part I--Financial Information:
Item 1. Consolidated Financial Statements .............................. 1
Consolidated Balance Sheets (Unaudited)......................... 1
Consolidated Statements of Income (Unaudited)................... 2
Consolidated Statements of Stockholders' Equity (Unaudited)..... 3
Consolidated Statements of Cash Flows (Unaudited)............... 4
Notes to Consolidated Financial Statements...................... 5-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Quantitative and Qualitative
Disclosure about Market Risk.................................. 19-46
Item 4. Controls and Procedures......................................... 47
Part II--Other Information:
Item 1. Legal Proceedings............................................... 48
Item 2. Common Stock Repurchase Activity................................ 48
Item 6. Exhibits and Reports on Form 8-K................................ 49
Signatures...................................................... 50
i
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
($ in millions -- except share data)
March 31, December 31,
2004 2003
--------- ------------
ASSETS
Financing and leasing assets:
Finance receivables........................................................ $32,187.4 $31,300.2
Reserve for credit losses.................................................. (636.7) (643.7)
--------- ---------
Net finance receivables.................................................... 31,550.7 30,656.5
Operating lease equipment, net............................................. 7,576.2 7,615.5
Finance receivables held for sale.......................................... 1,006.2 918.3
Cash and cash equivalents..................................................... 1,356.5 1,973.7
Retained interest in securitizations.......................................... 1,364.6 1,380.8
Goodwill and intangible assets................................................ 485.5 487.7
Other assets.................................................................. 2,912.7 3,310.3
--------- ---------
Total Assets.................................................................. $46,252.4 $46,342.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper........................................................... $ 4,820.2 $ 4,173.9
Variable-rate senior notes................................................. 9,170.7 9,408.4
Fixed-rate senior notes.................................................... 19,829.8 19,830.8
Preferred capital securities............................................... 255.1 255.5
--------- ---------
Total debt.................................................................... 34,075.8 33,668.6
Credit balances of factoring clients.......................................... 3,619.4 3,894.6
Accrued liabilities and payables.............................................. 3,025.9 3,346.4
--------- ---------
Total Liabilities.......................................................... 40,721.1 40,909.6
--------- ---------
Commitments and Contingencies (Note 10)
Minority interest............................................................. 38.6 39.0
Stockholders' Equity:
Preferred stock: $0.01 par value, 100,000,000 authorized, none issued...... -- --
Common stock: $0.01 par value, 600,000,000 authorized,
211,849,987 issued, 211,832,465 outstanding.............................. 2.1 2.1
Paid-in capital, net of deferred compensation of $52.8 and $30.6........... 10,668.2 10,677.0
Accumulated deficit........................................................ (4,980.5) (5,141.8)
Accumulated other comprehensive loss....................................... (196.4) (141.6)
Less: Treasury stock, 17,522 and 43,529 shares, at cost.................... (0.7) (1.5)
--------- ---------
Total Stockholders' Equity................................................. 5,492.7 5,394.2
--------- ---------
Total Liabilities and Stockholders' Equity................................. $46,252.4 $46,342.8
========= =========
See Notes to Consolidated Financial Statements.
1
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in millions-- except per share data)
For the Quarters Ended March 31,
--------------------------------
2004 2003
-------- --------
Finance income................................................................ $ 902.9 $ 939.2
Interest expense.............................................................. 298.0 354.7
-------- --------
Net finance income............................................................ 604.9 584.5
Depreciation on operating lease equipment..................................... 234.5 278.8
-------- --------
Net finance margin............................................................ 370.4 305.7
Provision for credit losses................................................... 85.6 103.0
-------- --------
Net finance margin after provision for credit losses.......................... 284.8 202.7
Other revenue................................................................. 230.4 239.9
Gain (loss) on venture capital investments.................................... 0.7 (4.4)
-------- --------
Operating margin.............................................................. 515.9 438.2
Salaries and general operating expenses....................................... 247.3 225.6
Gain on redemption of debt.................................................... 41.8 --
-------- --------
Income before provision for income taxes...................................... 310.4 212.6
Provision for income taxes.................................................... (121.1) (82.9)
Dividends on preferred capital securities, after tax.......................... -- (2.7)
-------- --------
Net income.................................................................... $ 189.3 $ 127.0
======== ========
Earnings per share
Basic earnings per share...................................................... $ 0.89 $ 0.60
======== ========
Diluted earnings per share.................................................... $ 0.88 $ 0.60
======== ========
Number of shares - basic (thousands).......................................... 211,839 211,573
======== ========
Number of shares - diluted (thousands)........................................ 215,809 211,899
======== ========
Dividends per common share.................................................... $ 0.13 $ 0.12
======== ========
See Notes to Consolidated Financial Statements.
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
($ in millions)
Accumulated Total Total
Common Paid-in Treasury (Deficit)/ Comprehensive Stockholders'
Stock Capital Stock Earnings (Loss)/Income Equity
------ --------- -------- ----------- ------------- -------------
Balance December 31, 2003......... $ 2.1 $10,677.0 $ (1.5) $(5,141.8) $(141.6) $5,394.2
Net income........................ -- -- -- 189.3 -- 189.3
Foreign currency translation
adjustments..................... -- -- -- -- 1.4 1.4
Change in fair values of
derivatives qualifying as
cash flow hedges................ -- -- -- -- (61.6) (61.6)
Unrealized gains on equity
and securitization
investments, net................ -- -- -- -- 5.4 5.4
--------
Total comprehensive income........ -- -- -- -- -- 134.5
--------
Cash dividends.................... -- -- -- (28.0) -- (28.0)
Restricted common
stock grants.................... -- 6.6 -- -- -- 6.6
Treasury stock purchased,
at cost......................... -- -- (37.1) -- -- (37.1)
Exercise of stock
option awards................... -- (15.4) 37.9 -- -- 22.5
----- --------- ------ --------- ------- --------
Balance March 31, 2004............ $ 2.1 $10,668.2 $ (0.7) $(4,980.5) $(196.4) $5,492.7
===== ========= ====== ========= ======= ========
See Notes to Consolidated Financial Statements.
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
For the Quarters
Ended March 31,
--------------------------
2004 2003
---------- ----------
Cash Flows From Operations
Net income.................................................................... $ 189.3 $ 127.0
Adjustments to reconcile net income to net cash flows from operations:
Depreciation and amortization.............................................. 248.2 288.8
Provision for credit losses................................................ 85.6 103.0
Provision for deferred federal income taxes................................ 95.4 74.7
Gains on equipment, receivable and investment sales........................ (62.5) (60.7)
Gain on debt redemption.................................................... (41.8) --
Decrease (increase) in other assets........................................ 303.1 (116.7)
(Decrease) increase in accrued liabilities and payables.................... (346.6) 61.1
Other...................................................................... (26.0) 21.5
---------- ----------
Net cash flows provided by operations......................................... 444.7 498.7
---------- ----------
Cash Flows From Investing Activities
Loans extended................................................................ (12,699.8) (12,341.1)
Collections on loans.......................................................... 10,829.8 10,233.4
Proceeds from asset and receivable sales...................................... 1,731.9 1,699.2
Purchases of finance receivable portfolios.................................... (595.1) (360.8)
Net decrease in short-term factoring receivables.............................. (400.8) (182.7)
Purchases of assets to be leased.............................................. (268.7) (333.4)
Other ...................................................................... (1.1) (41.4)
---------- ----------
Net cash flows (used for) investing activities................................ (1,403.8) (1,326.8)
---------- ----------
Cash Flows From Financing Activities
Repayments of variable and fixed-rate notes................................... (3,011.5) (2,997.8)
Proceeds from the issuance of variable and fixed-rate notes................... 2,804.2 4,352.4
Net decrease in commercial paper.............................................. 646.3 (484.1)
Net repayments of non-recourse leveraged lease debt........................... (61.1) (28.2)
Cash dividends paid........................................................... (28.0) (25.4)
Other ...................................................................... (8.0) --
---------- ----------
Net cash flows provided by financing activities............................... 341.9 816.9
---------- ----------
Net (decrease) in cash and cash equivalents................................... (617.2) (11.2)
Cash and cash equivalents, beginning of period................................ 1,973.7 2,036.6
---------- ----------
Cash and cash equivalents, end of period...................................... $ 1,356.5 $ 2,025.4
========== ==========
Supplementary Cash Flow Disclosure
Interest paid................................................................. $ 287.5 $ 331.2
Federal, foreign, state and local income taxes paid, net...................... $ 24.7 $ 18.9
See Notes to Consolidated Financial Statements.
4
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 -- Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a global commercial and consumer finance company that was founded in 1908. CIT
provides financing and leasing capital for companies in a wide variety of
industries, offering vendor, equipment, commercial, factoring, consumer, and
structured financing products. CIT operates primarily in North America, with
locations in Europe, Latin America, Australia and the Asia-Pacific region.
These financial statements, which have been prepared in accordance with
the instructions to Form 10-Q, do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States ("GAAP") and should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Financial statements
in this Form 10-Q have not been examined by independent accountants in
accordance with generally accepted auditing standards, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of CIT's financial position and
results of operations. Certain prior period amounts have been reclassified to
conform to the current presentation.
In accordance with the provisions of FASB Interpretation No. 46R ("FIN
46"), "Consolidation of Variable Interest Entities," CIT consolidates variable
interest entities for which management has concluded that CIT is the primary
beneficiary. Entities that do not meet the definition of a variable interest
entity are subject to the provisions of Accounting Research Bulletin No. 51
("ARB 51"), "Consolidated Financial Statements" and are consolidated when
management has determined that it has the controlling financial interest.
Entities which do not meet the consolidation criteria in either FIN 46 or ARB 51
but which are significantly influenced by the Company, generally those entities
that are twenty to fifty percent owned by CIT, are included in other assets at
cost for securities not readily marketable and presented at the corresponding
share of equity plus loans and advances. Investments in entities which
management does not have significant influence are included in other assets at
cost, less declines in value that are other than temporary. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
qualifying special purpose entities utilized in securitizations are not
consolidated. Inter-company transactions have been eliminated.
Stock Based Compensation
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" in accounting for its
stock-based compensation plans. Under APB 25, CIT does not recognize
compensation expense on the issuance of its stock options because the option
terms are fixed and the exercise price equals the market price of the underlying
stock on the grant date. The following table presents the pro forma information
required by SFAS 123 as if CIT had accounted for stock options granted under the
fair value method of SFAS 123, as amended ($ in millions, except per share
data):
For the Quarters Ended March 31,
--------------------------------
2004 2003
------ ------
Net income as reported.......................................................... $189.3 $127.0
Stock-based compensation expense-- fair value method, after tax................. 5.1 6.7
------ ------
Pro forma net income............................................................ $184.2 $120.3
====== ======
Basic earnings per share as reported............................................ $ 0.89 $ 0.60
====== ======
Basic earnings per share pro forma.............................................. $ 0.87 $ 0.57
====== ======
Diluted earnings per share as reported.......................................... $ 0.88 $ 0.60
====== ======
Diluted earnings per share pro forma............................................ $ 0.85 $ 0.57
====== ======
5
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the quarters ended March 31, 2004 and 2003, net income includes $4.0
million and $0.5 million of after-tax compensation cost related to restricted
stock awards.
Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin 105 "Application
of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 requires that
certain mortgage loan commitments issued after March 31, 2004 be accounted for
as derivatives until the loan is made or they expire unexercised. Management
does not expect the adoption of SAB 105 to have a material financial statement
impact.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). FSP 106-1 permits
employers that sponsor postretirement benefit plans providing prescription drug
benefits to retirees to make a one-time election to defer accounting for any
effects of the Medicare Prescription Drug Improvement and Modernization Act of
2003. CIT has elected to defer the related accounting pending further guidance
from the FASB.
In December 2003, the FASB revised SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This revision requires
interim disclosures regarding certain components of net periodic pension costs
and the employer's contribution paid, or expected to be paid during the current
fiscal year, if significantly different from amounts previously disclosed for
interim periods beginning after December 15, 2003. The additional required
disclosures are included in Note 9 -- Post Retirement and Other Benefit Plans.
In December 2003, the SEC issued Staff Accounting Bulletin 104 "Revenue
Recognition" ("SAB 104"), which revises or rescinds portions of related
interpretive guidance in order to be consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The adoption of
SAB 104 as of January 1, 2004 did not have a material financial statement
impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Prior period restatement is not permitted. On November 7, 2003, certain
measurement and classification provisions of SFAS 150, relating to certain
mandatorily redeemable non-controlling interests, were deferred indefinitely.
The adoption of these delayed provisions, which relate primarily to minority
interests associated with finite-lived entities, is not expected to have a
significant impact on the financial position or results of operations.
Note 2 -- Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. The diluted
EPS computation includes the potential impact of dilutive securities, including
stock options and restricted stock grants. The dilutive effect of stock options
is computed using the treasury stock method, which assumes the repurchase of
common shares by CIT at the average market price for the period. Options that do
not have a dilutive effect (because the exercise price is above the market
price) are not included in the denominator and averaged approximately 16.1
million shares for the quarter ended March 31, 2004 and 17.3 million shares for
the quarter ended March 31, 2003.
6
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented ($ in millions, except per share amounts, which are
in whole dollars; weighted-average share balances in thousands):
Quarter Ended March 31, 2004 Quarter Ended March 31, 2003
--------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Income available to common
stockholders.................... $189.3 211,839 $ 0.89 $127.0 211,573 $0.60
Effect of Dilutive Securities:
Restricted shares................. -- 540 -- -- 326 --
Stock options..................... -- 3,430 (0.01) -- -- --
------ ------- ------ ------ ------- -----
Diluted EPS.......................... $189.3 215,809 $ 0.88 $127.0 211,899 $0.60
====== ======= ====== ====== ======= =====
Note 3 -- Business Segment Information
The selected financial information by business segment presented below is
based upon a fixed leverage ratio across business units and the allocation of
most corporate expenses. Corporate and Other includes operating losses on
venture capital investments, although those assets are included within
Structured Finance, which manages the assets ($ in millions).
Total
Specialty Commercial Equipment Capital Structured Business Corporate
Finance Finance Finance Finance Finance Segments and Other Consolidated
--------- ---------- --------- ------- ---------- -------- --------- ------------
At and for the quarter ended
March 31, 2004
Operating margin ........... $ 228.1 $ 142.3 $ 47.3 $ 48.3 $ 26.5 $ 492.5 $23.4 $ 515.9
Income taxes ............... 44.7 37.5 9.8 9.8 6.8 108.6 12.5 121.1
Net income ................. 78.2 60.6 15.2 19.0 10.1 183.1 6.2 189.3
Total financing and
leasing assets .......... 13,048.1 10,555.9 6,871.7 7,229.2 3,316.7 41,021.6 -- 41,021.6
Total managed assets ....... 19,062.6 10,555.9 9,924.2 7,229.2 3,316.7 50,088.6 -- 50,088.6
At and for the quarter ended
March 31, 2003
Operating margin ........... $ 190.5 $ 129.9 $ 40.2 $ 28.9 $ 28.3 $ 417.8 $20.4 $ 438.2
Income taxes ............... 33.4 34.6 6.8 4.9 7.8 87.5 (4.6) 82.9
Net income (loss) .......... 52.2 54.1 10.7 7.7 12.2 136.9 (9.9) 127.0
Total financing and
leasing assets .......... 11,925.8 8,682.7 6,928.2 6,196.7 3,359.9 37,093.3 -- 37,093.3
Total managed assets ....... 18,336.3 8,682.7 10,905.4 6,196.7 3,359.9 47,481.0 -- 47,481.0
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 4 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets ($ in millions):
March 31, 2004 December 31, 2003
-------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
Geographic
North America:
Northeast............................................... $ 8,166.6 19.9% $ 8,319.8 20.8%
West.................................................... 7,870.8 19.2% 7,485.5 18.7%
Midwest................................................. 6,271.5 15.3% 5,996.2 14.9%
Southeast............................................... 5,782.7 14.1% 5,558.6 13.9%
Southwest............................................... 4,643.1 11.3% 4,423.1 11.0%
Canada.................................................. 2,009.6 4.9% 2,055.5 5.1%
--------- ----- --------- -----
Total North America........................................ 34,744.3 84.7% 33,838.7 84.4%
Foreign.................................................... 6,277.3 15.3% 6,245.2 15.6%
--------- ----- --------- -----
Total................................................... $41,021.6 100.0% $40,083.9 100.0%
========= ===== ========= =====
March 31, 2004 December 31, 2003
-------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
Industry
Manufacturing(1) (no industry greater than 2.9%)........... $ 7,416.7 18.1% $ 7,340.6 18.3%
Retail(2).................................................. 5,700.7 13.9% 5,630.9 14.0%
Commercial airlines (including regional airlines).......... 5,029.6 12.3% 5,039.3 12.6%
Consumer based lending-- home mortgage..................... 3,465.1 8.4% 2,830.8 7.1%
Transportation(3).......................................... 2,920.8 7.1% 2,934.9 7.3%
Service industries......................................... 2,678.9 6.5% 2,608.3 6.5%
Consumer based lending-- non-real estate(4)................ 1,856.9 4.5% 1,710.9 4.3%
Construction equipment..................................... 1,471.3 3.6% 1,571.2 3.9%
Wholesaling................................................ 1,431.8 3.5% 1,374.7 3.4%
Communications(5).......................................... 1,317.7 3.2% 1,386.5 3.5%
Automotive Services........................................ 1,212.7 3.0% 1,152.3 2.9%
Other (no industry greater than 3.0%)(6)................... 6,519.4 15.9% 6,503.5 16.2%
--------- ----- --------- -----
Total................................................... $41,021.6 100.0% $40,083.9 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of textiles and apparel, industrial machinery and
equipment, electrical and electronic equipment and other industries.
(2) Includes retailers of apparel (5.9%) and general merchandise (4.1%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers for products in various industries
such as manufactured housing, recreational vehicles, marine and computers
and related equipment.
(5) Includes $500.0 million and $556.3 million of equipment financed for the
telecommunications industry at March 31, 2004 and December 31, 2003,
respectively, but excludes telecommunications equipment financed for other
industries.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $956.6 million, or 2.3% of
total financing and leasing assets at March 31, 2004. This amount includes
approximately $630.2 million in project financing and $269.0 million in
rail cars on lease.
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 5 -- Retained Interests in Securitizations
The following table details the components of retained interests in
securitizations ($ in millions):
March 31, December 31,
2004 2003
--------- ------------
Retained interests in commercial loans:
Retained subordinated securities.......................................... $ 456.1 $ 536.6
Interest-only strips...................................................... 371.9 366.8
Cash reserve accounts..................................................... 303.3 226.3
-------- --------
Sub total................................................................. 1,131.3 1,129.7
-------- --------
Retained interests in consumer loans:
Retained subordinated securities.......................................... 89.9 86.7
Interest-only strips...................................................... 49.9 58.9
Cash reserve accounts..................................................... 26.1 34.0
-------- --------
Sub total................................................................. 165.9 179.6
-------- --------
Aerospace equipment trust certificates....................................... 67.4 71.5
-------- --------
Total..................................................................... $1,364.6 $1,380.8
======== ========
Note 6 -- Accumulated Other Comprehensive Loss
The following table details the components of accumulated other
comprehensive loss, net of tax ($ in millions):
March 31, December 31,
2004 2003
--------- ------------
Foreign currency translation adjustments..................................... $(104.4) $(105.8)
Changes in fair values of derivatives qualifying as cash flow hedges......... (102.9) (41.3)
Unrealized gain on equity and securitization investments..................... 11.7 6.3
Minimum pension liability adjustments........................................ (0.8) (0.8)
------- -------
Total accumulated other comprehensive loss................................ $(196.4) $(141.6)
======= =======
Note 7 -- Derivative Financial Instruments
As part of managing exposure to interest rate, foreign currency, and, in
limited instances, credit risk, CIT, as an end-user, enters into various
derivative transactions, all of which are transacted in over-the-counter markets
with other financial institutions acting as principal counter parties.
Derivatives are utilized for hedging purposes only, and policy prohibits
entering into derivative financial instruments for trading or speculative
purposes. To ensure both appropriate use as a hedge and to achieve hedge
accounting treatment, whenever possible, substantially all derivatives entered
into are designated according to a hedge objective against a specific or
forecasted liability or, in limited instances, assets. The notional amounts,
rates, indices, and maturities of our derivatives closely match the related
terms of the underlying hedged items.
CIT utilizes interest rate swaps to exchange variable-rate interest
underlying forecasted issuances of commercial paper, specific variable-rate debt
instruments, and, in limited instances, variable-rate assets for fixed-rate
amounts. These interest rate swaps are designated as cash flow hedges and
changes in fair value of these swaps, to the extent they are effective as a
hedge, are recorded in other comprehensive income. Ineffective amounts are
recorded in interest expense. Interest rate swaps are also utilized to convert
fixed-rate interest on specific debt instruments to variable-rate amounts. These
interest rate swaps are designated as fair value hedges and changes in fair
value of these swaps are recorded as basis adjustments to the underlying debt
balance.
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position ($ in
millions):
Notional Amount
----------------------------------
March 31, 2004 December 31, 2003
-------------- -----------------
Effectively converts the interest
rate on an equivalent amount of
forecasted commercial paper
Floating to fixed-rate swaps-- issuances, variable-rate notes and
cash flow hedges..................... $2,585.5 $2,615.0 selected assets to a fixed rate.
Effectively converts the interest
rate on an equivalent amount of
Fixed to floating-rate swaps-- fixed-rate notes and selected assets
fair value hedges ................... 6,751.2 6,758.2 to a variable rate.
-------- --------
Total interest rate swaps.............. $9,336.7 $9,373.2
======== ========
In addition to the swaps in the table above, in conjunction with
securitizations, CIT entered into $2.8 billion in notional amount of interest
rate swaps with the related trusts to protect the trusts against interest rate
risk. CIT is insulated from this risk by entering into offsetting swap
transactions with third parties totaling $2.8 billion in notional amount at
March 31, 2004.
CIT utilizes foreign currency exchange forward contracts to hedge currency
risk underlying foreign currency loans to subsidiaries and the net investments
in foreign operations. These contracts are designated as foreign currency cash
flow hedges or net investment hedges and changes in fair value of these
contracts are recorded in other comprehensive income along with the translation
gains and losses on the underlying hedged items. CIT also utilizes cross
currency interest rate swaps to hedge currency risk underlying foreign currency
debt. These swaps are designated as foreign currency cash flow hedges or foreign
currency fair value hedges and changes in fair value of these contracts are
recorded in other comprehensive income along with the translation gains and
losses on the underlying hedged items.
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as cash flow hedges are presented in the following
table ($ in millions).
Fair Value Total
Adjustments Income Tax Unrealized
of Derivatives Effects Loss
-------------- ---------- ----------
Balance at December 31, 2003-- unrealized loss..................... $ 64.6 $(23.3) $ 41.3
Changes in values of derivatives qualifying as cash flow hedges.... 101.0 (39.4) 61.6
------ ------ ------
Balance at March 31, 2004-- unrealized loss........................ $165.6 $(62.7) $102.9
====== ====== ======
The unrealized loss as of March 31, 2004, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, followed by lower market interest rates.
For the quarter ended March 31, 2004, the ineffective portion of changes in the
fair value of cash flow hedges amounted to $0.3 million and has been recorded as
a decrease to interest expense. Assuming no change in interest rates,
approximately $43.3 million, net of tax, of Accumulated Other Comprehensive Loss
is expected to be reclassified to earnings over the next twelve months as
contractual cash payments are made. The Accumulated Other Comprehensive Loss
(along with the corresponding swap liability) will be adjusted as market
interest rates change over the remaining life of the swaps.
During the first quarter of 2004, CIT entered into credit default swaps,
with a combined notional value of $35.0 million and terms of 5 years, to
economically hedge certain credit exposures. These swaps do not meet the
requirements for hedge accounting treatment and therefore are recorded at fair
value, with both realized and unrealized gains or losses recorded in other
revenue in the consolidated statement of income. The fair value adjustment as of
March 31, 2004 was not significant.
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 8 -- Certain Relationships and Related Transactions
CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P.
("DFS"), a joint venture that offers financing to Dell customers. The joint
venture provides Dell with financing and leasing capabilities that are
complementary to its product offerings and provides CIT with a steady source of
new financings. CIT acquired this relationship through an acquisition during
November 1999, and the current agreement extends until October 2005. CIT
regularly purchases finance receivables from DFS at a premium, portions of which
are typically securitized within 90 days of purchase from DFS. CIT has limited
recourse to DFS on defaulted contracts. In accordance with the joint venture
agreement, net income generated by DFS as determined under GAAP is allocated 70%
to Dell and 30% to CIT, after CIT has recovered any cumulative losses. The DFS
board of directors voting representation is equally weighted between designees
of CIT and Dell, with one independent director. Any losses generated by DFS as
determined under GAAP are allocated to CIT. DFS is not consolidated in CIT's
March 31, 2004 financial statements and is accounted for under the equity
method. At March 31, 2004, financing and leasing assets related to the DFS
program (included in the CIT Consolidated Balance Sheet) were $1.6 billion and
securitized assets included in managed assets were $2.4 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 $202
million pretax at March 31, 2004, which is comprised of the investment in and
loans to the joint venture.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. CIT
acquired this relationship through an acquisition during November 1999. The
agreement with Snap-on extends until January 2007. CIT and Snap-on have 50%
ownership interests, 50% board of directors representation and share income and
losses equally. The Snap-on joint venture is accounted for under the equity
method and is not consolidated in CIT's financial statements. As of March 31,
2004, the related financing and leasing assets and securitized assets were $1.1
billion and $0.1 billion, respectively. In addition to the owned and securitized
assets purchased from the Snap-on joint venture, CIT's maximum exposure to loss
with respect to activities of the joint venture is approximately $21 million
pretax at March 31, 2004, which is comprised of the investment in and loans to
the joint venture.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based
lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint
venture and share income and losses equally. This entity is not consolidated in
CIT's financial statements and is accounted for under the equity method. As of
March 31, 2004, CIT's maximum exposure to loss with respect to activities of the
joint venture is $142 million pretax, which is comprised of the investment in
and loans to the joint venture.
CIT invests in various trusts, partnerships, and limited liability
corporations established in conjunction with structured financing transactions
of equipment, power and infrastructure projects. CIT's interests in certain of
these entities were acquired by CIT in November 1999, and others were
subsequently entered into in the normal course of business. At March 31, 2004,
other assets included $22 million of investments in non-consolidated entities
relating to such transactions that are accounted for under the equity or cost
methods. This investment is CIT's maximum exposure to loss with respect to these
interests as of March 31, 2004.
Certain shareholders of CIT provide investment management services in
conjunction with employee benefit plans. These services are provided in the
normal course of business.
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 9 -- Post retirement and Other Benefit Plans
The following table discloses various components of pension expense ($ in
millions).
For the Quarters Ended March 31,
--------------------------------
2004 2003
---- ----
Retirement Plans
Service cost.................................. $ 4.5 $ 3.9
Interest cost................................. 3.9 3.6
Expected return on plan assets................ (4.1) (2.3)
Amortization of net loss...................... 0.7 0.9
----- -----
Net periodic benefit cost..................... $ 5.0 $ 6.1
===== =====
Postretirement Plans
Service cost.................................. $ 0.5 $ 0.4
Interest cost................................. 0.8 0.7
Amortization of net loss...................... 0.3 0.1
----- -----
Net periodic benefit cost..................... $ 1.6 $ 1.2
===== =====
Note 10 -- Commitments and Contingencies
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including standby letters of
credit, which obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. In the event that the customer is unable to pay
according to the contractual terms, then the receivables would be purchased. As
of March 31, 2004, there were no outstanding liabilities relating to these
credit-related commitments or guarantees, as amounts are generally billed and
collected on a monthly basis.
The accompanying table summarizes the contractual amounts of
credit-related commitments ($ in millions).
At
December 31,
At March 31, 2004 2003
------------------------------------ ------------
Due to Expire
---------------------
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
Financing and leasing assets............................ $1,428.8 $5,486.0 $6,914.8 $5,934.3
Letters of credit and acceptances:
Standby letters of credit............................. 508.5 22.3 530.8 508.7
Other letters of credit............................... 627.2 72.8 700.0 694.0
Acceptances........................................... 11.2 -- 11.2 9.3
Guarantees.............................................. 97.5 12.4 109.9 133.2
Venture capital fund commitments........................ 3.4 113.7 117.1 124.2
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of March 31, 2004, commitments to purchase commercial aircraft from
both Airbus Industrie and The Boeing Company are detailed below ($ in millions).
Calendar Year: Amount Number
- -------------- ------ ------
2004............................................. $ 715.0 17
2005............................................. 918.0 18
2006............................................. 996.0 20
2007............................................. 260.0 5
-------- --
Total............................................ $2,889.0 60
======== ==
The order amounts exclude CIT's options to purchase additional aircraft.
Outstanding commitments to purchase equipment, other than the aircraft
detailed above, totaled $206.7 million at March 31, 2004. CIT is party to a
railcar sale-leaseback transaction under which it is obligated to pay a
remaining total of $465.7 million, approximately $28 million per year through
2010 and declining thereafter through 2024, which is more than offset by CIT's
re-lease of the assets, contingent on its ability to maintain railcar usage. In
conjunction with this sale-leaseback transaction, CIT has guaranteed all
obligations of the related consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
14 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies. In addition, CIT has guaranteed, on behalf of certain
non-consolidated subsidiaries, $11.9 million of third party debt, which is not
reflected in the consolidated balance sheet at March 31, 2004.
Note 11 -- Legal Proceedings
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its Chief Executive Officer and
its Chief Financial Officer. The lawsuit contained allegations that the
registration statement and prospectus prepared and filed in connection with
CIT's 2002 IPO were materially false and misleading, principally with respect to
the adequacy of CIT's telecommunications-related loan loss reserves at the time.
The lawsuit purported to have been brought on behalf of all those who purchased
CIT common stock in or traceable to the IPO, and sought, among other relief,
unspecified damages or rescission for those alleged class members who still hold
CIT stock and unspecified damages for other alleged class members. On June 25,
2003, by order of the United States District Court, the lawsuit was consolidated
with five other substantially similar suits, all of which had been filed after
April 10, 2003 and one of which named as defendants some of the underwriters in
the IPO and certain former directors of CIT. Glickenhaus & Co., a privately held
investment firm, has been named lead plaintiff in the consolidated action.
On September 16, 2003, an amended and consolidated complaint was filed.
That complaint contains substantially the same allegations as the original
complaints. In addition to the foregoing, two similar suits were brought by
certain shareholders on behalf of CIT against CIT and some of its present and
former directors under Delaware corporate law.
CIT believes that the allegations in each of these actions are without
merit and that its disclosures were proper, complete and accurate. CIT intends
to vigorously defend itself in these actions.
In addition, there are various legal proceedings pending against CIT,
which have arisen in the ordinary course of business. Management believes that
the aggregate liabilities, if any, arising from such actions, including the
class action suit above, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Note 12 -- Severance and Facility Restructuring Reserves
The following table summarizes purchase accounting liabilities (pre-tax)
related to severance of employees and closing facilities that were recorded in
connection with the acquisition of CIT by Tyco, as well as utilization during
the current quarter ($ in millions):
Severance Facilities
-------------------- ---------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance December 31, 2003......................... 43 $ 2.3 12 $ 7.2 $ 9.5
Utilization....................................... (12) (0.8) (2) (4.2) (5.0)
--- ----- -- ----- -----
Balance at March 31, 2004......................... 31 $ 1.5 10 $ 3.0 $ 4.5
== ===== == ===== =====
The reserves remaining at March 31, 2004 relate largely to the
restructuring of the European operations. Severance reserves include amounts
payable within the next year to individuals who chose to receive payments on a
periodic basis. The facility reserves relate primarily to shortfalls in sublease
transactions and will be utilized over the remaining lease terms, generally
within 6 years.
Note 13 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $485.5 million and $487.7 million
at March 31, 2004 and December 31, 2003, respectively. The Company periodically
reviews and evaluates its goodwill and other intangible assets for potential
impairment. Effective October 1, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), under which goodwill is no
longer amortized but instead is assessed for impairment at least annually. As
part of the adoption, the Company allocated its existing goodwill to each of its
reporting units as of October 1, 2001. Under the transition provisions of SFAS
142, there was no goodwill impairment as of October 1, 2001.
The most recent goodwill impairment analysis was performed during the
fourth quarter of 2003, which indicated that the fair value of goodwill was in
excess of the carrying value. There were no changes in the carrying values of
goodwill during the quarter ended March 31, 2004. The following table summarizes
the remaining goodwill balance by segment ($ in millions):
Specialty Commercial
Finance Finance Total
--------- ---------- -----
Balance as of March 31, 2004............ $12.7 $370.4 $383.1
Other intangible assets, net, comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
totaled $102.4 million and $104.6 million, at March 31, 2004 and December 31,
2003, and are included in Goodwill and Intangible Assets in the Consolidated
Balance Sheets. Other intangible assets are being amortized in relation to the
related revenue streams over their respective lives that range from five to
twenty years. Amortization expense totaled $2.2 million for the quarter ended
March 31, 2004 versus $1.1 million for the quarter ended March 31, 2003. The
projected amortization for the years ended December 31, 2004 through December
31, 2008 are: $9.1 million for 2004 and 2005; $8.0 million for 2006; and $4.7
million for 2007 and 2008.
Note 14 -- Summarized Financial Information of Subsidiaries
The following presents condensed consolidating financial information for
CIT Holdings LLC and Capita Corporation (formerly AT&T Capital Corporation). CIT
has guaranteed on a full and unconditional basis the existing debt securities
that were registered under the Securities Act of 1933 and certain other
indebtedness of these subsidiaries. CIT has not presented related financial
statements or other information for these subsidiaries on a stand-alone basis ($
in millions).
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------- ----------- -------- ------------ ------------ -----
March 31, 2004
ASSETS
Net finance receivables.............. $ 1,203.3 $3,523.0 $1,300.4 $25,524.0 $ -- $31,550.7
Operating lease equipment, net....... -- 586.9 117.4 6,871.9 -- 7,576.2
Finance receivables held for sale.... -- 74.6 77.0 854.6 -- 1,006.2
Cash and cash equivalents............ 633.2 472.6 256.3 (5.6) -- 1,356.5
Other assets......................... 7,648.8 310.4 349.5 1,946.8 (5,492.7) 4,762.8
---------- -------- -------- --------- --------- ---------
Total Assets...................... $ 9,485.3 $4,967.5 $2,100.6 $35,191.7 $(5,492.7) $46,252.4
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt................................. $ 31,879.4 $ 536.3 $1,433.4 $ 226.7 $ -- $34,075.8
Credit balances of
factoring clients................. -- -- -- 3,619.4 -- 3,619.4
Accrued liabilities and payables..... (27,886.8) 3,829.2 (555.6) 27,639.1 -- 3,025.9
---------- -------- -------- --------- --------- ---------
Total Liabilities................. 3,992.6 4,365.5 877.8 31,485.2 -- 40,721.1
Minority interest.................... -- -- -- 38.6 -- 38.6
Total Stockholders' Equity........... 5,492.7 602.0 1,222.8 3,667.9 (5,492.7) 5,492.7
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity.............. $ 9,485.3 $4,967.5 $2,100.6 $35,191.7 $(5,492.7) $46,252.4
========== ======== ======== ========= ========= =========
December 31, 2003
ASSETS
Net finance receivables.............. $ 1,581.3 $3,755.4 $1,208.8 $24,111.0 $ -- $30,656.5
Operating lease equipment, net....... -- 580.3 146.4 6,888.8 -- 7,615.5
Finance receivables held for sale.... -- 80.0 163.8 674.5 -- 918.3
Cash and cash equivalents............ 1,479.9 410.6 227.5 (144.3) -- 1,973.7
Other assets......................... 8,308.2 198.1 174.1 1,892.6 (5,394.2) 5,178.8
---------- -------- -------- --------- --------- ---------
Total Assets...................... $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $(5,394.2) $46,342.8
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt................................. $ 30,656.7 $1,003.5 $1,407.7 $ 600.7 $ -- $33,668.6
Credit balances of
factoring clients................. -- -- -- 3,894.6 -- 3,894.6
Accrued liabilities and payables..... (24,681.5) 3,412.0 (701.2) 25,317.1 -- 3,346.4
---------- -------- -------- --------- --------- ---------
Total Liabilities................. 5,975.2 4,415.5 706.5 29,812.4 -- 40,909.6
Minority interest.................... -- -- -- 39.0 -- 39.0
Total Stockholders' Equity........... 5,394.2 608.9 1,214.1 3,571.2 (5,394.2) 5,394.2
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity.............. $ 11,369.4 $5,024.4 $1,920.6 $33,422.6 $(5,394.2) $46,342.8
========== ======== ======== ========= ========= =========
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- -------- ------------ ------------ -----
Quarter Ended
March 31, 2004
Finance income....................... $ 9.5 $184.4 $47.6 $661.4 $ -- $902.9
Interest expense..................... (22.9) 54.1 3.9 262.9 -- 298.0
------ ------ ----- ------ ------- ------
Net finance income................... 32.4 130.3 43.7 398.5 -- 604.9
Depreciation on operating
lease equipment................... -- 84.6 11.1 138.8 -- 234.5
------ ------ ----- ------ ------- ------
Net finance margin................... 32.4 45.7 32.6 259.7 -- 370.4
Provision for credit losses.......... 4.2 10.7 2.6 68.1 -- 85.6
------ ------ ----- ------ ------- ------
Net finance margin, after provision
for credit losses................. 28.2 35.0 30.0 191.6 -- 284.8
Equity in net income
of subsidiaries................... 155.6 -- -- -- (155.6) --
Other revenue........................ 0.6 31.3 32.6 165.9 -- 230.4
Gain on venture capital
investments....................... -- -- -- 0.7 -- 0.7
------ ------ ----- ------ ------- ------
Operating margin..................... 184.4 66.3 62.6 358.2 (155.6) 515.9
Operating expenses................... 18.6 36.7 23.2 168.8 -- 247.3
Gain on redemption of debt........... 41.8 -- -- -- -- 41.8
------ ------ ----- ------ ------- ------
Income (loss) before provision
for income taxes.................. 207.6 29.6 39.4 189.4 (155.6) 310.4
Provision for income taxes........... 18.3 11.5 15.4 75.9 -- 121.1
------ ------ ----- ------ ------- ------
Net income (loss).................... $189.3 $ 18.1 $24.0 $113.5 $(155.6) $189.3
====== ====== ===== ====== ======= ======
Quarter Ended
March 31, 2003
Finance income....................... $ 29.7 $202.6 $48.5 $658.4 $ -- $939.2
Interest expense..................... (2.1) 88.9 (2.7) 270.6 -- 354.7
------ ------ ----- ------ ------- ------
Net finance income................... 31.8 113.7 51.2 387.8 -- 584.5
Depreciation on operating
lease equipment................... -- 98.2 20.1 160.5 -- 278.8
------ ------ ----- ------ ------- ------
Net finance margin................... 31.8 15.5 31.1 227.3 -- 305.7
Provision for credit losses.......... 12.7 13.3 2.7 74.3 -- 103.0
------ ------ ----- ------ ------- ------
Net finance margin, after
provision for credit losses....... 19.1 2.2 28.4 153.0 -- 202.7
Equity in net income of
subsidiaries...................... 107.7 -- -- -- (107.7) --
Other revenue........................ 0.6 34.0 21.1 184.2 -- 239.9
Loss on venture capital
investments....................... -- -- -- (4.4) -- (4.4)
------ ------ ----- ------ ------- ------
Operating margin..................... 127.4 36.2 49.5 332.8 (107.7) 438.2
Operating expenses................... (1.9) 40.1 40.0 147.4 -- 225.6
------ ------ ----- ------ ------- ------
Income (loss) before provision for
income taxes...................... 129.3 (3.9) 9.5 185.4 (107.7) 212.6
Provision (benefit) for income taxes. 2.3 (1.5) 3.7 78.4 -- 82.9
Dividends on preferred capital
securities, after tax............. -- -- -- (2.7) -- (2.7)
------ ------ ----- ------ ------- ------
Net income (loss).................... $127.0 $ (2.4) $ 5.8 $104.3 $(107.7) $127.0
====== ====== ===== ====== ======= ======
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING STATEMENT CIT Capita Holdings Other
OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- -------- ------------ ------------ -----
Quarter Ended
March 31, 2004
Cash Flows From
Operating Activities:
Net cash flows provided by
(used for) operations............. $ 65.0 $ (83.3) $(141.1) $ 604.1 $ -- $ 444.7
--------- ------- ------- --------- --------- ---------
Cash Flows From
Investing Activities:
Net (increase) decrease in financing
and leasing assets................ 374.0 154.4 18.1 (1,949.2) -- (1,402.7)
Decrease in inter-company loans
and investments................... (2,508.4) -- -- -- 2,508.4
Other................................ -- -- -- (1.1) -- (1.1)
--------- ------- ------- --------- --------- ---------
Net cash flows (used for) provided
by investing activities........... (2,134.4) 154.4 18.1 (1,950.3) 2,508.4 (1,403.8)
--------- ------- ------- --------- --------- ---------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt...... 1,222.7 (467.2) 25.7 (403.3) -- 377.9
Inter-company financing.............. -- 458.1 126.1 1,924.2 (2,508.4) --
Cash dividends paid.................. -- -- -- (28.0) -- (28.0)
Other................................ -- -- -- (8.0) -- (8.0)
--------- ------- ------- --------- --------- ---------
Net cash flows provided by
(used for) financing activities... 1,222.7 (9.1) 151.8 1,484.9 (2,508.4) 341.9
--------- ------- ------- --------- --------- ---------
Net (decrease) increase in cash
and cash equivalents.............. (846.7) 62.0 28.8 138.7 -- (617.2)
Cash and cash equivalents,
beginning of period............... 1,479.9 410.6 227.5 (144.3) -- 1,973.7
--------- ------- ------- --------- --------- ---------
Cash and cash equivalents,
end of period..................... $ 633.2 $ 472.6 $ 256.3 $ (5.6) $ -- $ 1,356.5
========= ======= ======= ========= ========= =========
17
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
CIT
CONSOLIDATING STATEMENT CIT Capita Holdings Other
OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- -------- ------------ ------------ -----
Quarter Ended
March 31, 2003
Cash Flows From
Operating Activities:
Net cash flows provided
by (used for) operations.......... $ (534.5) $ 466.3 $ (77.4) $ 644.3 $ -- $ 498.7
-------- ------- ------- --------- ------- ---------
Cash Flows From
Investing Activities:
Net decrease in financing and
leasing assets.................... (2.2) (12.6) (42.1) (1,228.5) -- (1,285.4)
Decrease in inter-company loans
and investments................... (430.9) -- -- -- 430.9 --
Other................................ -- -- -- (41.4) -- (41.4)
-------- ------- ------- --------- ------- ---------
Net cash flows (used for)
investing activities.............. (433.1) (12.6) (42.1) (1,269.9) 430.9 (1,326.8)
-------- ------- ------- --------- ------- ---------
Cash Flows From
Financing Activities:
Net increase (decrease) in debt...... 1,073.3 (16.4) (249.0) 34.4 -- 842.3
Inter-company financing.............. -- (379.9) 146.9 663.9 (430.9) --
Cash dividends paid.................. -- -- -- (25.4) -- (25.4)
-------- ------- ------- --------- ------- ---------
Net cash flows provided by
(used for) financing activities... 1,073.3 (396.3) (102.1) 672.9 (430.9) 816.9
-------- ------- ------- --------- ------- ---------
Net (decrease) increase in cash
and cash equivalents.............. 105.7 57.4 (221.6) 47.3 -- (11.2)
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
======== ======= ======= ========= ======= =========
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosure
about Market Risk
The following discussion uses financial terms that we believe to be
relevant to our business. A glossary of other key terms used in our business can
be found following the "Introduction" section.
Introduction
CIT is a global commercial and consumer finance company that was founded
in 1908. We provide financing and leasing capital for companies in a wide
variety of industries, offering vendor, equipment, commercial, factoring,
consumer, and structured financing products.
Our primary sources of revenue are interest and rental income related to
collateralized lending and equipment leasing. Finance receivables (loans and
capital leases) and operating lease equipment (operating leases) are the two
major asset types that generate this revenue. In the case of finance receivables
(which are financial assets), the substantive risks and rewards of equipment and
other collateralized asset ownership belong to the customer and we retain
predominantly the borrower credit risk. With operating lease equipment, we
retain the substantive risks and rewards of equipment ownership, including the
right to take depreciation and the risk of damage or obsolescence. We fund our
leasing and lending activity via the global capital markets, using commercial
paper, unsecured term debt, and securitizations. We refer to the excess of our
interest and rental income over our interest expense as "net finance margin."
This revenue is supplemented by other "non-spread" sources of revenue such as
syndication fees, gains from dispositions of equipment, factoring commissions,
servicing of loans and other fees.
We measure our overall level of profitability with the following metrics:
o Net income as a percentage of average earning assets (AEA);
o Net income per common share (EPS); and
o Net income as a percentage of average tangible equity (ROTE).
The keys to enhancing profitability in our business are as follows:
Net Interest Margin -- Our ability to lend money at rates in excess of our cost
of borrowing. We measure this with the following ratios:
o Finance income as a percentage of AEA; and
o Net finance income as a percentage of AEA.
Funding and Market Rate Risk Management -- Our ability to access funding sources
at competitive rates, which depends on maintaining high quality assets, strong
capital ratios and high credit ratings. This profitability key is also a
function of interest rate risk management, where the goal is to substantially
insulate our interest margins and profits from movements in market interest
rates and foreign currency exchange rates. We gauge our funding and interest
rate risk management activities with various measurements, including the
following:
o Interest expense as a percentage of AEA;
o Quality spread trends (our interest rate costs over comparable term
U.S. Treasury rates);
o Net finance margin as a percentage of AEA; and
o Various interest sensitivity and liquidity measurements that are
discussed in Risk Management.
Credit Risk Management -- Our ability to evaluate the creditworthiness of our
customers, both during the credit granting process and periodically after the
advancement of funds, and to maintain high quality assets. We assess our credit
risk management activities with the following measurements:
o Delinquent assets as a percentage of finance receivables;
o Non-performing assets as a percentage of finance receivables; and
o Net charge-offs as a percentage of average finance receivables.
19
Expense Management -- Our ability to maintain efficient operating platforms and
infrastructure in order to run our business at competitive cost levels. We track
our efficiency with the following measurements:
o Efficiency ratio, which is the ratio of salaries and general
operating expenses to operating margin excluding the provision for
credit losses; and
o Operating expenses as a percentage of average managed assets (AMA).
Equipment and Residual Risk Management -- Our ability to evaluate collateral
risk in leasing and lending transactions and to remarket equipment at lease
termination. We measure these activities with the following:
o Operating lease margin as a percentage of average leased equipment;
o Gains and losses on equipment sales; and
o Equipment utilization/value of equipment off lease.
Asset Generation and Growth -- Our ability to originate new business and build
our earning assets in a focused and prudent manner. We measure our performance
in these areas with the following:
o Origination volumes;
o Levels of financing and leasing assets and managed assets (including
securitized finance receivables that we continue to manage); and
o Levels of non-spread and other revenue.
Capital Management -- Our ability to maintain a strong capital base and adequate
credit loss reserve levels. We measure our performance in these areas with the
following:
o Debt to tangible equity ratio;
o Tangible equity to managed assets ratio; and
o Reserve for credit losses as a percentage of finance receivables, of
delinquent assets, and of non-performing assets.
Glossary of Key Terms
Term Description
- ----- ----------
Average Earning Assets (AEA)........ "AEA" is the average during the reporting
period of finance receivables, operating
lease equipment, finance receivables held
for sale and certain investments, less
credit balances of factoring clients. The
average is used for certain key
profitability ratios, including return on
AEA and margins as a percentage of AEA.
Average Finance Receivables (AFR)... "AFR" is the average during the reporting
period of finance receivables and
includes loans and finance leases. It
excludes operating lease equipment. The
average is used to measure the rate of
charge-offs for the period.
Average Managed Assets (AMA)........ "AMA" is the average earning assets plus
the average of finance receivables
previously securitized and still managed
by us. The average is used to measure the
rate of charge-offs on a managed basis
for the period to monitor overall credit
performance, and to monitor expense
control.
Derivative Contracts................ Derivatives are entered into to reduce
interest rate or foreign currency risks
and more recently to hedge credit risk.
Derivative contracts used by CIT include
interest rate swaps, cross currency
swaps, foreign exchange forward contracts
and credit default swaps.
20
Term Description
- ----- ----------
Efficiency Ratio.................... The efficiency ratio measures the level
of expenses in relation to revenue
earned, and is calculated as the
percentage of salaries and general
operating expenses to operating margin,
excluding the provision for credit
losses.
Finance Income...................... Finance income includes both interest
income on finance receivables and rental
income on operating leases.
Financing and Leasing Assets........ Financing and leasing assets include
loans, capital and finance leases,
leveraged leases, operating leases,
assets held for sale and certain
investments.
Leases -- capital and finance....... Lease designation describing financing
structures whereby substantially all of
the economic benefits and risks of
ownership are passed to the lessee.
Leases -- leveraged................. Similar to capital leases except a third
party, long-term creditor is involved and
provides debt financing. CIT is party to
these lease types as creditor or as
lessor, depending on the transaction.
Leases -- tax-optimized leveraged... Tax-optimized leveraged leases where we
are the lessor and have increased risk in
comparison to other leveraged lease
structures, as the creditor in these
structures has a priority recourse to the
leased equipment.
Leases -- operating................. Lease designation where CIT maintains
ownership of the asset, collects rent
payments, recognizes depreciation on the
asset, and assumes the risks of
ownership, including obsolescence.
Non-GAAP Financial Measures......... Non-GAAP financial measures are balances
that do not readily agree to balances
disclosed in financial statements
presented in accordance with accounting
principles generally accepted in the U.S.
These measures are disclosed to provide
additional information and insight
relative to historical operating results
and financial position of the business.
Non-performing Assets............... Non-performing assets include loans
placed on non-accrual status, due to
doubt of collectibility of principal and
interest, and repossessed assets.
Non-spread Revenue.................. Non-spread revenues include syndication
fees, gains from dispositions of
equipment, factoring commissions, loan
servicing and other fees and are reported
in Other Revenue.
Quality Spreads..................... Interest costs we incur on borrowings in
excess of comparable term U.S. Treasury
rates measured in percentage terms. These
incremental costs typically reflect our
debt credit ratings.
Retained Interest................... The portion of the interest in assets
sold in a securitization transaction that
is retained by CIT.
Residual Values..................... Residual values represent the estimated
value of equipment at the end of the
lease term. For operating leases, it is
the value to which the asset is
depreciated at the end of its useful
economic life (i.e. "salvage" or "scrap
value").
Risk Adjusted Margin................ Net finance margin after provision for
credit losses.
21
Term Description
- ----- ----------
Special Purpose Entity (SPE)........ Distinct legal entities created for a
specific purpose in order to isolate the
risks and rewards of owning its assets
and incurring its liabilities. SPEs are
typically used in securitization
transactions, joint venture relationships
and certain structured leasing
transactions.
Tangible Equity..................... Tangible stockholders' equity excludes
goodwill and other intangible assets, and
certain other comprehensive income items
and includes preferred capital
securities. Tangible equity is utilized
in leverage ratios and return ratios.
Yield-related Fees.................. In certain transactions, in addition to
interest income, yield-related fees are
collected for the assumption of
underwriting risk. Yield-related fees are
reported in Finance Income and are
recognized over the life of the lending
transaction.
Profitability and Key Business Trends
Net income for the quarter ended March 31, 2004 included a $25.5 million
after-tax gain recognized on the early redemption of debt. Aside from this item,
our improved profitability reflected higher asset levels, lower charge-offs and
lower borrowing costs.
Our profitability measurements for the respective periods are presented in
the table below:
Quarters Ended March 31,
------------------------
2004 2003
----- -----
Net income per diluted share(1).................. $0.88 $0.60
Net income as a percentage of AEA(1)............. 2.05% 1.47%
Return on average tangible equity(1)............. 15.1% 11.0%
- --------------------------------------------------------------------------------
(1) For the quarter ended March 31, 2004, net income per diluted share, net
income as a percentage of AEA and return on tangible equity, excluding
gain on redemption of debt, were $0.76, 1.78% and 13.1%, respectively.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosure about Market
Risk" contain certain non-GAAP financial measures. See "Non-GAAP Financial
Measurements" for additional information. The sections that follow analyze our
results by financial statement caption and are referenced back to the
profitability keys that are discussed in "Introduction."
The following table summarizes the impact of various items for the
respective reporting periods that affect the comparability of our financial
results under GAAP. We are presenting these items as a supplement to the GAAP
results to facilitate the comparability of results between periods. As noted
above, during the quarter ended March 31, 2004, we recognized a gain on the
early redemption of debt. While this gain is significant, it does not represent
income from our core business, and does not occur on a regular basis. Venture
capital gains and losses relate to private equity investments that we are in the
process of running off, through both the systematic liquidation of the private
fund investments and the sale of the direct investment portfolio. For these
reasons, we believe that this table, in addition to the GAAP results, aids in
the analysis of comparing the results in our business over the periods presented
($ in millions):
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Net income (loss) GAAP basis..................... $189.3 $127.0
Charges (gains) included in net income/loss
Gain on debt redemption........................ (25.5) --
Venture capital (gains) losses.................. (0.4) 2.7
------ ------
Net Income-- before gains/losses............... $163.4 $129.7
====== ======
22
Net Finance Margin
An analysis of net finance margin is set forth below ($ in millions):
Quarters Ended March 31,
--------------------------
2004 2003
--------- ---------
Finance income.................................. $ 902.9 $ 939.2
Interest expense................................ 298.0 354.7
--------- ---------
Net finance income............................ 604.9 584.5
Depreciation on operating lease equipment....... 234.5 278.8
--------- ---------
Net finance margin............................ $ 370.4 $ 305.7
========= =========
Average Earnings Asset ("AEA").................. $36,865.1 $34,600.6
========= =========
As a % of AEA:
Finance income.................................. 9.80% 10.86%
Interest expense................................ 3.23% 4.11%
---- -----
Net finance income............................ 6.57% 6.75%
Depreciation on operating lease equipment....... 2.55% 3.22%
---- -----
Net finance margin.............................. 4.02% 3.53%
==== =====
Net finance margin improved by $64.7 million and 49 basis points (as a
percentage of AEA) from the first quarter of 2003 due primarily to reduced
borrowing costs. Year over year growth in financing and leasing assets was
offset by lower finance income and operating lease rentals, which declined
correspondingly with market interest rates. Lower operating lease rentals
reduced finance income by $33.7 million or 37 basis points from the first
quarter of 2003. Operating lease margin, while down modestly as a percentage of
operating lease equipment, increased $10.6 million from 2003. See "Operating
Leases" for additional information regarding operating lease margin.
The trend in net finance margin as a percentage of AEA, excluding the
impact of operating lease rentals, reflects a greater decline in interest
expense than in finance income yield, due to the narrowing (improvement) of our
credit spreads, the refinancing of higher-cost debt and a reduced level of
excess liquidity represented by a lower cash balance. The increase in AEA
reflects growth in the latter part of 2003 and 2004.
For the March 2004 quarter, we made a reporting change to reclassify debt
commissions from general operating expense to interest expense to reflect all-in
funding costs in margin. This change was also made in the historical comparative
data and does not impact net income. As a result of this change, prior year
interest expense was increased by approximately $8 million and was roughly 10
basis points higher than historically reported ratios.
The following table summarizes the trend in our quality spreads in
relation to 5-year U.S. Treasuries. Amounts are in basis points and represent
the average spread or cost of funds over comparable term U.S. Treasury
securities:
Quarter Year Quarter Year Nine Months
Ended Ended Ended Ended Ended
March 31, December 31, December 31, September 30, September 30,
2004 2003 2002 2002 2001
--------- ------------ ------------ ------------- -------------
Average spread over
U.S. Treasuries...................... 78 138 302 313 147
As the table shows, our borrowing spreads have improved since the funding
base disruption in the first half of 2002.
23
Additional information regarding our borrowing costs is shown in the
following table ($ in millions).
Quarter Ended Quarter Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Before Swaps
Commercial paper, variable-rate senior notes
and bank credit facilities................... $13,704.2 1.56% $12,704.5 1.94%
Fixed-rate senior and subordinated notes....... 18,948.1 5.70% 19,695.7 6.32%
--------- ---------
Composite...................................... $32,652.3 3.96% $32,400.2 4.61%
========= =========
After Swaps
Commercial paper, variable-rate senior notes
and bank credit facilities................... $17,823.7 2.26% $14,751.9 2.80%
Fixed-rate senior and subordinated notes....... 14,828.6 5.34% 17,648.3 6.10%
--------- ---------
Composite...................................... $32,652.3 3.66% $32,400.2 4.60%
========= =========
Operating Leases
The table below summarizes operating lease margin, both in amount and as a
percentage of average operating lease equipment ($ in millions):
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Rental income............................... $ 346.3 $ 380.0
Depreciation expense........................ 234.5 278.8
-------- --------
Operating lease margin.................... $ 111.8 $ 101.2
======== ========
Average operating lease equipment........... $7,590.0 $6,712.6
======== ========
As a % of Average Operating
Lease Equipment:
Rental income............................... 18.25% 22.65%
Depreciation expense........................ 12.36% 16.62%
-------- --------
Operating lease margin.................... 5.89% 6.03%
======== ========
The decline in operating lease margin and its components for the above
periods reflects lower rentals on the Capital Finance aerospace portfolio due to
the commercial airline industry downturn and the change in equipment mix to a
greater proportion of aircraft and rail assets with an average depreciable life
of 25 and 40 years, respectively, compared to smaller-ticket assets with lives
generally of 3 years in the Specialty Finance and Equipment Finance portfolios.
Aerospace rentals have trended downward following September 11, 2001, but have
recently shown some stability.
The following table summarizes the total operating lease portfolio by
segment ($ in millions).
March 31, March 31,
2004 2003
--------- ---------
Capital Finance -- Aerospace................. $3,991.6 $3,400.2
Capital Finance -- Rail and Other............ 2,150.5 1,572.8
Specialty Finance............................ 919.1 1,227.6
Equipment Finance............................ 385.6 527.4
Structured Finance........................... 129.4 103.4
-------- --------
Total........................................ $7,576.2 $6,831.4
======== ========
o The increase in the Capital Finance aerospace portfolio reflects
deliveries of new commercial aircraft.
o The increase in the Capital Finance rail and other portfolio was due
primarily to a second quarter 2003 rail acquisition.
o The decline in the Specialty Finance and Equipment Finance operating
lease portfolios are a result of the continued trend toward
financing equipment through finance leases and loans in these
segments.
24
Maximizing equipment utilization levels is a prime component of operating
lease portfolio profitability. Equipment not subject to lease agreements totaled
$231.1 million and $265.9 million, at March 31, 2004 and December 31, 2003,
respectively. The current weakness in the commercial airline industry could
adversely impact prospective rental and utilization rates.
Net Finance Margin after Provision for Credit Losses (Risk-adjusted Margin)
The following table summarizes risk-adjusted margin, both in amount and as
a percentage of AEA ($ in millions):
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Net finance margin............................. $370.4 $305.7
Provision for credit losses.................... 85.6 103.0
------ ------
Risk-adjusted margin......................... $284.8 $202.7
====== ======
As a percentage of AEA:
Net finance margin............................. 4.02% 3.53%
Provision for credit losses.................... 0.93% 1.19%
------ ------
Risk-adjusted margin......................... 3.09% 2.34%
====== ======
The improvement to 3.09% for the March 31, 2004 quarter primarily reflects
the previously discussed improvement in net finance margin, as well as
incremental benefit from a lower provision for charge-offs, which is discussed
further in "Credit Metrics".
Discounts related to the liquidating portfolios, recorded under fresh
start accounting in conjunction with the June 2001 acquisition by Tyco, are
being accreted into income as the portfolios liquidate. These portfolios totaled
$874 million and $923 million at March 31, 2004 and December 31, 2003. For the
quarter ended March 31, 2004, this finance income accretion was 13 basis points
(as a percentage of consolidated AEA) and was completely offset by liquidating
portfolio charge-offs. For the quarter ended March 31, 2003 finance income
accretion of 22 basis points was largely offset by 17 basis points in
liquidating portfolio charge-offs. In addition, risk-adjusted interest margin
was impacted positively due to fair value adjustments to mark receivables and
debt to market in conjunction with the 2001 acquisition by approximately six
basis points for the quarter ended March 31, 2004 and 19 basis points for the
quarter ended March 31, 2003. See "Financing and Leasing Assets" for additional
information regarding the liquidating portfolios.
Other Revenue
The components of other revenue are set forth in the following table ($ in
millions).
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Fees and other income........................... $126.7 $144.7
Factoring commissions........................... 55.0 46.9
Gains on sales of leasing equipment............. 27.3 17.6
Gains on securitizations........................ 21.4 30.7
------ ------
Total......................................... $230.4 $239.9
====== ======
Total Other Revenue as % of AEA................. 2.50% 2.77%
====== ======
The following table presents information regarding gains on
securitizations ($ in millions):
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Total volume securitized........................ $1,236.4 $1,237.4
Gains........................................... $ 21.4 $ 30.7
Gains as a percentage of volume securitized..... 1.73% 2.48%
Gains as a percentage of pre-tax income......... 6.9% 14.4%
25
We continue to emphasize growth and diversification of other revenues to
improve our overall profitability.
o Fees and other income include servicing fees, miscellaneous fees,
syndication fees and gains from asset sales. The reduction from the
prior year reflects lower fees in our Business Credit unit and in
Equipment Finance. In line with the improving economy, business has
generally returned to smaller working capital asset-based lending
activities, away from the larger-ticket, debtor-in-possession
lending. Reduced fees and other income also reflect lower fee
revenue related to securitizations consistent with the runoff in
securitized asset balances.
o Higher factoring commissions benefited from two large acquisitions
completed during the second half of 2003.
o Securitization volume, while essentially unchanged from the prior
year, is comprised of a higher proportion of commercial assets, as
we continue to fund home equity growth entirely on-balance sheet.
2003 volume includes $0.4 billion of home equity loans.
o Gains on sales of leasing equipment increased from 2003 due to
higher commercial aircraft equipment gains as well as general
strengthening of equipment values.
Venture Capital Investments
We announced on January 15, 2004, that we signed a purchase and sale
agreement for the disposition of the direct investment portfolio at an amount
approximating the carrying value at December 31, 2003. We are working toward a
closing in the second quarter of 2004. Results from venture capital investments
include realized and unrealized gains and losses on both direct investments and
venture capital fund investments for both quarters presented.
Provision for Credit Losses
Our provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions).
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Balance beginning of period............................................... $643.7 $760.8
------ ------
Provision for credit losses............................................... 85.6 103.0
Reserves relating to acquisitions, other.................................. 6.7 7.5
------ ------
Additions to reserve for credit losses, net............................. 92.3 110.5
------ ------
Net credit losses:
Specialty Finance......................................................... 38.7 44.0
Commercial Finance........................................................ 12.5 16.6
Equipment Finance......................................................... 26.3 38.1
Capital Finance........................................................... -- 1.8
Structured Finance........................................................ 21.8 13.8
------ ------
Total net credit losses................................................. 99.3 114.3
------ ------
Balance end of period..................................................... $636.7 $757.0
====== ======
Reserve for credit losses as a percentage of finance receivables.......... 1.98% 2.64%
====== ======
Reserve for credit losses as a percentage of past due receivables
(60 days or more)(1).................................................... 104.5% 77.9%
====== ======
Reserve for credit losses as a percentage of non-performing assets(2)..... 95.4% 75.2%
====== ======
- --------------------------------------------------------------------------------
(1) The reserve for credit losses as a percentage of past due receivables (60
days or more), excluding telecommunication and Argentine reserves and
corresponding delinquencies, was 89.9% at March 31, 2004 and 51.5% at
March 31, 2003.
(2) The reserve for credit losses as a percentage of non-performing assets,
excluding telecommunication and Argentine reserves and corresponding
non-performing assets, was 88.3% at March 31, 2004 and 52.4% at March 31,
2003.
The decreased provision for the quarter ended March 31, 2004 in relation
to 2003 reflects lower charge-offs and improving credit metrics. See 'Credit
Metrics' for further discussion on net charge-offs and other related statistics.
26
Reserve for Credit Losses
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of corresponding finance receivables
($ in millions):
March 31, 2004 December 31, 2003 March 31, 2003
-------------- ----------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Finance receivables..... $531.4 1.68% $524.6 1.71% $482.2 1.74%
Telecommunications(1)... 92.8 18.56% 106.6 19.16% 139.8 21.33%
Argentina(2)............ 12.5 69.83% 12.5 55.07% 135.0 72.50%
------ ------ ------
Total................... $636.7 1.98% $643.7 2.06% $757.0 2.64%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
The decline in the reserve for credit losses at March 31, 2004 from the
2003 periods, in both amount and percentage, was due to telecommunication
charge-offs taken against the previously established specific reserve and the
improving credit metrics. The 2003 decline in the specific Argentine reserve
resulted largely from the fourth quarter 2003 charge-off of $101.0 million.
Reserve for Credit Losses -- Finance Receivables
The reserve for credit losses is determined based on three key components:
(1) specific reserves for collateral dependent loans which are impaired under
SFAS 114, (2) reserves for estimated losses inherent in the portfolio based upon
historical and projected credit trends and (3) reserves for general economic
environment and other factors.
The reserve includes specific reserves relating to impaired loans
(excluding telecommunication and Argentine) of $50.2 million at March 31, 2004,
compared to $66.4 million at December 31, 2003 and $52.8 million at March 31,
2003. The changes in the inherent estimated loss and estimation risk components
of the reserve reflect trends in our key credit metrics.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral values, among other things. Therefore, changes in
economic conditions or credit metrics, including past due and non-performing
accounts, or other events affecting specific obligors or industries may
necessitate additions or reductions to the consolidated reserve for credit
losses. Management continues to believe that the credit risk characteristics of
the portfolio are well diversified by geography, industry, borrower and
equipment type. Refer to "Concentrations" for more information. Based on
currently available information, management believes that our total reserve for
credit losses is adequate.
Reserve for Credit Losses -- Telecommunications
We added $200.0 million to the reserve for credit losses during the
quarter ended June 30, 2002 in light of the continued deterioration in the
telecommunications sector at that time, particularly with respect to our CLEC
portfolio. In the subsequent quarters through March 31, 2004, we have recorded
net charge-offs of $107.2 million against this specific reserve.
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in Note 4 to the Consolidated Financial
Statements. This portfolio includes lending and leasing transactions to the
telecommunications sector. Lending and leasing of telecommunication equipment to
non-telecom companies is conducted in our Specialty Finance business and is
categorized according to the customer's ("obligor's") industry in the industry
composition table. Certain statistical data is presented in the following table
($ in millions).
27
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ ---------
CLEC accounts............................................. $191.3 $197.8 $238.0
Other telecommunication accounts.......................... 327.3 381.2 440.7
------ ------ ------
Total telecommunications portfolio........................ $518.6 $579.0 $678.7
====== ====== ======
Portfolio as a % of total financing and leasing assets.... 1.3% 1.5% 1.8%
Number of accounts........................................ 42 44 53
Top 10 accounts........................................... $236.8 $253.4 $265.6
Largest account exposure.................................. $ 30.6 $ 31.0 $ 33.4
Non-performing accounts................................... $ 65.7 $ 57.2 $ 85.5
Number of non-performing accounts......................... 8 6 9
Non-performing accounts as a percentage of portfolio...... 12.7% 9.9% 12.6%
Reserve for Credit Losses -- Argentina
We established a $135.0 million specific reserve for Argentine exposure in
the first half of 2002 to reflect the geopolitical risks associated with
collecting our peso-based assets and repatriating them into U.S. dollars that
resulted from the Argentine government instituting certain economic reforms.
When established, the reserve was about two-thirds of our combined currency and
credit exposure. During the fourth quarter of 2003, based on the substantial
progress with collection and work out efforts, we recorded a $101.0 million
charge-off against this specific reserve and transferred $21.5 million to the
Reserve for Credit Losses -- Finance Receivables. At March 31, 2004, we have
$17.9 million in Argentine loans that remains to be collected and repatriated,
down slightly from December 31, 2003. Collections efforts of remaining balances
are ongoing.
On April 20, 2004, we signed an agreement to sell the portfolio to an
Argentine bank at a price approximating our book value. The sale is subject to
certain Argentine regulatory approvals.
Credit Metrics
Net Charge-offs
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown in the following tables ($ in millions):
Quarter Ended March 31, 2004
-----------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
----------------- ------------------ ------------------
Specialty Finance -- commercial................ $22.0 1.24% $21.5 1.21% $ 0.5 --
Commercial Finance............................. 12.5 0.48% 12.5 0.48% -- --
Equipment Finance.............................. 26.3 1.67% 21.0 1.37% 5.3 12.35%
Capital Finance................................ -- -- -- -- -- --
Structured Finance............................. 21.8 2.96% 8.1 1.34% 13.7 10.38%
----- ----- -----
Total Commercial Segments................... 82.6 1.19% 63.1 0.93% 19.5 11.13%
Specialty Finance -- consumer.................. 16.7 1.84% 10.2 1.42% 6.5 3.45%
----- ----- -----
Total....................................... $99.3 1.26% $73.3 0.98% $26.0 7.16%
===== ===== =====
Quarter Ended March 31, 2003
------------------------------------------------------------
Before
Liquidating and Liquidating and
Total Telecommunications Telecommunications
------------------ ------------------ ------------------
Specialty Finance -- commercial................ $ 31.0 1.73% $30.6 1.76% $ 0.4 8.65%
Commercial Finance............................. 16.6 0.80% 16.6 0.80% -- --
Equipment Finance.............................. 38.1 2.39% 29.7 2.02% 8.4 6.48%
Capital Finance................................ 1.8 0.55% 1.8 0.55% -- --
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% $29.0 5.70%
====== ===== =====
28
Charge-offs were 1.26% for the first quarter of 2004, reflecting
improvements across virtually all segments:
o Specialty Finance -- commercial improvements were primarily in the
small-ticket and international portfolios.
o Commercial Finance charge-offs fell well below the prior year in
both the asset-based lending and factoring business.
o Equipment Finance improvement was considerable in relation to prior
year due to reductions across all product lines, but charge-off
levels remain above management's expectations.
o Structured Finance charge-offs continue to be driven primarily by
telecommunication charge-offs, with the 2004 increase due to a
project finance portfolio write-off.
o Specialty Finance-consumer charge-offs, while up in absolute
amounts, were down as a percentage of finance receivables from the
prior year reflecting the return to on balance sheet funding of this
portfolio.
Past Due and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets and the related percentages of
finance receivables ($ in millions):
March 31, 2004 December 31, 2003 March 31, 2003
---------------- ----------------- ----------------
Past Dues:
Specialty Finance-- commercial.............. $185.8 2.60% $226.4 3.17% $ 264.7 3.68%
Commercial Finance.......................... 107.2 1.02% 105.9 1.03% 152.8 1.76%
Equipment Finance........................... 113.8 1.79% 137.9 2.18% 292.5 4.69%
Capital Finance............................. 10.7 0.98% 9.5 0.87% 74.0 6.05%
Structured Finance.......................... 32.9 1.12% 47.0 1.59% 55.2 1.89%
------ ------ --------
Total Commercial Segments................... 450.4 1.60% 526.7 1.90% 839.2 3.19%
Specialty Finance -- consumer............... 159.0 3.87% 149.6 4.26% 132.0 5.53%
------ ------ --------
Total....................................... $609.4 1.89% $676.3 2.16% $ 971.2 3.39%
====== ====== ========
Non-performing assets:
Specialty Finance-- commercial.............. $102.3 1.43% $119.8 1.68% $ 160.4 2.23%
Commercial Finance.......................... 77.0 0.73% 75.6 0.74% 128.0 1.47%
Equipment Finance........................... 213.9 3.36% 218.3 3.46% 338.5 5.43%
Capital Finance............................. 3.4 0.31% 3.6 0.33% 86.9 7.10%
Structured Finance.......................... 104.9 3.57% 103.0 3.48% 143.4 4.91%
------ ------ --------
Total Commercial Segments................... 501.5 1.79% 520.3 1.87% 857.2 3.26%
Specialty Finance-- consumer................ 165.9 4.04% 156.2 4.45% 149.2 6.25%
------ ------ --------
Total....................................... $667.4 2.07% $676.5 2.16% $1,006.4 3.51%
====== ====== ========
Non accrual loans.............................. $558.8 $566.5 $ 851.3
Repossessed assets............................. 108.6 110.0 155.1
------ ------ --------
Total non-performing assets................. $667.4 $676.5 $1,006.4
====== ====== ========
The March 31, 2004 delinquency rate of 1.89% marked the sixth consecutive
quarter of improvement, with the most notable declines in Specialty Finance --
commercial and Equipment Finance.
o Specialty Finance -- commercial delinquency improvement from both prior
year periods was driven primarily by the decline in past dues in the
international portfolios, most notably in our European operations,
where servicing was centralized during 2003, and in the Small Business
Lending portfolio.
o Commercial Finance past due levels, while flat with December 2003, were
down considerably from March 2003 due to improvements in both the
Commercial Services (factoring) and Business Credit (asset-based
lending) units.
o Equipment Finance delinquency improved across virtually all product
lines in relation to both 2003 periods and was down 61% in absolute
amounts from March 2003.
29
o Structured Finance improvement during the March 2004 quarter reflected
a project finance charge-off, and lower delinquency in the
telecommunications and media portfolios.
o Specialty Finance -- consumer delinquency was up in dollar amount but
down as a percentage of finance receivables from 2003, reflecting a
return to on-balance growth in the home equity portfolio. However,
consumer delinquency on a managed basis has been relatively stable in
percentage terms over the periods presented.
Non-performing assets also declined for the sixth consecutive quarter,
reflecting the same trends discussed above. Non-performing telecommunications
accounts (in Structured Finance) totaled $65.7 million, $57.2 million and $85.5
million at March 31, 2004, December 31, 2003, and March 31, 2003, respectively.
Managed past due loans in dollar amount and as a percentage managed
financial assets are shown in the table below ($ in millions).
March 31, 2004 December 31, 2003 March 31, 2003
---------------- ----------------- -----------------
Past Dues:
Specialty Finance-- commercial.............. $273.7 2.35% $ 321.2 2.77% $ 343.0 3.04%
Commercial Finance.......................... 107.2 1.02% 105.9 1.03% 152.8 1.76%
Equipment Finance........................... 199.1 2.09% 243.6 2.49% 466.7 4.50%
Capital Finance............................. 10.7 0.98% 9.5 0.87% 74.0 6.05%
Structured Finance.......................... 32.9 1.12% 47.0 1.59% 55.2 1.89%
------ -------- --------
Total Commercial............................ 623.6 1.74% 727.2 2.04% 1,091.7 3.16%
Specialty Finance-- consumer................ 304.2 4.68% 294.8 4.78% 269.6 4.64%
------ -------- --------
Total....................................... $927.8 2.20% $1,022.0 2.44% $1,361.3 3.38%
====== ======== ========
Managed past due loans decreased both in dollar amount and as a percentage
of managed financial assets, reflecting the same factors that are discussed in
the owned delinquency analysis.
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are summarized in the following table
($ in millions).
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Efficiency ratio.......................................................... 41.1% 41.7%
Salaries and general operating expenses as a percentage of AMA............ 2.15% 2.01%
Salaries and general operating expenses................................... $ 247.3 $ 225.6
Average Managed Assets.................................................... $46,104.0 $44,967.8
Salaries and general operating expenses for the quarter ended March 31,
2004 increased from the prior year quarter primarily due to higher
incentive-based compensation, including restricted stock awards, acquisition
activities, and higher corporate expenses reflecting increased governance and
compliance-related costs. Personnel decreased to approximately 5,795 at March
31, 2004, from 5,845 at March 31, 2003.
Beginning with the March 2004 quarter, we made a reporting change to
reclassify debt commissions from general operating expense to interest expense
to reflect all-in funding costs in margin. This change was also made in the
historical comparative data and does not impact net income. As a result of this
change, prior year salaries and general operating expenses were reduced by
approximately $8 million and are roughly 7 basis points lower (as a percentage
of AMA) than historically reported ratios.
Expenses are monitored closely by business unit and corporate management
and are reviewed monthly. An approval and review procedure is in place for major
capital expenditures, such as computer equipment and software, including
post-implementation evaluations. We continue to target an improved efficiency
ratio in the mid 30% area and an AMA ratio of under 2.00%, as we have existing
capacity to grow assets without commensurate expense increases.
30
Gain on Redemption of Debt
In January 2004 and December 2003, we called at par $1.25 billion of term
debt securities. These notes were listed on the New York Stock Exchange under
the ticker symbols CIC and CIP and are commonly known as PINEs ("Public Income
Notes"). The securities carried coupon rates of 8.25% and 8.125%, but were
marked down to a market interest rate yield of approximately 7.5% in our
financial statements through purchase accounting. In light of the high coupon
rates, we called the securities for redemption pursuant to the terms outlined in
the prospectuses. The call of the $512 million on January 15, 2004 resulted in a
pretax gain of $41.8 million ($25.5 million after tax). The December call of
$735 million resulted in a pretax gain of $50.4 million ($30.8 million after
tax) during the fourth quarter of 2003.
Income Taxes
The following table sets for the certain information concerning our income
taxes ($ in millions):
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Provision for income taxes...................... $121.1 $82.9
Effective tax rate.............................. 39.0% 39.0%
The effective tax rate exceeds the U.S. Federal tax rate of 35% primarily
due to state and local and foreign income taxes.
At March 31, 2004, CIT had U.S. federal net operating losses of
approximately $1,937.7 million, which expire in various years beginning in 2011.
In addition, CIT has various state net operating losses that will expire in
various years beginning in 2004. Federal and state operating losses may be
subject to annual use limitations under section 382 of the Internal Revenue Code
of 1986, as amended, and other limitations under certain state laws. Management
believes that CIT will have sufficient taxable income in future years and can
avail itself of tax planning strategies in order to fully utilize these losses.
Accordingly, we do not believe a valuation allowance is required with respect to
these net operating losses.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO, we classified our tax reporting as a "reportable condition", as
defined by standards established by the American Institute of Certified Public
Accountants. We have made substantial progress in rebuilding our tax reporting
and compliance functions, including hiring and training personnel, rebuilding
tax reporting systems, preparing amendments to prior period U.S. Federal income
tax returns, and implementing processes and controls with respect to income tax
reporting and compliance. During the quarter, we completed processes and
developed the data for preparing a tax basis balance sheet to complete the
analysis of deferred tax assets and liabilities as of December 31, 2003. Further
work continues in the areas of quality control, proof and reconciliation and the
tax basis balance sheet analysis is nearing completion. Future income tax return
filings and the completion of the aforementioned analysis of deferred tax assets
and liabilities could result in reclassifications amongst deferred tax assets
and liabilities.
31
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, and
the allocation of most corporate expenses ($ in millions).
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Net Income
Specialty Finance............................... $ 78.2 $ 52.2
Commercial Finance.............................. 60.6 54.1
Equipment Finance............................... 15.2 10.7
Capital Finance................................. 19.0 7.7
Structured Finance.............................. 10.1 12.2
------ ------
Total Segments................................ 183.1 136.9
Corporate, including certain charges............ 6.2 (9.9)
------ ------
Total......................................... $189.3 $127.0
====== ======
Return on AEA
Specialty Finance............................... 2.47% 1.75%
Commercial Finance.............................. 3.62% 3.58%
Equipment Finance............................... 0.88% 0.60%
Capital Finance................................. 1.04% 0.50%
Structured Finance.............................. 1.31% 1.63%
Total Segments................................ 1.99% 1.60%
Corporate, including certain charges............ 0.06% (0.13)%
Total......................................... 2.05% 1.47%
For all periods shown, Corporate includes the operating results of the
venture capital business including gains and losses of venture capital
investments (losses of $3.8 million and $8.9 million after tax for the quarters
ended March 31, 2004 and 2003) and unallocated corporate operating expenses. For
the quarter ended March 31, 2004, Corporate also includes the gain on the early
redemption of debt ($25.5 million after tax).
Noteworthy trends by segment are as follows:
o Specialty Finance profitability showed broad based improvement
across the vendor finance business, Small Business Lending and the
small-ticket leasing businesses.
o Commercial Finance earnings remained strong, benefiting from
continued high returns in both the factoring and asset-based lending
businesses. The current year results also benefited from last year's
factoring acquisitions.
o Equipment Finance returns, while still below management's
expectations, improved from the prior year, reflecting lower
charge-offs and higher equipment gains.
o Capital Finance earnings reflected improved aerospace profitability
due to higher asset levels and increased aircraft equipment gains.
o Structured Finance returns for 2004 were below the prior year due to
increased project finance charge-offs. Results continued to benefit
from strong fee activity.
In April 2004, we initiated the combination of Structured Finance into
Capital Finance, and the transfer of the Communication and Media business of
Structured Finance to the Business Credit unit of Commercial Finance. This will
better align our business with the markets that we serve.
32
Financing and Leasing Assets
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions).
Percentage Change
--------------------------
March 31, December 31, March 31, March 04 vs. March 04 vs.
2004 2003 2003 Dec. 03 March 03
--------- ------------ --------- ----------- ------------
Specialty Finance
Commercial
Finance receivables................... $ 7,135.6 $ 7,150.0 $ 7,201.5 (0.2)% (0.9)%
Operating lease equipment, net........ 919.1 959.5 1,227.6 (4.2)% (25.1)%
Finance receivables held for sale..... 737.1 548.1 899.6 34.5% (18.1)%
--------- --------- ---------
Owned assets........................ 8,791.8 8,657.6 9,328.7 1.6% (5.8)%
Finance receivables securitized
and managed by CIT.................. 3,769.0 3,915.4 3,191.7 (3.7)% 18.1%
--------- --------- ---------
Managed assets...................... 12,560.8 12,573.0 12,520.4 (0.1)% 0.3%
--------- --------- ---------
Consumer
Finance receivables-- home equity..... 3,315.1 2,664.3 1,391.3 24.4% 138.3%
Finance receivables-- other........... 791.2 846.5 995.8 (6.5)% (20.5)%
Finance receivables held for sale..... 150.0 150.0 210.0 -- (28.6)%
--------- --------- ---------
Owned assets........................ 4,256.3 3,660.8 2,597.1 16.3% 63.9%
Home equity finance receivables
securitized and managed by CIT...... 1,651.9 1,867.6 2,358.6 (11.5)% (30.0)%
Other finance receivables securitized
and managed by CIT.................. 593.6 642.5 860.2 (7.6)% (31.0)%
--------- --------- ---------
Managed assets...................... 6,501.8 6,170.9 5,815.9 5.4% 11.8%
--------- --------- ---------
Commercial Finance
Commercial Services
Finance receivables................... 6,450.0 6,325.8 4,726.1 2.0% 36.5%
Business Credit
Finance receivables................... 4,105.9 3,936.1 3,956.6 4.3% 3.8%
--------- --------- ---------
Owned assets........................ 10,555.9 10,261.9 8,682.7 2.9% 21.6%
--------- --------- ---------
Equipment Finance
Finance receivables................... 6,367.0 6,317.9 6,237.4 0.8% 2.1%
Operating lease equipment, net........ 385.6 419.6 527.4 (8.1)% (26.9)%
Finance receivables held for sale..... 119.1 220.2 163.4 (45.9)% (27.1)%
--------- --------- ---------
Owned assets........................ 6,871.7 6,957.7 6,928.2 (1.2)% (0.8)%
Finance receivables securitized
and managed by CIT.................. 3,052.5 3,226.2 3,977.2 (5.4)% (23.3)%
--------- --------- ---------
Managed assets...................... 9,924.2 10,183.9 10,905.4 (2.6)% (9.0)
--------- --------- ---------
Capital Finance
Finance receivables................... 1,087.1 1,097.4 1,223.7 (0.9)% (11.2)%
Operating lease equipment, net........ 6,142.1 6,103.8 4,973.0 0.6% 23.5%
--------- --------- ---------
Owned assets........................ 7,229.2 7,201.2 6,196.7 0.4% 16.7%
--------- --------- ---------
Structured Finance
Finance receivables................... 2,935.5 2,962.2 2,922.2 (0.9)% 0.5%
Operating lease equipment, net........ 129.4 132.6 103.4 (2.4)% 25.1%
--------- --------- ---------
Owned assets........................ 3,064.9 3,094.8 3,025.6 (1.0)% 1.3%
--------- --------- ---------
Other-- Equity Investments............... 251.8 249.9 334.3 0.8% (24.7)%
--------- --------- ---------
Total Managed Assets.................. $50,088.6 $49,735.6 $47,481.0 0.7% 5.5%
========= ========= =========
Finance receivables...................... $32,187.4 $31,300.2 $28,654.6 2.8% 12.3%
Operating lease equipment, net........... 7,576.2 7,615.5 6,831.4 (0.5)% 10.9%
Finance receivables held for sale........ 1,006.2 918.3 1,273.0 9.6% (21.0)%
--------- --------- ---------
Financing and leasing assets excluding
equity investments.................... 40,769.8 39,834.0 36,759.0 2.3% 10.9%
Equity investments (included in
other assets)......................... 251.8 249.9 334.3 0.8% (24.7)%
--------- --------- ---------
Owned assets.......................... 41,021.6 40,083.9 37,093.3 2.3% 10.6%
Finance receivables securitized and
managed by CIT........................ 9,067.0 9,651.7 10,387.7 (6.1)% (12.7)%
--------- --------- ---------
Total Managed Assets.................. $50,088.6 $49,735.6 $47,481.0 0.7% 5.5%
========= ========= =========
33
The increase in owned assets from 2003 was driven by: the combination of a
strong mortgage refinancing market and acquisitions in the Specialty Finance
home equity portfolio; two factoring acquisitions in Commercial Services; and
deliveries of aerospace assets in Capital Finance. The decline in receivables
securitized reflects our return to funding home equity growth on balance sheet.
The table below summarizes the targeted non-strategic business lines. In
addition, during 2001 we ceased making new venture capital investments beyond
existing commitments. During the fourth quarter of 2003, we decided to
accelerate the liquidation of the venture capital direct investment portfolio.
See "Losses on Venture Capital Investments" for more information ($ in
millions):
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ ---------
Portfolio
Manufactured housing...................................... $578 $584 $ 613
Recreational vehicle...................................... 52 58 51
Recreational marine....................................... 79 86 114
Wholesale inventory finance............................... -- 2 4
Franchise finance......................................... 98 102 316
Owner-operator trucking................................... 67 91 184
---- ---- ------
Total on-balance sheet financing and leasing assets..... $874 $923 $1,282
==== ==== ======
The following table presents new business volume (excluding factoring) by
segment ($ in millions).
Quarters Ended March 31,
------------------------
2004 2003
------ ------
Specialty Finance............................... $3,575.9 $3,073.0
Commercial Finance.............................. 374.0 227.0
Equipment Finance............................... 922.1 828.9
Capital Finance................................. 102.0 280.5
Structured Finance.............................. 242.8 100.2
-------- --------
Total new business volume..................... $5,216.8 $4,509.6
======== ========
New origination volume for the quarter ended March 31, 2004 included
stronger volume from our Specialty Finance vendor finance, international and
home equity units, as well as improved demand for financing in Equipment Finance
and working capital financings in the Business Credit unit of Commercial
Finance.
34
Concentrations
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.5% of our total financing and leasing assets at March 31, 2004
(the largest account being less than 1.0%), 5.2% at December 31, 2003, and 5.0%
at March 31, 2003.
Leveraged Leases
As of March 31, 2004, net investments in leveraged leases totaled $1.1
billion, or 3.5% of finance receivables, with the major components being (i)
$453.9 million in commercial aerospace transactions, including $218.9 million of
tax-optimization leveraged leases (which generally have increased risk for
lessors in relation to conventional lease structures due to additional leverage
in the transactions); (ii) $325.3 million of project finance transactions,
primarily in the power and utility sector; and (iii) $227.8 million in rail
transactions.
Joint Venture Relationships
Our strategic relationships with industry-leading equipment vendors are a
significant origination channel for our financing and leasing activities. These
vendor alliances include traditional vendor finance programs, joint ventures and
profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya Inc.
are among our largest alliances. The joint venture agreements with Dell and
Snap-on run until October 2005 and January 2007, respectively. The Avaya
agreement, which relates to profit sharing on a CIT direct origination program,
extends through September 2006.
At March 31, 2004, our financing and leasing assets included $1,587.4
million, $1,099.1 million and $770.1 million related to the Dell, Snap-on and
Avaya programs, respectively. These amounts include receivables originated
directly by CIT as well as receivables purchased from joint venture entities.
Securitized assets included $2,408.5 million, $70.8 million and $669.5 million
from the Dell, Snap-on and Avaya origination sources, respectively.
A significant reduction in origination volumes from any of these alliances
could have a material impact on our asset and net income levels. For additional
information regarding certain of our joint venture activities, see Note 8 --
Certain Relationships and Related Transactions.
Geographic Composition
The following table summarizes significant state concentrations greater
than 5.0% and foreign concentrations in excess of 1.0% of our owned financing
and leasing portfolio assets at March 31, 2004, December 31, 2003 and March 31,
2003. For each period presented, our managed asset geographic composition did
not differ significantly from our owned asset geographic composition.
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ ---------
State
California...................... 10.3% 10.2% 9.7%
Texas........................... 7.8% 7.7% 7.5%
New York........................ 6.6% 7.4% 6.9%
Total United States................ 79.8% 79.3% 79.6%
Country
Canada.......................... 4.9% 5.1% 5.0%
England......................... 2.6% 2.8% 3.3%
Australia....................... 1.4% 1.3% 1.3%
Germany......................... 1.1% 1.0% 1.0%
Mexico.......................... 1.1% 1.0% (1)
France.......................... 1.0% 1.1% 1.0%
China........................... (1) (1) 1.2%
Brazil.......................... (1) (1) 1.0%
Total Outside U.S.................. 20.2% 20.7% 20.4%
- --------------------------------------------------------------------------------
(1) The applicable balances are less than 1.0%.
35
Industry Composition
The following discussions provide information with respect to selected
industry compositions.
Aerospace
At March 31, 2004, our commercial aerospace portfolio in Capital Finance
consists of financing and leasing assets of $4,700.9 million covering 209
aircraft, with an average age of approximately 7 years (based on a dollar value
weighted average). The portfolio was comprised of 85 accounts, with the majority
placed with major airlines around the world. The commercial aerospace portfolio
at December 31, 2003 was $4,716.1 million of financing and leasing assets, which
included 209 aircraft and 84 customers, with a weighted average age of
approximately 6 years. The commercial aircraft all comply with stage III noise
regulations.
The following table summarizes the composition of the commercial aerospace
portfolio ($ in millions):
March 31, 2004 December 31, 2003 March 31, 2003
------------------- ------------------- -------------------
Net Net Net
Investment Number Investment Number Investment Number
---------- ------ ---------- ------ ---------- ------
Commercial Aerospace Portfolio:
By Region:
Europe................................ $1,994.8 66 $1,991.0 65 $1,537.4 51
North America(1)...................... 1,001.7 72 1,029.7 72 1,110.1 78
Asia Pacific.......................... 1,040.8 40 1,013.6 40 886.5 36
Latin America......................... 606.5 28 612.7 28 572.5 26
Africa/Middle East.................... 57.1 3 69.1 4 73.2 4
-------- --- -------- --- -------- ---
Total.................................... $4,700.9 209 $4,716.1 209 $4,179.7 195
======== === ======== === ======== ===
By Manufacturer:
Boeing................................ $2,577.0 140 $2,581.7 140 $2,514.2 138
Airbus................................ 2,104.8 57 2,114.6 57 1,640.8 42
Other................................. 19.1 12 19.8 12 24.7 15
-------- --- -------- --- -------- ---
Total.................................... $4,700.9 209 $4,716.1 209 $4,179.7 195
======== === ======== === ======== ===
By Body Type(2):
Narrow body........................... $3,416.5 159 $3,415.7 159 $2,909.8 144
Intermediate body..................... 866.5 18 877.0 18 871.6 18
Wide body............................. 398.8 20 403.6 20 373.6 18
Other................................. 19.1 12 19.8 12 24.7 15
-------- --- -------- --- -------- ---
Total.................................... $4,700.9 209 $4,716.1 209 $4,179.7 195
======== === ======== === ======== ===
- --------------------------------------------------------------------------------
(1) Comprised of net investments in the U.S. and Canada of $781.2 million (65
aircraft) and $220.5 million (7 aircraft) at March 31, 2004, $822.7
million (66 aircraft) and $207.0 million (6 aircraft) at December 31,
2003, and $902.0 million (72 aircraft) and $208.1 million (6 aircraft) at
March 31. 2003, respectively.
(2) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglass DC10
series aircraft.
As of March 31, 2004, operating leases were approximately 85% of the
portfolio, with the remainder consisting of capital leases (including leveraged
leases) and loans. Total leveraged leases were $453.9 million or 9.7% of the
aerospace portfolio including tax optimization structures of approximately
$218.9 million. Of the 209 aircraft, four are off-lease, one of which has been
remarketed with a lease pending as of March 31, 2004. In general, the use of
leverage increases the risk of a loss in the event of a default, with the
greatest risk incurred in tax-optimization leveraged leases.
The top five commercial aerospace exposures totaled $1,057.7 million at
March 31, 2004, the largest of which was $266.6 million. All top five are to
carriers outside of the U.S. and the top three are to European carriers. The
largest exposure to a U.S. carrier at December 31, 2003 was $160.8 million.
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.
36
The regional aircraft portfolio at March 31, 2004 consists of 119 planes
with a net investment of $291.7 million, relatively unchanged from December 31,
2003, and is concentrated primarily in Structured Finance. The carriers are
primarily located in North America and Europe. Operating leases account for
about 43% of the portfolio, with the rest capital leases or loans. There are
currently 13 aircraft off-lease with a total book value of approximately $51.3
million.
The following is a list of our exposure to bankrupt aerospace carriers and
the current status of the related aircraft at March 31, 2004.
o UAL Corp. -- United Airlines leases 4 CIT-owned narrow body aircraft
(2 Boeing 757 aircraft and 2 Boeing 737 aircraft) with a net
investment of $85.8 million.
o Avianca Airlines -- Lessee of one MD 80 aircraft and one Boeing 757,
with a combined net investment of $31.9 million.
o Air Canada -- Our net investment in aircraft is approximately $49.1
million, relating to one Boeing 767 aircraft which was converted
from an investment in a non-accrual leveraged lease (not a
tax-optimized structure) to a performing operating lease during
2003, and a $1.8 million loan collateralized by 12 Bombardier Dash 8
aircraft. The loan is collateralized by the Bombardier aircraft and
fully guaranteed by the Canadian government.
o Sobelair -- Filed a bankruptcy proceeding in Belgium, in January
2004, which resulted in a liquidation of the airline. By agreement
with Sobelair's trustee, we took possession of our two Boeing 737
aircraft on operating lease with the carrier in January 2004. We
have leased one aircraft and have agreed to lease terms for the
other aircraft.
Additionally, we hold Senior A tranche Enhanced Equipment Trust
Certificates ("EETCs") issued by United Airlines, which are debt instruments
collateralized by aircraft operated by the airline, with a fair value of $45.7
million. In connection with United Airlines' filing under Chapter 11, we are a
co-arranger in a $1.2 billion secured revolving and term loan facility with a
commitment of $102.0 million. This debtor-in-possession facility, with an
outstanding balance of $25.8 million at March 31, 2004, is secured by, among
other collateral, previously unencumbered aircraft.
Our aerospace assets include both operating leases and capital leases.
Management monitors economic conditions affecting equipment values, trends in
equipment values, and periodically obtains third party appraisals of commercial
aerospace equipment, which include projected rental rates. We adjust the
depreciation schedules of commercial aerospace equipment on operating leases or
residual values underlying capital leases, when required. Aerospace assets are
reviewed for impairment annually, or more often when events or circumstances
warrant. An aerospace asset is defined as impaired when the expected
undiscounted cash flow over its expected remaining life is less than its book
value. Both historical information and current economic trends are factored into
the assumptions and analyses used when determining the expected undiscounted
cash flow. Included among these assumptions are the following:
o Lease terms
o Remaining life of the asset
o Lease rates supplied by independent appraisers
o Remarketing prospects
o Maintenance costs
An impairment loss is recognized if circumstances indicate that the
carrying amount of the asset may not be recoverable. Commercial aerospace
equipment utilization is high, with only four aircraft off-lease at March 31,
2004 (one of which has a letter of intent signed), which demonstrates our
ability to place aircraft. However, current placements are at compressed rental
rates, which reflects current market conditions. Generally, leases are being
written for terms between three and five years. See table in "Risk Management"
section for additional information regarding commitments to purchase additional
aircraft.
37
Equity and Venture Capital Investments
Our portfolio of direct and private fund venture capital equity
investments is summarized in the following table ($ in millions).
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ ---------
Equity and Venture Capital Investments:
Total investment balance...................................... $251.8 $249.9 $334.3
Direct investments............................................ $100.6 $101.1 $179.6
Number of companies........................................... 47 47 57
Private equity funds.......................................... $151.2 $148.8 $154.7
Number of funds............................................... 52 52 52
Remaining fund and equity commitments......................... $117.1 $124.2 $153.7
See Note 4 -- Concentrations for further discussion on concentrations.
Other Assets
Other assets totaled $2.9 billion at March 31, 2004 and $3.3 billion at
December 31, 2003. The decline in other assets is primarily due to lower
receivables from derivative counterparties in 2004.
Other assets primarily consisted of the following at March 31, 2004:
investments in and receivables from non-consolidated subsidiaries of $0.7
billion, accrued interest and receivables from derivative counterparties of $0.4
billion, deposits on commercial aerospace flight equipment of $0.3 billion,
direct and private fund equity investments of $0.3 billion, prepaid expenses of
$0.1 billion and repossessed assets and off-lease equipment of $0.1 billion. The
remaining balance includes furniture and fixtures, miscellaneous receivables and
other assets.
Risk Management
Our risk management process is described in more detail in our 2003 Annual
Report on Form 10-K.
Interest Rate Risk Management -- We monitor our interest rate sensitivity
on a regular basis by analyzing the impact of interest rate changes upon the
financial performance of the business. We also consider factors such as the
strength of the economy, customer prepayment behavior and re-pricing
characteristics of our assets and liabilities.
We evaluate and monitor various risk metrics:
o Value at Risk (VAR), which measures the net economic value of assets
by assessing the duration of assets and liabilities.
Our asset portfolio is generally comprised of loans and leases of short to
intermediate term. As such, the duration of our asset portfolio is generally
less than three years. We target to closely match the duration of our liability
portfolio with that of our asset portfolio. As of March 31, 2004 our liability
portfolio duration was slightly longer than our asset portfolio duration.
o Margin at Risk (MAR), which measures the impact of changing interest
rates upon interest income over the subsequent twelve months.
At the date that interest rate sensitivity is modeled, net interest income
is derived considering the current level of interest-sensitive assets and
related run-off (including both contractual repayment and historical prepayment
experience), the current level of interest-sensitive liabilities and related
maturities, and the current level of derivatives. Market interest rates are then
raised 100 basis points instantaneously and parallel across the entire yield
curve, and a "rate shocked" simulation is run.
An immediate hypothetical 100 basis point parallel increase in the yield
curve on April 1, 2004 modeled against interest rate sensitive assets and
liabilities as shown in the table below would reduce net income by an estimated
$15 million after-tax over the next twelve months. A corresponding decrease in
the yield curve would cause an increase in net income of a like amount. Although
management believes that this measure provides an estimate of our interest rate
sensitivity, there are certain limitations inherent in this sensitivity
analysis, as it is unlikely that rate movements would be instantaneous or
parallel, nor would our assets and debt reprice immediately. Additionally, it
does not consider any potential remedial actions that management could take such
as the pre-funding of liabilities and other business developments consistent
with an increasing rate environment that may affect net income, for example
asset
38
growth and changes to our liability durations. Further, it does not account for
potential changes in the credit quality, size, composition and prepayment
characteristics of the balance sheet. Accordingly, no assurance can be given
that actual results would not differ materially from the estimated outcomes of
our simulations. Such simulations do not represent management's current view of
future market interest rate movements.
The following table summarizes the composition of our interest sensitive
assets (including operating leases) and liabilities (excluding equity) before
and after derivatives:
Before Derivatives After Derivatives
-------------------------- --------------------------
Fixed Rate Floating Rate Fixed Rate Floating Rate
---------- ------------- ---------- -------------
March 31, 2004
Assets................ 56% 44% 56% 44%
Liabilities........... 61% 39% 48% 52%
December 31, 2003
Assets................ 57% 43% 57% 43%
Liabilities........... 63% 37% 49% 51%
Total interest sensitive assets were $37.9 billion and $36.7 billion at
March 31, 2004 and December 31, 2003, while total interest sensitive liabilities
were $32.6 billion and $31.5 billion at March 31, 2004 and December 31, 2003.
Certain December 31, 2003 amounts have been adjusted to conform to the current
period presentation.
Liquidity Risk Management -- Liquidity risk refers to the risk of being
unable to meet potential cash outflows promptly and cost-effectively. Factors
that could cause such a risk to arise might be a disruption of a securities
market or other source of funds. We actively manage and mitigate liquidity risk
by maintaining diversified sources of funding and committed alternate sources of
funding, and we maintain and periodically review a contingency funding plan to
be implemented in the event of any form of market disruption. The primary
funding sources are commercial paper (U.S., Canada and Australia), long-term
debt (U.S. and International) and asset-backed securities (U.S. and Canada).
Outstanding commercial paper totaled $4.8 million at March 31, 2004 and
$4.2 billion at December 31, 2003. Our targeted U.S. program size remains at
$5.0 billion with modest foreign programs aggregating $500 million to be
maintained in Canada and Australia. Our goal is to maintain committed bank lines
in excess of aggregate outstanding commercial paper. Consistent with our
liquidity management strategy to extend our maturity profile, on April 14, 2004
we retired a $2.0 billion bank facility due in March 2005, and $2.1 billion due
in October 2004, and we negotiated two new $2.1 billion facilities due April
2009 and April 2005. CIT now has aggregate U.S. bank facilities of $6.3 billion
with $4.2 billion in multi-year facilities.
CIT maintains registration statements with the Securities and Exchange
Commission ("SEC") covering debt securities that we may sell in the future. At
March 31, 2004, we had $7.4 billion of registered, but unissued, debt securities
available under a shelf registration statement. Term-debt issued during the
quarter totaled $2.8 billion: $1.5 billion in variable-rate medium-term notes
and $1.3 billion in fixed-rate notes.
To further strengthen our funding capabilities, we maintain committed
asset backed facilities and shelf registration statements, which cover a range
of assets from equipment to consumer home equity receivables and trade accounts
receivable. While these are predominantly in the U.S., we also maintain
facilities for Canadian domiciled assets. As of March 31, 2004, we had
approximately $3.7 billion of availability in our committed asset-backed
facilities, including $1.0 billion relating to our trade receivable facility,
and $2.9 billion of registered, but unissued, securities available under public
shelf registration statements relating to our asset-backed securitization
program.
Our committed asset-backed commercial paper programs in the U.S. and
Canada provide a substantial source of alternate liquidity. We also maintain
committed bank lines of credit to provide backstop support of commercial paper
borrowings and local bank lines to support our international operations.
Additional sources of liquidity are loan and lease payments from customers,
whole-loan asset sales and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability as
outlined in the following table.
March 31, December 31,
Liquidity Measurement Current Target 2004 2003
- --------------------- -------------- --------- ------------
Commercial paper to total debt............................. Maximum of 15% 14% 13%
Short-term debt to total debt.............................. Maximum of 45% 39% 36%
Bank lines to short-term debt.............................. Minimum of 45% 76% 76%
Aggregate alternate liquidity* to short-term debt.......... Minimum of 75% 86% 93%
- --------------------------------------------------------------------------------
* Aggregate alternative liquidity includes available bank facilities,
asset-backed conduit facilities and cash.
39
Our credit ratings are an important factor in meeting our margin targets
as better ratings generally correlate to lower cost of funds (see Net Finance
Margin, interest expense discussion). The following credit ratings have been in
place since September 30, 2002.
Short-Term Long-Term Outlook
---------- --------- -------
Moody's........................... P-1 A2 Stable
Standard & Poor's................. A-1 A Stable
Fitch............................. F1 A Stable
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 certain covenants contained in our legal documents that govern our
funding sources. The most significant covenant in CIT's indentures and credit
agreements is a negative pledge provision, which limits granting or permitting
liens on our assets, but provides for exceptions for certain ordinary course
liens needed to operate our business. In addition, our credit agreements also
contain a minimum net worth test of $4.0 billion.
The following tables summarize various contractual obligations, selected
contractual cash receipts and contractual commitments as of March 31, 2004 ($ in
millions):
Contractual Payments and Collections by Period
--------------------------------------------------------------------
Total(3) 2004 2005 2006 2007 2008+
--------- --------- --------- -------- --------- ---------
Commercial Paper........................ $ 4,820.2 $ 4,820.2 $ -- $ -- $ -- $ --
Variable-rate term debt................. 9,170.7 3,112.3 3,350.8 1,451.3 1,042.1 214.2
Fixed-rate term debt.................... 19,829.8 2,742.1 4,251.2 2,619.3 3,467.6 6,749.6
Preferred securities.................... 255.1 -- -- -- -- 255.1
Lease rental expense.................... 162.9 37.5 42.6 30.8 24.2 27.8
--------- --------- --------- -------- --------- ---------
Total contractual obligations........ 34,238.7 10,712.1 7,644.6 4,101.4 4,533.9 7,246.7
--------- --------- --------- -------- --------- ---------
Finance receivables(1).................. 32,187.4 10,555.9 4,765.5 3,767.3 2,488.1 10,610.6
Operating lease rental income........... 2,522.4 641.1 645.5 442.7 280.2 512.9
Finance receivables held for sale(2).... 1,006.2 1,006.2 -- -- -- --
Cash-- current balance.................. 1,356.5 1,356.5 -- -- -- --
Retained interest in securitizations.... 1,364.6 527.5 367.8 212.2 131.3 125.8
--------- --------- --------- -------- --------- ---------
Total projected cash availability.... 38,437.1 14,087.2 5,778.8 4,422.2 2,899.6 11,249.3
--------- --------- --------- -------- --------- ---------
Net projected cash inflow (outflow)..... $ 4,198.4 $ 3,375.1 $(1,865.8) $ 320.8 $(1,634.3) $ 4,002.6
========= ========= ========= ======== ========= =========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amounts could differ due to
prepayments, extensions of credit, charge-offs and other factors.
(2) Based upon management's intent to sell rather than contractual maturities
of underlying assets.
(3) Projected proceeds from the sale of operating lease equipment, interest
revenue from finance receivables, debt interest expense and other items
are excluded. Obligations relating to postretirement programs are also
excluded.
Commitment Expiration by Period
--------------------------------------------------------------------
After
Total 2004 2005 2006 2007 2007
--------- -------- -------- -------- -------- --------
Credit extensions....................... $ 6,914.8 $1,428.8 $ 754.0 $ 940.4 $ 776.0 $3,015.6
Aircraft purchases...................... 2,889.0 715.0 918.0 996.0 260.0 --
Letters of credit....................... 1,230.8 1,135.7 21.5 73.2 0.2 0.2
Sale-leaseback payments................. 465.7 7.9 28.5 28.5 28.5 372.3
Manufacturer purchase commitments....... 206.7 206.7 -- -- -- --
Venture capital commitments............. 117.1 3.4 0.5 -- 3.0 110.2
Guarantees.............................. 109.9 97.5 -- -- 10.5 1.9
Acceptances............................. 11.2 11.2 -- -- -- --
--------- -------- -------- -------- -------- --------
Total contractual commitments........... $11,945.2 $3,606.2 $1,722.5 $2,038.1 $1,078.2 $3,500.2
========= ======== ======== ======== ======== ========
40
Internal Controls
The Internal Controls Committee is responsible for monitoring and
improving internal controls and overseeing the internal controls attestation
mandated by Section 404 of the Sarbanes-Oxley Act of 2002 ("SARBOX"), for which
the implementation year is 2004. The committee, which is chaired by the
Controller, includes the CFO, the Director of Internal Audit and other senior
executives in finance, legal, risk management and information technology. We are
currently finalizing the documentation phase of the SARBOX project and have
entered the testing phase. Our management self-assessment is targeted to be
completed during the second half of 2004.
Off-Balance Sheet Arrangements
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and provide an additional
source of liquidity, we use an array of securitization programs, including both
asset-backed commercial paper and term structures, to access both the public and
private asset-backed securitization markets. Current products in these programs
include receivables and leases secured by equipment as well as consumer loans
secured by residential real estate. The following table summarizes data relating
to our securitization balance and activity ($ in millions).
At or for the Quarters Ended
March 31,
----------------------------
2004 2003
-------- ---------
Securitized Assets:
Specialty Finance-- commercial................... $3,769.0 $ 3,191.7
Specialty Finance-- consumer..................... 2,245.5 3,218.8
Equipment Finance................................ 3,052.5 3,977.2
-------- ---------
Total securitized assets......................... $9,067.0 $10,387.7
======== =========
Securitized assets as a % of managed assets...... 18.1% 21.9%
======== =========
Volume Securitized:
Specialty Finance-- commercial................... $ 963.3 $ 409.3
Specialty Finance-- consumer..................... -- 367.1
Equipment Finance................................ 273.1 461.0
======== =========
Total volume securitized......................... $1,236.4 $ 1,237.4
======== =========
Our securitization activity relating to commercial finance receivables was
$1.2 billion, as the economics remained favorable to complete these sales.
During the second half of 2003 we decided to grow the consumer home equity
portfolio on-balance sheet.
Under our typical asset-backed securitization, we sell a "pool" of secured
loans or leases to a special-purpose entity, typically a trust. The
special-purpose entity, in turn, issues certificates and/or notes that are
collateralized by the pool and entitle the holders thereof to participate in
certain pool cash flows. We retain the servicing of the securitized contracts,
for which we earn a servicing fee. We also participate in certain "residual"
cash flows (cash flows after payment of principal and interest to certificate
and/or note holders, servicing fees and other credit-related disbursements). At
the date of securitization, we estimate the "residual" cash flows to be received
over the life of the securitization, record the present value of these cash
flows as a retained interest in the securitization (retained interests can
include bonds issued by the special-purpose entity, cash reserve accounts on
deposit in the special-purpose entity or interest only receivables) and
typically recognize a gain.
In estimating residual cash flows and the value of the retained interests,
we make a variety of financial assumptions, including pool credit losses,
prepayment speeds and discount rates. These assumptions are supported by both
our historical experience and anticipated trends relative to the particular
products securitized. Subsequent to recording the retained interests, we review
them quarterly for impairment based on estimated fair value. These
41
reviews are performed on a disaggregated basis. Fair values of retained
interests are estimated utilizing current pool demographics, actual
note/certificate outstandings, current and anticipated credit losses, prepayment
speeds and discount rates.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during the quarter ended March 31,
2004 were as follows:
Commercial Equipment
-------------------------
Specialty Equipment
Finance Finance
--------- ---------
Weighted average prepayment speed............... 40.10% 11.62%
Weighted average expected credit losses......... 0.44% 0.84%
Weighted average discount rate.................. 6.82% 9.00%
Weighted average life (in years)................ 1.25 1.84
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at March 31, 2004 were as
follows:
Commercial Equipment Consumer
---------------------- -------------------------------
Home Equity and Recreational
Specialty Equipment Manufactured Vehicles and
Finance Finance Housing Boat
--------- --------- --------------- ------------
Weighted average prepayment speed......... 25.68% 13.38% 26.27% 17.77%
Weighted average expected credit losses... 1.13% 1.50% 1.33% 1.13%
Weighted average discount rate............ 7.92% 9.76% 13.09% 14.18%
Weighted average life (in years).......... 1.08 1.40 3.08 3.04
The Specialty Finance -- commercial securitized assets include receivables
originated to consumers through DFS.
Securitization and Joint Venture Activities
We utilize special purpose entities ("SPEs") and joint ventures in the
normal course of business to execute securitization transactions and conduct
business in key vendor relationships.
Securitization Transactions -- SPEs are used to achieve "true sale"
requirements for these transactions in accordance with SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." Pools of assets are originated or acquired and sold to SPEs, which
in turn issue debt securities to investors solely backed by asset pools.
Accordingly, CIT has no legal obligations to repay the securities in the event
of a default by the SPE. CIT retains the servicing rights and participates in
certain cash flows of the pools. The present value of expected net cash flows
that exceeds the estimated cost of servicing is recorded in other assets as a
"retained interest." Assets securitized are shown in our managed assets and our
capitalization ratios on a managed basis. Under the recently issued rules
relating to consolidation and SPEs, non-qualifying securitization entities have
to be consolidated. We believe that all of our existing asset-backed SPE
structures meet the definition of a qualifying special purpose entity ("QSPE")
as defined by SFAS No. 140 and therefore will continue to qualify as off-balance
sheet transactions. As part of these related activities, CIT entered into $2.8
billion in notional amount of hedge transactions to protect the related trusts
against interest rate risk. CIT is insulated from this risk by entering into
offsetting swap transactions with third parties totaling $2.8 billion in
notional amount at March 31, 2004.
Joint Ventures -- We utilize joint ventures organized through distinct
legal entities to conduct financing activities with certain strategic vendor
partners. Receivables are originated by the joint venture and purchased by CIT.
The vendor partner and CIT jointly own these distinct legal entities, and there
is no third-party debt involved. These arrangements are accounted for using the
equity method, with profits and losses distributed according to the joint
venture agreement. See disclosure in Item 1. Financial Statements, Note 8 --
Certain Relationships and Related Transactions.
42
Capitalization
The following table presents information regarding our capital structure
($ in millions).
March 31, December 31,
2004 2003
--------- ------------
Commercial paper................................................................ $ 4,820.2 $ 4,173.9
Term debt....................................................................... 29,000.5 29,239.2
Preferred Capital Securities.................................................... 255.1 255.5
Stockholders' equity(1)......................................................... 5,584.3 5,427.8
--------- ---------
Total capitalization............................................................ 39,660.1 39,096.4
Goodwill and other intangible assets............................................ (485.5) (487.7)
--------- ---------
Total tangible capitalization................................................... $39,174.6 $38,608.7
========= =========
Tangible stockholders' equity(1) and Preferred Capital Securities
to managed assets............................................................. 10.69% 10.45%
Total debt (excluding overnight deposits) to tangible stockholders'
equity(1) and Preferred Capital Securities.................................... 6.15x 6.14x
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 7 to the Consolidated
Financial Statements and certain unrealized gains or losses on retained
interests and investments, as these amounts are not necessarily indicative
of amounts that will be realized. See "Non-GAAP Financial Measurements."
The preferred capital securities are 7.70% Preferred Capital Securities
issued in 1997 by CIT Capital Trust I, a wholly-owned subsidiary. CIT Capital
Trust I invested the proceeds of that issue in Junior Subordinated Debentures of
CIT having identical rates and payment dates. Consistent with rating agency
measurements, preferred capital securities are included in tangible equity in
our leverage ratios. See "Non-GAAP Financial Measurements" for additional
information.
See "Liquidity Risk Management" for discussion of risks impacting our
liquidity and capitalization.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to use judgment in making estimates and assumptions that affect
reported amounts of assets and liabilities, the reported amounts of income and
expense during the reporting period and the disclosure of contingent assets and
liabilities at the date of the financial statements. We consider accounting
estimates relating to the following to be critical in applying our accounting
policies:
o Investments
o Charge-off of Finance Receivables
o Impaired Loans
o Reserve for Credit Losses
o Retained Interests in Securitizations
o Lease Residual Values
o Goodwill
o Deferred Income Taxes
There have been no significant changes to the methodologies and processes
used in developing estimates relating to these items from what is described in
our 2003 Annual Report on Form 10-K.
43
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,
------------------------
2004 2003
---------- ----------
Finance income..................................................... 9.80% 10.86%
Interest expense................................................... 3.23% 4.11%
--------- ---------
Net finance income............................................... 6.57% 6.75%
Depreciation on operating lease equipment.......................... 2.55% 3.22%
--------- ---------
Net finance margin............................................... 4.02% 3.53%
Provision for credit losses........................................ 0.93% 1.19%
--------- ---------
Net finance margin after provision for credit losses............... 3.09% 2.34%
Other revenue...................................................... 2.50% 2.77%
Gain (loss) on venture capital investments......................... 0.01% (0.05)%
--------- ---------
Operating margin................................................... 5.60% 5.06%
--------- ---------
Salaries and general operating expenses............................ 2.68% 2.60%
Gain on redemption of debt......................................... 0.45% --
--------- ---------
Income (loss) before provision for income taxes.................... 3.37% 2.46%
Provision for income taxes......................................... (1.32)% (0.96)%
Dividends on preferred capital securities, after tax............... -- (0.03)%
--------- ---------
Net income (loss)................................................ 2.05% 1.47%
========= =========
Average Earning Assets............................................. $36,865.1 $34,600.6
========= =========
Non-GAAP Financial Measurements
The SEC adopted Regulation G, which applies to any public disclosure or
release of material information that includes a non-GAAP financial measure. The
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosure about Market
Risk contain certain non-GAAP financial measures. The SEC defines a non-GAAP
financial measure as a numerical measure of a company's historical or future
financial performance, financial position, or cash flows that excludes amounts,
or is subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the financial statements or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures disclosed in this report are meant to provide
additional information and insight relative to historical operating results and
financial position of the business, are used by management in its analysis and,
in certain cases, to provide financial information that is presented to rating
agencies and other users of financial information. These measures are not in
accordance with, or a substitute for, GAAP and may be different from or
inconsistent with non-GAAP financial measures used by other companies.
44
Selected non-GAAP disclosures are presented and reconciled in the table
below ($ in millions):
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ ---------
Managed assets(1):
Finance receivables.......................................... $32,187.4 $31,300.2 $28,654.6
Operating lease equipment, net............................... 7,576.2 7,615.5 6,831.4
Finance receivables held for sale............................ 1,006.2 918.3 1,273.0
Equity and venture capital investments (included in other assets) 251.8 249.9 334.3
--------- -------- ---------
Total financing and leasing portfolio assets................. 41,021.6 40,083.9 37,093.3
Securitized assets........................................... 9,067.0 9,651.7 10,387.7
--------- -------- ---------
Managed Assets............................................... $50,088.6 $49,735.6 $47,481.0
========= ========= =========
Earning assets(2):
Total financing and leasing portfolio assets................. $41,021.6 $40,083.9 $37,093.3
Credit balances of factoring clients......................... (3,619.4) (3,894.6) (2,437.9)
--------- --------- ---------
Earning assets............................................... $37,402.2 $36,189.3 $34,655.4
========= ========= =========
Tangible equity(3):
Total equity................................................. $ 5,492.7 $ 5,394.2 $ 4,996.6
Other comprehensive loss relating to derivative financial
instruments.................................................. 102.9 41.3 92.6
Unrealized gain on securitization investments................ (11.3) (7.7) (12.5)
Goodwill and intangible assets............................... (485.5) (487.7) (399.8)
--------- --------- ---------
Tangible common equity....................................... 5,098.8 4,940.1 4,676.9
Preferred capital securities................................. 255.1 255.5 256.8
--------- --------- ---------
Tangible equity.............................................. $ 5,353.9 $ 5,195.6 $ 4,933.7
========= ========= =========
Debt, net of overnight deposits(4):
Total Debt................................................... $34,075.8 $33,668.6 $32,551.8
Overnight deposits........................................... (884.0) (1,529.4) (1,432.5)
Preferred capital securities................................. (255.1) (255.5) --
--------- --------- ---------
Debt, net of overnight deposits.............................. $32,936.7 $31,883.7 $31,119.3
========= ========= =========
Earnings per share, excluding certain items(5)
GAAP Earnings per share...................................... $ 0.88 $ 0.72 $ 0.60
Gain on debt redemption...................................... (0.12) (0.14) --
Loss on venture capital investments.......................... -- 0.17 0.01
--------- --------- ---------
Adjusted earnings per share.................................. $ 0.76 $ 0.75 $ 0.61
========= ========= =========
- --------------------------------------------------------------------------------
(1) Managed assets are utilized in certain credit and expense ratios.
Securitized assets are included in managed assets because CIT retains
certain credit risk and the servicing related to assets that are funded
through securitizations.
(2) Earning assets are utilized in certain revenue and earnings ratios.
Earning assets are net of credit balances of factoring clients. This net
amount, which corresponds to amounts funded, is a basis for revenues
earned, such as finance income and factoring commissions.
(3) Tangible equity is utilized in leverage ratios, and is consistent with our
presentation to rating agencies. Other comprehensive losses and unrealized
gains on securitization investments (both included in the separate
component of equity) are excluded from the calculation, as these amounts
are not necessarily indicative of amounts which will be realized.
(4) Debt, net of overnight deposits, is utilized in certain leverage ratios.
Overnight deposits are excluded from these calculations, as these amounts
are retained by the Company to repay debt. Overnight deposits are
reflected in both debt and cash and cash equivalents.
(5) The EPS related to the items listed are shown separately, as the items are
not indicative of our on-going operations.
45
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements contained herein, in
press releases, written statements or other documents filed with the Securities
and Exchange Commission or in communications and discussions with investors and
analysts in the normal course of business through meetings, webcasts, phone
calls and conference calls, concerning our operations, economic performance and
financial condition are subject to known and unknown risks, uncertainties and
contingencies. Forward-looking statements are included, for example, in the
discussions about:
o our liquidity risk management,
o our credit risk management,
o our asset/liability risk management,
o our funding, borrowing costs and net finance margin
o our capital, leverage and credit ratings,
o our operational and legal risks,
o our commitments to extend credit or purchase equipment, and
o how we may be affected by legal proceedings.
All forward-looking statements involve risks and uncertainties, many of
which are beyond our control, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Also, forward-looking statements are based upon management's
estimates of fair values and of future costs, using currently available
information. Therefore, actual results may differ materially from those
expressed or implied in those statements. Factors that could cause such
differences include, but are not limited to:
o risks of economic slowdown, downturn or recession,
o industry cycles and trends,
o risks inherent in changes in market interest rates and quality
spreads,
o funding opportunities and borrowing costs,
o changes in funding markets, including commercial paper, term debt
and the asset-backed securitization markets,
o uncertainties associated with risk management, including credit,
prepayment, asset/liability, interest rate and currency risks,
o adequacy of reserves for credit losses,
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.
46
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are designed to
ensure that the information that the Company must disclose in its reports filed
under the Securities Exchange Act is communicated and processed in a timely
manner. Albert R. Gamper Jr. Chairman and Chief Executive Officer, and Joseph M.
Leone, Vice Chairman and Chief Financial Officer, participated in this
evaluation.
Based on this evaluation, Messrs. Gamper and Leone concluded that, during
the last fiscal quarter covered by this report, the Company's disclosure
controls and procedures were effective, except as noted in the next paragraph.
Since the date of the evaluation described above, there have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. Following
our 2002 IPO, we classified our tax reporting as a "reportable condition", as
defined by standards established by the American Institute of Certified Public
Accountants. We have made substantial progress in rebuilding our tax reporting
and compliance functions, including hiring and training personnel, rebuilding
tax reporting systems, preparing amendments to prior period U.S. Federal income
tax returns, and implementing processes and controls with respect to income tax
reporting and compliance. During the quarter, we completed processes and
developed the data for preparing a tax basis balance sheet to complete the
analysis of deferred tax assets and liabilities as of December 31, 2003. Further
work continues in the areas of quality control, proof and reconciliation and the
tax basis balance sheet analysis is nearing completion. Future income tax return
filings and the completion of the aforementioned analysis of deferred tax assets
and liabilities could result in reclassifications amongst deferred tax assets
and liabilities.
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 contained allegations that the
registration statement and prospectus prepared and filed in connection with
CIT's 2002 IPO were materially false and misleading, principally with respect to
the adequacy of CIT's telecommunications-related loan loss reserves at the time.
The lawsuit purported to have been brought on behalf of all those who purchased
CIT common stock in or traceable to the IPO, and sought, among other relief,
unspecified damages or rescission for those alleged class members who still hold
CIT stock and unspecified damages for other alleged class members. On June 25,
2003, by order of the United States District Court, the lawsuit was consolidated
with five other substantially similar suits, all of which had been filed after
April 10, 2003 and one of which named as defendants some of the underwriters in
the IPO and certain former directors of CIT. Glickenhaus & Co., a privately held
investment firm, has been named lead plaintiff in the consolidated action.
On September 16, 2003, an amended and consolidated complaint was filed.
That complaint contains substantially the same allegations as the original
complaints. In addition to the foregoing, two similar suits were brought by
certain shareholders on behalf of CIT against CIT and some of its present and
former directors under Delaware corporate law.
CIT believes that the allegations in each of these actions are without
merit and that its disclosures were proper, complete and accurate. CIT intends
to vigorously defend itself in these actions.
In addition, there are various legal proceedings pending against CIT,
which have arisen in the ordinary course of business. Management believes that
the aggregate liabilities, if any, arising from such actions, including the
class action suit above, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of CIT.
Item 2. Common Stock Repurchase Activity
The following table details the repurchase activity of CIT common stock
during the quarter ($ in millions, except average price which is in whole
dollars).
Number of Average
Shares Price Amount
---------- ------- ------
Balance at December 31, 2003........ 43,529 $35.48 $ 1.5
-------- ------ ------
Purchases related to exercise of
options and other benefit plans
January.......................... 544,000 $39.16 21.3
February......................... 221,800 $38.46 8.5
March............................ 185,000 $39.12 7.3
-------- ------ ------
Total Purchases.................. 950,800 $38.99 37.1
-------- ------ ------
Re-issuances........................ (976,807) $38.83 (37.9)
-------- ------ ------
Balance at March 31, 2004........... 17,522 $39.08 $ 0.7
======== ====== ======
None of the above activity relates to the recently announced program
described below.
On April 21, 2004, our Board of Directors approved a common stock
repurchase program to acquire up to three million shares of our outstanding
common stock. The program authorizes the company to purchase shares on the open
market from time to time over a two-year period beginning April 23, 2004. The
repurchased common stock will be held as treasury shares and may be used for the
issuance of shares under CIT's employee stock plans. Acquisitions under the
share repurchase program will be made from time to time at prevailing prices as
permitted by applicable laws, and subject to market conditions and other
factors. The program may be discontinued at any time and is not expected to have
a significant impact on our capitalization.
48
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Form 10-Q filed by CIT on August
12, 2003).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Form 10-Q filed by CIT on August 12, 2003).
4.1 Indenture dated as of August 26, 2002 by and among CIT Group
Inc., Bank One Trust Company, N.A., as Trustee and Bank One
NA, London Branch, as London Paying Agent and London
Calculation Agent, for the issuance of unsecured and
unsubordinated debt securities (incorporated by reference to
Exhibit 4.18 to Form 10-K filed by CIT on February 26, 2003).
4.2 Form of 364-Day Credit Agreement, dated as of April 14, 2004,
among CIT Group Inc., the several banks and financial
institutions named therein, J.P. Morgan Securities Inc. and
Banc of America Securities LLC, as joint lead arrangers and
bookrunners, JPMorgan Chase Bank as administrative agent, Bank
of America, N.A. and Citibank, N.A. as syndication agents and
Barclays Bank PLC as documentation agent.
4.3 Form of 5-Year Credit Agreement, dated as of April 14, 2004,
among CIT Group Inc., the several banks and financial
institutions named therein, J.P. Morgan Securities Inc. and
Citigroup Global Markets Inc., as joint lead arrangers and
bookrunners, JPMorgan Chase Bank, as administrative agent,
Bank of America, N.A. and Citibank, N.A. as syndication agents
and Barclays Bank PLC, as documentation agent.
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
31.1 Certification of Albert R. Gamper, Jr. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Joseph M. Leone pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of 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.
32.2 Certification of Joseph M. Leone pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K filed January 22, 2004, reporting
(i) that CIT declared a dividend of $0.13 per share, payable
February 27, 2004 to shareholders of record on February 15,
2004, and (ii) the financial results of CIT as of and for the
quarter and year ended December 31, 2003.
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
Vice Chairman and Chief Financial Officer
By: /s/ William J. Taylor
.........................................
William J. Taylor
Executive Vice President, Controller
and Principal Accounting Officer
May 7, 2004
50