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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31369
CIT Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1211 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (212) 536-1211
----------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $0.01 per share............ New York Stock Exchange
5 7/8% Notes due October 15, 2008.................. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [_].
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act of 1934. Yes |X| No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
The aggregate market value of voting common stock held by non-affiliates
of the registrant, based on the New York Stock Exchange Composite Transaction
closing price of Common Stock ($38.29 per share, 210,700,091 shares of common
stock outstanding), which occurred on June 30, 2004, was $8,067,706,484. For
purposes of this computation, all officers and directors of the registrant are
deemed to be affiliates. Such determination shall not be deemed an admission
that such officers and directors are, in fact, affiliates of the registrant. At
February 15, 2005, 210,851,464 shares of CIT's common stock, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List here under the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Portions of the registrant's definitive proxy statement relating to the
2005 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof to the extent described herein.
See pages 105 to 107 for the exhibit index.
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TABLE OF CONTENTS
Form 10-K
Item No. Name of Item Page
- -------- ------------ ----
Part I
Item 1. Business ......................................................... 1
Item 2. Properties ....................................................... 9
Item 3. Legal Proceedings ................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders .............. 10
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................... 11
Item 6. Selected Financial Data .......................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 14
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk .................................................... 14
Item 8. Financial Statements and Supplementary Data ...................... 52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 102
Item 9A. Controls and Procedures .......................................... 102
Item 9B. Other Information ................................................ 103
Part III
Item 10. Directors and Executive Officers of the Registrant ............... 104
Item 11. Executive Compensation ........................................... 104
Item 12. Security Ownership of Certain Beneficial
Owners and Management .......................................... 104
Item 13. Certain Relationships and Related Transactions ................... 104
Item 14. Principal Accountant Fees and Services ........................... 104
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K ........................................ 105
Signatures ................................................................ 108
Where You Can Find More Information ....................................... 109
i
PART I
Item 1. Business
OVERVIEW
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global commercial and consumer finance company. Founded in 1908, we
provide financing and leasing capital for companies in a wide variety of
industries, including many of today's leading industries and growing economic
sectors. We offer vendor, equipment, commercial, factoring, home lending, small
business, educational lending and structured financing products.
We have broad access to customers and markets through our "franchise"
businesses and sales force organizations. Each business focuses on specific
industries, asset types, products and markets, with portfolios diversified by
client, industry and geography. Managed assets, including assets securitized by
us, were $53.5 billion. Owned financing and leasing assets were $45.2 billion.
Stockholders' equity was $6.1 billion at December 31, 2004.
We provide a wide range of financing and leasing products to small,
midsize and larger companies across a wide variety of industries, including
manufacturing, retailing, transportation, aerospace, construction, technology,
communication, and various service-related industries. Our secured lending,
leasing and factoring products include direct loans and leases, operating
leases, leveraged and single investor leases, secured revolving lines of credit
and term loans, credit protection, accounts receivable collection, import and
export financing, debtor-in-possession and turnaround financing, and acquisition
and expansion financing. Consumer lending consists primarily of first mortgage
lending to consumers originated largely through a network of brokers and
correspondents. In February 2005, we began to offer student lending products,
the majority of which are backed by the U.S. government.
Transactions are generated through direct calling efforts with borrowers,
lessees, equipment end-users, vendors, manufacturers and distributors and
through referral sources and other intermediaries. In addition, our strategic
business units work together both in referring transactions to other CIT units
and by combining various products and structures to meet our customers' overall
financing needs. We also buy and sell participations in and syndications of
finance receivables and/or lines of credit. From time to time, in the normal
course of business, we purchase finance receivables on a wholesale basis
(commonly called bulk portfolio purchases) which add to our origination volume.
We also sell certain finance receivables and equipment under operating leases to
reduce concentration risk, for other balance sheet management purposes, or to
improve profitability.
See page 7 for a glossary of key terms used by management in our business.
Business Segments
We conduct our operations through two strategic groups, comprised of five
business segments that market products and services to satisfy the financing
needs of specific customers, industries, vendors/manufacturers, and markets. Our
segment reporting was modified in two ways in 2004. First, in order to better
align with the market place and improve efficiency, the former Structured
Finance segment was merged with Capital Finance, and at the same time the
telecommunications and media portfolio was moved to the Business Credit unit of
Commercial Finance. Secondly, our Specialty Finance -- consumer unit was broken
out as a separate segment. All prior periods have been restated for these
changes and this updated presentation is consistent with the reporting to
management during 2004.
In the third quarter of 2004, we hired a senior executive to manage our
"commercial finance" businesses, which are comprised of the Commercial Finance,
Equipment Finance and Capital Finance segments. As a result, the Office of the
Chairman includes two senior executives (Vice Chairman -- Specialty Finance and
Vice Chairman -- Commercial Finance) who have the day-to-day responsibility for
business operations across the Company.
Traditionally, our business structure was primarily product-focused. We
began the transition to an industry-focused structure with the creation of a
healthcare "vertical" in the fourth quarter of 2004 in order to offer directly a
complete array of products and services to this industry (as opposed to the
traditional product-based
1
approach). A communications, media and entertainment vertical unit is currently
being developed and we have additional plans for the re-design of more business
units in the Commercial Finance strategic group featuring complete product
offerings to a specific industry. We believe that this approach positions the
Company to more effectively and efficiently offer enterprise-wide solutions to
customers.
Our five business segments are as follows:
Specialty Finance (strategic group)
-----------------------------------
o Specialty Finance -- commercial (segment) -- vendor programs,
small-ticket commercial lending and leasing, U.S. Small
Business Administration loans and liquidating manufactured
housing assets.
o Specialty Finance -- consumer (segment) -- home lending and
other loans to consumers, including loans retained by CIT
Bank, a Utah industrial loan corporation. In February 2005, we
began to offer student lending products (primarily U.S.
government guaranteed).
Commercial Finance (strategic group)
------------------------------------
o Commercial Finance (segment) -- mid- to large-ticket
asset-based and enterprise value lending (Business Credit),
and factoring (Commercial Services);
o Equipment Finance (segment) -- diversified, middle market
equipment lending and leasing;
o Capital Finance (segment) -- commercial aircraft, rail and
other large-ticket equipment leasing and lending, project
finance and advisory services.
The following table summarizes the managed assets (excluding equity
investments), financing and leasing assets and returns of our business segments
at December 31, 2004 ($ in billions):
Returns by Segment
------------------
Financing & Net %
Managed Assets Leasing Assets Income of AEA
-------------- -------------- ------ ------
Specialty Finance -- commercial .. $15.4 28.9% $11.2 24.9% $268.3 2.55%
Specialty Finance -- consumer .... 6.6 12.4% 5.4 12.0% 48.9 1.26%
----- ----- ----- ----- ------
Specialty Finance -- strategic
group ....................... 22.0 41.3% 16.6 36.9% 317.2 2.21%
----- ----- ----- ----- ------
Commercial Finance ............... 11.8 22.1% 11.8 26.2% 295.5 3.58%
Equipment Finance ................ 9.8 18.4% 6.9 15.3% 77.7 1.12%
Capital Finance .................. 9.7 18.2% 9.7 21.6% 105.0 1.14%
----- ----- ----- ----- ------
Commercial Finance -- strategic
group ....................... 31.3 58.7% 28.4 63.1% 478.2 1.96%
----- ----- ----- ----- ------
Total ......................... $53.3 100.0% $45.0 100.0% $795.4 2.05%
===== ===== ===== ===== ======
2
Specialty Finance -- commercial Segment
The Specialty Finance -- commercial segment financing and leasing assets
include vendor programs, small/mid-ticket commercial financing and leasing
assets, loans guaranteed by the U.S. Small Business Administration and
liquidating manufactured housing assets.
Specialty Finance forms global relationships with industry-leading
equipment vendors, including manufacturers, dealers and distributors, to deliver
customized asset-based sales and financing solutions to both commercial and
consumer customers of the vendor in a wide array of vendor programs. These
alliances allow our vendor partners to focus on their core competencies, reduce
capital needs and drive incremental sales volume. As a part of these programs,
we offer (i) credit financing to the manufacturer's commercial and consumer
customers for the purchase or lease of the manufacturer's products, and (ii)
enhanced sales tools to manufacturers and vendors, such as asset management
services, efficient loan processing and real-time credit adjudication.
Higher-level partnership programs provide integration with the vendor's business
planning process and product offering systems to improve execution and reduce
cycle times. Specialty Finance has significant vendor programs in information
technology and telecommunications equipment and serves many other industries
through its global network.
These vendor alliances feature traditional vendor finance programs, joint
ventures, profit sharing and other transaction structures with large,
sales-oriented vendor partners. In the case of joint ventures, Specialty Finance
and the vendor combine financing activities through a distinct legal entity that
is jointly owned. Generally, Specialty Finance accounts for these arrangements
on an equity basis, with profits and losses distributed according to the joint
venture agreement, and purchases qualified finance receivables originated by the
joint venture. Specialty Finance also utilizes "virtual joint ventures," whereby
the assets are originated on Specialty Finance's balance sheet, while profits
and losses are shared with the vendor. These strategic alliances are a key
source of business for Specialty Finance and are generated through
intermediaries and other referral sources, as well as through direct end-user
relationships. During 2004 we broadened our international presence with the
acquisition of a Western European vendor finance business.
The Specialty Finance small/mid-ticket commercial loan business focuses on
leasing office products, computers, point-of-sale equipment and other technology
products primarily in the United States and Canada. Products are originated
through direct calling on customers and through relationships with
manufacturers, dealers, distributors and other intermediaries. During the second
quarter of 2004, we purchased a technology financing business to compliment our
product line-up.
We have been liquidating the manufactured housing portfolio since 2001.
During the fourth quarter of 2004, we considered additional opportunities for
more rapid liquidation of these assets and entered into an agreement to sell
over $300 million of the $553 million in this portfolio. This sale, which closed
in January 2005, is the continuation of an ongoing process to re-deploy capital
in higher return businesses. We will consider additional opportunities for more
rapid liquidation of non-strategic assets to the extent available.
Specialty Finance -- consumer Segment
The Specialty Finance -- consumer financing assets include home lending
and loans retained by CIT Bank, a Utah industrial loan corporation.
The home lending unit primarily originates, purchases and services loans
secured by first or second liens on detached, single-family, residential
properties. Products are both fixed and variable-rate closed-end loans, and
variable-rate lines of credit. Customers borrow to consolidate debts, refinance
an existing mortgage, fund home improvements, pay education expenses and other
reasons. Loans are originated through brokers and correspondents with a high
proportion of home lending applications processed electronically over the
Internet via BrokerEdge(SM), a proprietary system. Through experienced lending
professionals and automation, Specialty Finance provides rapid turnaround time
from application to loan funding, which is critical to broker relationships.
CIT Bank, with assets of $307 million and deposits of $165 million, is
located in Salt Lake City, Utah and provides a benefit to CIT in the form of
favorable funding rates for various private label consumer and small business
financing programs in both the local and national marketplace. CIT Bank also
originates certain loans associated with bank affiliation programs comprised of
manufacturers/distributors of consumer products. The Bank is chartered by the
state of Utah as an Industrial Bank, and is subject to regulation and
examination by the Federal Deposit Insurance Corporation and the Utah Department
of Financial Institutions.
3
Specialty Finance occasionally sells individual loans and portfolios of
loans to banks, thrifts and other originators of consumer loans to maximize the
value of its origination network and to improve overall profitability. Contract
servicing for securitization trusts and other third parties is provided through
a centralized consumer Asset Service Center. Our Asset Service Center centrally
services and collects substantially all of our consumer receivables, including
loans retained in our portfolio and loans subsequently securitized or sold with
servicing retained. The servicing portfolio also includes loans owned by third
parties that are serviced by our Specialty Finance segment for a fee on a
"contract" basis. These third-party portfolios totaled $3.2 billion at December
31, 2004.
In February 2005, Specialty Finance broadened its product offering with
the acquisition of Education Lending Group, which offers student loans
(primarily U.S. government guaranteed). This acquisition provides Specialty
Finance with approximately $4 billion in assets and an entry platform into the
education finance market.
Commercial Finance Segment
We conduct our Commercial Finance operations through two business units,
both of which focus on accounts receivable and inventories as the primary source
of security for their lending transactions.
o Commercial Services provides factoring and receivable/collection
management products and secured financing to companies in apparel,
textile, furniture, home furnishings and other industries.
o Business Credit provides secured financing, including term and
revolving loans based on asset values, as well as cash flow and
enterprise value structures, to a full range of borrowers from small
to larger-sized companies.
Commercial Services
Commercial Services offers a full range of domestic and international
customized credit protection, lending and outsourcing services that include
working capital and term loans, factoring, receivable management outsourcing,
bulk purchases of accounts receivable, import and export financing and letter of
credit programs.
Financing is provided to clients through the purchase of accounts
receivable owed to clients by their customers, as well as by guaranteeing
amounts due under letters of credit issued to the clients' suppliers, which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable is traditionally known as "factoring" and results in the payment by
the client of a factoring fee which is commensurate with the underlying degree
of credit risk and recourse, and which is generally a percentage of the factored
receivables or sales volume. When Commercial Services "factors" (i.e.,
purchases) a customer invoice from a client, it records the customer receivable
as an asset and also establishes a liability for the funds due to the client
("credit balances of factoring clients"). Commercial Services also may advance
funds to its clients prior to collection of receivables, typically in an amount
up to 80% of eligible accounts receivable (as defined for that transaction),
charging interest on such advances (in addition to any factoring fees) and
satisfying such advances by the collection of receivables. The operating systems
of the clients and Commercial Services are integrated to facilitate the
factoring relationship.
Clients use Commercial Services' products and services for various
purposes, including improving cash flow, mitigating or reducing the risk of
charge-offs, increasing sales and improving management information. Further,
with the TotalSource(SM) product, clients can outsource bookkeeping, collection
and other receivable processing activities. These services are attractive to
industries outside the typical factoring markets. Commercial Services generates
business regionally from a variety of sources, including direct calling efforts
and referrals from existing clients and other referral sources. Accounts
receivable, operations and other administrative functions are centralized.
Business Credit
Business Credit offers loan structures ranging from asset-based revolving
and term loans secured by accounts receivable, inventories and fixed assets to
loans based on earnings performance and enterprise valuations to mid and
larger-sized companies. Clients use such loans primarily for working capital,
asset growth, acquisitions, debtor-in-possession financing and debt
restructurings. Business Credit sells and purchases participation interests in
such loans to and from other lenders. In conjunction with the combination of the
former Structured Finance segment into Capital Finance, approximately $1.3
billion of communication and media assets were transferred to Business Credit
during 2004.
4
Business Credit meets its customer financing needs through its variable
rate, senior revolving and term products. Business Credit primarily structures
financings on a secured basis, although its Corporate Finance and Communication
and Media units extend loans based upon the sustainability of a customer's
operating cash flow and ongoing enterprise valuations. Revolving and term loans
are made on a variable interest-rate basis based upon published indices such as
LIBOR or the prime rate of interest.
Business is originated regionally via solicitation activities focused upon
various types of intermediaries and referral sources. Business Credit maintains
long-term relationships with selected banks, finance companies, and other
lenders both to source and diversify senior debt exposures.
Equipment Finance Segment
The Equipment Finance Segment is a middle-market secured equipment lender
with a strong market presence throughout North America. Equipment Finance
provides customized financial solutions for its customers, which include
manufacturers, dealers, distributors, intermediaries, and end-users of
equipment. Equipment Finance's financing and leasing assets include a diverse
mix of customers, industries, equipment types and geographic areas.
Primary products in Equipment Finance include: loans, leases, wholesale
and retail financing packages, operating leases, sale-leaseback arrangements,
portfolio acquisitions, revolving lines of credit and in-house syndication
capabilities. A core competency for Equipment Finance is assisting customers
with the total life-cycle management of their capital assets including
acquisition, maintenance, refinancing and the eventual liquidation of their
equipment. Equipment Finance originates its products through direct
relationships with manufacturers, dealers, distributors and intermediaries and
through an extensive network of direct sales representatives and business
partners located throughout the United States and Canada. Competitive advantage
is built through an experienced staff that is both familiar with local market
factors and knowledgeable about the industries they serve. Operating
efficiencies are realized through Equipment Finance's two servicing centers
located in Tempe, Arizona, and Burlington, Ontario. These offices centrally
service and collect loans and leases originated throughout the United States and
Canada.
Equipment Finance is organized into three primary operating units:
Construction and Industrial, Specialized Industries and Canadian Operations. The
Construction and Industrial unit has provided financing to the construction and
industrial industries in the United States for over fifty years. Products
include equipment loans and leases, collateral and cash flow loans, revolving
lines of credit and other products that are designed to meet the special
requirements of contractors, distributors and dealers. The Specialized Industry
unit offers a wide range of financial products and services to customers in
specialized industries such as corporate aircraft, food and beverage, defense
and security, mining and energy, and regulated industries. Equipment Finance's
Canadian Operation has leadership positions in the construction, healthcare,
printing, plastics and machine tool industries.
Capital Finance Segment
During 2004, the former Structured Finance segment was combined with
Capital Finance. The prior period balances have been restated to reflect this
realignment. In conjunction with the combination, approximately $1.3 billion of
communication and media assets were transferred to Business Credit.
Capital Finance specializes in providing customized leasing and secured
financing primarily to end-users of aircraft, locomotives and railcars,
including operating leases, single investor leases, equity portions of leveraged
leases, and sale and leaseback arrangements, as well as loans secured by
equipment. Typical customers are major domestic and international airlines,
North American railroad companies and middle-market to larger-sized companies.
New business is generated through direct calling efforts, supplemented with
transactions introduced by intermediaries and other referral sources. Capital
Finance utilizes special purpose entities ("SPEs") to record certain structured
leasing transactions, primarily aerospace leveraged leases. These SPEs are
consolidated in CIT's financial statements.
Capital Finance has provided financing to commercial airlines for over 30
years, and the commercial aerospace portfolio includes most of the leading U.S.
and foreign commercial airlines. As of December 31, 2004, the commercial
aerospace financing and leasing portfolio was $5.1 billion, consisting of 92
accounts and 212 aircraft with an average age of approximately 6 years. Capital
Finance has developed strong direct relationships with most major airlines and
major aircraft and aircraft engine manufacturers. This provides Capital Finance
with
5
access to technical information, which enhances customer service, and provides
opportunities to finance new business. See "Concentrations" section of "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion of our aerospace portfolio.
Capital Finance has been financing the rail industry for over 25 years.
Its dedicated rail equipment group maintains relationships with several leading
railcar manufacturers and calls directly on railroads and rail shippers in North
America. The rail portfolio, which totaled $2.6 billion at December 31, 2004,
includes leases to all of the U.S. and Canadian Class I railroads (which are
railroads with annual revenues of at least $250 million) and numerous shippers.
The operating lease fleet primarily includes: covered hopper cars used to ship
grain and agricultural products, plastic pellets and cement; gondola cars for
coal, steel coil and mill service; open hopper cars for coal and aggregates;
center beam flat cars for lumber; and boxcars for paper and auto parts. The
railcar operating lease fleet is relatively young, with an average age of
approximately 7 years and approximately 83% (based on net investment) built in
1995 or later. The rail owned and serviced fleet totals in excess of 60,000
railcars and over 500 locomotives.
Capital Finance also provides specialized investment banking services to
the international corporate finance and institutional finance markets by
providing asset-based financing for large-ticket asset acquisitions, project
financing and related advisory services to equipment manufacturers, corporate
clients, regional airlines, governments and public sector agencies.
Transportation and the power and utilities sectors are among the industries that
Capital Finance serves. Capital Finance has a global presence with operations in
the United States, Canada and Europe.
Capital Finance personnel have extensive experience in managing equipment
over its full life cycle, including purchasing new equipment, maintaining
equipment, estimating residual values and re-marketing via re-leasing or selling
equipment. The unit's equipment and industry expertise enables it to manage
equipment risk. We manage the equipment, the residual value and the risk of
equipment remaining idle for extended periods of time and, where appropriate,
locate alternative equipment users or purchasers.
Capital Finance manages the direct private equity ($30.1 million at
December 31, 2004) and private fund venture capital ($151.0 million) investment
portfolios. We are in the process of the accelerated liquidation of both the
direct and fund portfolios via sale. In 2001, we ceased making new venture
capital investments beyond existing commitments. In our segment reporting, the
results are reflected in Corporate. See the "Concentrations" section of "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information.
Other Segment and Concentration Data
The percentage of total segment operating margin for the year ended
December 31, 2004 by segment is as follows: Specialty Finance -- commercial --
35%, Specialty Finance -- consumer -- 7%, Commercial Finance -- 30%, Equipment
Finance -- 10%, and Capital Finance -- 13%. For the year ended December 31,
2004, approximately 82% of our revenues were derived from U.S. financing and
leasing activities and approximately 18% were derived from international
financing and leasing activities.
See the "Results by Business Segments" and "Concentrations" sections of
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 7A. Quantitative and Qualitative Disclosures about
Market Risk," and Notes 5 and 21 of "Item 8. Financial Statements and
Supplementary Data," for additional information.
Competition
Our markets are highly competitive based on factors that vary depending
upon product, customer and geographic region. Competitors include captive and
independent finance companies, commercial banks and thrift institutions,
industrial banks, leasing companies, insurance companies, hedge funds,
manufacturers and vendors. Substantial financial services operations with global
reach have been formed by bank holding, leasing, finance and insurance companies
that compete with us. On a local level, community banks and smaller independent
finance and mortgage companies are a competitive force. Some competitors have
substantial local market positions. Many of our competitors are large companies
that have substantial capital, technological and marketing resources. Some
6
of these competitors are larger than we are and may have access to capital at a
lower cost than we do. The markets for most of our products are characterized by
a large number of competitors, although the number of competitors has fallen in
recent years as a consequence of continued consolidation in the industry.
We compete primarily on the basis of terms, structure, client service and
price. From time to time, our competitors seek to compete aggressively on the
basis of these factors and we may lose market share to the extent we are
unwilling to match competitor pricing and terms in order to maintain interest
margins and/or credit standards.
Other primary competitive factors include industry experience, equipment
knowledge and relationships. In addition, demand for our products with respect
to certain industries will be affected by demand for such industry's services
and products and by industry regulations.
Regulation
Our operations are subject, in certain instances, to supervision and
regulation by state, federal and various foreign governmental authorities and
may be subject to various laws and judicial and administrative decisions
imposing various requirements and restrictions, which, among other things, (i)
regulate credit granting activities, including establishing licensing
requirements, if any, in various jurisdictions, (ii) establish maximum interest
rates, finance charges and other charges, (iii) regulate customers' insurance
coverages, (iv) require disclosures to customers, (v) govern secured
transactions, (vi) set collection, foreclosure, repossession and claims handling
procedures and other trade practices, (vii) prohibit discrimination in the
extension of credit and administration of loans and (viii) regulate the use and
reporting of information related to a borrower's credit experience and other
data collection. In addition, (i) CIT Bank, a Utah industrial loan corporation
wholly owned by CIT, is subject to regulation and examination by the Federal
Deposit Insurance Corporation and the Utah Department of Financial Institutions,
(ii) CIT Small Business Lending Corporation, a Delaware corporation, is licensed
by and subject to regulation and examination by the U.S. Small Business
Administration, (iii) The Equipment Insurance Company, a Vermont corporation,
and Highlands Insurance Company Limited, a Barbados company, are each licensed
to enter into insurance contracts and are regulated by the Department of
Insurance in Vermont and Barbados, respectively, (iv) various banking
corporations in the United Kingdom, France, Italy, Belgium, Sweden, and the
Netherlands are each subject to regulation and examination by banking regulators
in their home country, and (v) various broker-dealer entities in Canada, the
United Kingdom, and the United States are each subject to regulation and
examination by securities regulators in its home country.
Employees
CIT employed approximately 5,860 people at December 31, 2004, of which
approximately 4,380 were employed in the United States and approximately 1,480
were outside the United States.
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.
7
Term Description
- --------------------------------------------------------------------------------
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.
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 .. Leveraged leases are where we are the
lessor and have increased risk of loss
in default in comparison to other
leveraged lease structures, because they
typically feature higher leverage, and
the third-party creditor in these
structures has a priority recourse to
the leased equipment.
Leases -- operating ................ Lease designation where CIT retains
beneficial ownership of the asset,
collects rental payments, recognizes
depreciation on the asset, and assumes
the risks of ownership, including
obsolescence.
Managed Assets ..................... Managed assets are comprised of finance
receivables, operating lease equipment,
finance receivables held for sale,
certain investments, and receivables
securitized and still managed by us. The
change in managed assets during a
reporting period is one of our
measurements of asset growth.
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.
Operating Margin ................... The total of net finance margin after
provision for credit losses (risk
adjusted margin) and other revenue.
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").
8
Term Description
- --------------------------------------------------------------------------------
Return on Equity or
Tangible Equity................... Net income expressed as a percentage of
average equity or average tangible
equity. These are key measurements of
profitability.
Risk Adjusted Margin................ Net finance margin after provision for
credit losses.
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,
which include prepayment fees and
certain origination fees, are reported
in Finance Income and are recognized
over the life of the lending
transaction.
Item 2. Properties
CIT operates in the United States, Canada, Europe, Latin America,
Australia and the Asia-Pacific region. CIT occupies approximately 2.0 million
square feet of office space, substantially all of which is leased. Such office
space is suitable and adequate for our needs and we utilize, or plan to utilize,
substantially all of our leased office space.
Item 3. Legal Proceedings
Putative Securities Class Action
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its former Chief Executive
Officer and its Chief Financial Officer. The lawsuit contained allegations that
the registration statement and prospectus prepared and filed in connection with
CIT's 2002 initial public offering ("IPO") were materially false and misleading,
principally with respect to the adequacy of CIT's telecommunications-related
loan loss reserves at the time. The lawsuit purported to have been brought on
behalf of all those who purchased CIT common stock in or traceable to the IPO,
and sought, among other relief, unspecified damages or rescission for those
alleged class members who still hold CIT stock and unspecified damages for other
alleged class members.
On June 25, 2003, by order of the United States District Court, the
lawsuit was consolidated with five other substantially similar suits, all of
which had been filed after April 10, 2003 and one of which named as defendants
some of the underwriters in the IPO and certain former directors of CIT.
Glickenhaus & Co., a privately held investment firm, was named lead plaintiff in
the consolidated action. On September 16, 2003, an amended and consolidated
complaint was filed. That complaint contained substantially the same allegations
as the original complaints. In addition to the foregoing, two similar suits (the
"Derivative Suits") were brought by certain shareholders on behalf of CIT
against CIT and some of its present and former directors under Delaware
corporate law.
On December 28, 2004, the United States District Court entered an order
granting CIT's motion to dismiss the consolidated case. The plaintiff's time to
appeal that order expired on January 28, 2005 with no notice of appeal having
been filed. The cases against all parties, including the Derivative Suits, have
been dismissed.
9
NorVergence Related Litigation
On September 9, 2004, Exquisite Caterers v. Popular Leasing et al.
("Exquisite Caterers"), a putative national class action, was filed against 13
financial institutions, including CIT, who had acquired equipment leases
("NorVergence Leases") from NorVergence, Inc., a reseller of telecommunications
and Internet services to businesses. The Exquisite Caterers lawsuit is now
pending in the Superior Court of New Jersey, Monmouth County. Exquisite Caterers
based its complaint on allegations that NorVergence misrepresented the
capabilities of the equipment leased to its customers and overcharged for the
equipment. The complaint asserts that the NorVergence Leases are unenforceable
and seeks rescission, punitive damages, treble damages and attorneys' fees. In
addition, putative class action suits in Florida, Illinois, New York and Texas
and several individual suits, all based upon the same core allegations and
seeking the same relief, have been filed by NorVergence customers against CIT
and other financial institutions.
On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation of
NorVergence under Chapter 7 of the Bankruptcy Code. Thereafter, the Attorneys
General of Florida, New Jersey, New York, Illinois, Massachusetts and Texas
commenced investigations of NorVergence and the financial institutions,
including CIT, which purchased NorVergence Leases. CIT entered into settlement
negotiations with those Attorney Generals and with Attorneys General from
several other states, including Pennsylvania and Massachusetts. In December
2004, CIT reached separate settlements with the New York and the New Jersey
Attorneys General. Under those settlements, lessees in those states will have an
opportunity to resolve all claims by and against CIT by paying a percentage of
the remaining balance on their lease. Negotiations with other Attorneys General
are continuing. CIT has also been asked by the Federal Trade Commission to
produce documents for transactions related to NorVergence. In addition, on
February 15, 2005, CIT was served with a subpoena seeking the production of
documents in a grand jury proceeding being conducted by the U.S. Attorney for
the Southern District of New York in connection with an investigation of
transactions related to NorVergence. CIT is in the process of complying with
these information requests.
Other Litigation
In addition, there are various legal proceedings against CIT, which have
arisen in the ordinary course of business. While the outcomes of the above
mentioned and ordinary course legal proceedings and the related activities are
not certain, based on present assessments, management does not believe that they
will have a material adverse effect on the financial condition of CIT.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of security holders during the
three months ended December 31, 2004.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York Stock Exchange. The following
table sets forth the high and low reported sale prices for CIT's common stock
for each of the quarterly periods in the two years ended December 31, 2004.
2004 2003
---------------- ----------------
Common Stock Prices High Low High Low
- ------------------- ------ ------ ------ ------
First Quarter .............. $39.91 $35.83 $21.90 $16.61
Second Quarter ............. $38.73 $33.28 $24.65 $17.22
Third Quarter .............. $38.48 $34.53 $30.10 $23.97
Fourth Quarter ............. $45.82 $36.51 $35.95 $29.50
During the year ended December 31, 2004, for each of the four quarters, we
paid a dividend of $0.13 per share for a total of $0.52 per share. During the
year ended December 31, 2003, for each of the four quarters, we paid a dividend
of $0.12 per share for a total of $0.48 per share. This $0.12 per share
quarterly dividend rate was approved by our Board of Directors following our
July 2002 IPO and was paid initially on November 27, 2002 to shareholders of
record on November 15, 2002.
Our dividend practice is to pay a dividend while retaining a strong
capital base. The declaration and payment of future dividends are subject to the
discretion of our Board of Directors. Any determination as to the payment of
dividends, including the level of dividends, will depend on, among other things,
general economic and business conditions, our strategic and operational plans,
our financial results and condition, contractual, legal and regulatory
restrictions on the payment of dividends by us, and such other factors as the
Board of Directors may consider to be relevant.
As of February 15, 2005, there were 82,666 beneficial owners of CIT common
stock.
All equity compensation plans in effect during 2004 were approved by our
shareholders, and are summarized in the following table.
Number of securities
remaining available for
Number of securities future issuance under
to be issued Weighted-average equity compensation plans
upon exercise of exercise price of (excluding securities
outstanding options(1) outstanding options reflected in column (a))(2)
---------------------- ------------------- ---------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders...................... 19,863,907 $33.07 9,797,410
- --------------------------------------------------------------------------------
(1) Excludes 1,269,641 unvested restricted shares and 688,928 performance
shares outstanding under the Long-Term Equity Compensation Plan.
(2) Does not consider 688,928 performance shares outstanding under the
Long-Term Equity Compensation Plan.
We had no equity compensation plans that were not approved by
shareholders. For further information on our equity compensation plans,
including the weighted average exercise price, see Item 8. Financial Statements
and Supplementary Data, Note 16.
11
The following table details the repurchase activity of CIT common stock
during the quarter ended December 31, 2004.
Total Number of Maximum Number
Total Average Shares Purchased of Shares that May
Number of Price as Part of Publicly Yet be Purchased
Shares Paid Announced Plans Under the Plans
Purchased Per Share or Programs or Programs
Balance at September 30, 2004 2,222,256 $36.28 273,500
----------
October 1 - 31, 2004 ..... 262,500 $37.94 262,500 3,011,000
November 1 - 30, 2004 .... 255,000 $40.63 255,000 2,756,000
December 1 - 31, 2004 .... 375,000 $44.18 375,000 2,381,000
---------- -------
Total Purchases .......... 892,500 892,500
---------- -------
Reissuances(1) .............. (1,442,723)
----------
Balance at December 31, 2004 1,672,033
==========
- --------------------------------------------------------------------------------
(1) Includes the issuance of shares of our common stock upon exercise of stock
options.
On October 20, 2004, our Board of Directors approved a continuation of the
common stock repurchase program to acquire up to an additional 3 million shares
of our outstanding common stock in conjunction with employee equity compensation
programs. These are in addition to the 273,500 shares remaining from the
previously approved program on April 21, 2004. The program authorizes the
company to purchase shares on the open market from time to time over a two-year
period beginning October 21, 2004. The repurchased common stock is 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.
12
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial information
regarding our results of operations and balance sheets. The data presented below
should be read in conjunction with Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures about Market Risk and Item 8. Financial Statements and
Supplementary Data.
At or for At or for At or for At or At or for At or for
the Year the Year the Three for the the Nine the Year
Ended Ended Months Ended Year Ended Months Ended Ended
December 31, December 31, December 31, September 30, September 30, December 31,
2004 2003 2002 2002 2001 2000
--------- --------- --------- --------- --------- ---------
($ in millions, except per share data)
- --------------------------------------
Results of Operations
Net finance margin ................. $ 1,569.6 $ 1,327.8 $ 344.9 $ 1,637.1 $ 1,301.7 $ 1,447.9
Provision for credit losses ........ 214.2 387.3 133.4 788.3 332.5 255.2
Operating margin ................... 2,242.5 1,799.8 468.6 1,781.1 1,541.8 2,104.7
Salaries and general operating
expenses ........................ 1,046.4 912.9 232.6 921.0 777.4 1,013.7
Net income (loss) .................. 753.6 566.9 141.3 (6,698.7)(2) 263.3 611.6
Net income (loss) per
share(1) -- diluted ............. 3.50 2.66 0.67 (31.66) 1.24 2.89
Dividends per share(1) ............. 0.52 0.48 0.12 -- 0.25 0.50
Balance Sheet Data
Total finance receivables .......... $35,048.2 $31,300.2 $27,621.3 $28,459.0 $31,879.4 $33,497.5
Reserve for credit losses .......... 617.2 643.7 760.8 777.8 492.9 468.5
Operating lease equipment, net ..... 8,290.9 7,615.5 6,704.6 6,567.4 6,402.8 7,190.6
Total assets ....................... 51,111.3 46,342.8 41,932.4 42,710.5 51,349.3 48,689.8
Commercial paper ................... 4,210.9 4,173.9 4,974.6 4,654.2 8,869.2 9,063.5
Variable-rate senior notes ......... 11,545.0 9,408.4 4,906.9 5,379.0 9,614.6 11,130.5
Fixed-rate senior notes ............ 21,715.1 19,830.8 19,681.8 18,385.4 17,113.9 17,571.1
Stockholders' equity ............... 6,055.1 5,394.2 4,870.7 4,757.8 5,947.6 6,007.2
Selected Data and Ratios
Profitability
Net income (loss) as a percentage
of AEA .......................... 1.93% 1.58% 1.73% (18.71)% 0.87% 1.50%
Net income (loss) as a percentage
of average tangible stockholders'
equity .......................... 14.5% 11.8% 12.5% (160.0)% 8.5% 16.0%
Net finance margin as a percentage
of AEA .......................... 4.02% 3.71% 4.22% 4.57% 4.29% 3.56%
Efficiency ratio ................... 42.6% 41.7% 38.6% 35.8% 41.5% 43.0%
Salaries and general operating
expenses (excluding goodwill
amortization in 2001 and prior
periods) as a percentage
of AMA .......................... 2.20% 1.99% 2.10% 1.95% 2.05% 1.97%
Credit Quality
60+ days contractual delinquency
as a percentage of finance
receivables................... 1.73% 2.16% 3.63% 3.76% 3.46% 2.98%
Non-accrual loans as a percentage
of finance receivables........ 1.31% 1.81% 3.43% 3.43% 2.67% 2.10%
Net credit losses as a percentage
of AFR........................ 0.91% 1.77% 2.32% 1.67% 1.20% 0.71%
Reserve for credit losses as a
percentage of finance
receivables................... 1.76% 2.06% 2.75% 2.73% 1.55% 1.40%
Other
Total managed assets............. $53,470.6 $49,735.6 $46,357.1 $47,622.3 $50,877.1 $54,900.9
Tangible stockholders' equity to
managed assets................ 10.7% 10.4% 10.4% 9.9% 8.6% 7.8%
Employees........................ 5,860 5,800 5,835 5,850 6,785 7,355
- --------------------------------------------------------------------------------
(1) Net income (loss) and dividend per share calculations for the periods
preceding September 30, 2002 assume that common shares outstanding as a
result of the July 2002 IPO (basic and diluted of 211.6 million and 211.7
million) were outstanding during such historical periods.
(2) Includes goodwill impairment charge of $6,511.7 million.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and
Item 7A. Quantitative and Qualitative Disclosures 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 in Part I -- Item 1. "Business" section.
Introduction
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
depreciation benefits 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);
o Net income as a percentage of average tangible equity (ROTE);
and
o Net income as a percentage of average equity (ROE).
We believe that 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 and currency 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 Net finance margin as a percentage of AEA; and
o Various interest sensitivity and liquidity measurements that
are discussed in Net Finance Margin and Risk Management.
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.
14
Credit Risk Management -- Our ability to evaluate the creditworthiness of
our customers, both during the credit granting process and after the
advancement of funds, and to maintain high quality assets while balancing
income potential with adequate credit loss reserve levels. We assess our
credit risk management activities with the following measurements:
o Net charge-offs as a percentage of average finance
receivables;
o Delinquent assets as a percentage of finance receivables;
o Non-performing assets as a percentage of finance receivables;
o Reserve for credit losses as a percentage of finance
receivables, of delinquent assets, and of non-performing
assets; and
o Concentration risk management.
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).
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. We
measure our performance in these areas with the following:
o Tangible capital base; and
o Tangible equity to managed assets ratio.
Profitability and Key Business Trends
Profitability measurements for the respective periods are presented in the
table below:
Years Ended Three Months
December 31, Ended Year Ended
---------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------- -------------
Net income per diluted share ......... $3.50 $2.66 $0.67 $(31.66)
Net income as a percentage of AEA .... 1.93% 1.58% 1.73% (18.71)%
Return on average tangible equity .... 14.5% 11.8% 12.5% (160.0)%
Managed assets grew 7.5% during 2004 to $53.5 billion, following 7.3%
growth in 2003. Consistent with 2003, our focus in 2004 was on prudent growth,
as we continued to supplement organic growth with strategic acquisitions that
integrated well with existing business platforms. Aided by an improving economy,
this approach to growth and risk management led to continued declines in
delinquency, non-performing assets and charge-off levels from 2003.
The ratio of tangible stockholders' equity to managed assets strengthened
to 10.72% at December 31, 2004, versus 10.45% and 10.41% at the end of the prior
two years. During 2004, we also executed on our strategy to allocate capital to
businesses with higher risk-adjusted returns through the continued liquidation
of non-strategic portfolios. As part of this strategy, during the fourth quarter
of 2004, we contracted to sell over $300 million of manufactured housing
receivables and approximately $150 million of venture capital fund investments.
These
15
actions were consistent with similar sale and syndication initiatives earlier in
2004 and in 2003. Including the impact of the recently announced student lending
business acquisition and the fourth quarter accelerated liquidations, we believe
that our capital is adequate.
Expense efficiency measurements for 2004 deteriorated from the prior year,
reflecting increases in both revenue generation costs (expenses related to
acquired businesses, incentive-based compensation, enhancement / maintenance
costs related to aerospace and rail operating lease assets) and administrative
costs (professional services and other compliance-related costs, credit and
collection expenses). Improvement in expense efficiency is a primary corporate
goal for 2005. Accordingly, several initiatives are underway to reduce costs,
including systems consolidations and process efficiency reviews.
The following table summarizes the impact of various items for the
respective reporting periods that affect the comparability of our financial
results under GAAP. We are presenting these items as a supplement to the GAAP
results to facilitate the comparability of results between periods. ($ in
millions):
Years Ended Three Months
December 31, Ended Year Ended
---------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------ ---------
Net income/(loss) GAAP basis ................. $753.6 $566.9 $141.3 $(6,698.7)
Charges/(gains) included in net income/loss
Gain on debt redemption .................... (25.5) (30.8) -- --
Specific reserving actions and other charges (26.4) -- -- 220.1
Venture capital losses, net ................ 2.1 53.9 3.9 25.0
Goodwill impairment ........................ -- -- -- 6,511.7
TCH losses ................................. -- -- -- 723.5
------ ------ ------ ---------
Non-GAAP net income -- before charges/gains .. $703.8 $590.0 $145.2 $ 781.6
====== ====== ====== =========
During 2004 and 2003, we recognized a gain on the redemption of certain
debt instruments. In 2002, we took specific reserving actions and recorded other
charges. A portion of the remaining specific reserves were reduced through net
income in 2004. The exclusion of these transactions aids in the analysis of
results over the periods presented. The adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets" in October 2001 introduced goodwill impairment charges.
The impairment charge in the period ended September 30, 2002 was a non-cash
charge and did not impact our tangible capital. The TCH results relate to a Tyco
acquisition company that had temporary status with respect to Tyco's acquisition
of CIT.
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."
16
Results by Business Segment
The tables that follow summarize selected financial information by
business segment, based upon a fixed leverage ratio across business units, the
allocation of most corporate expenses and exclude TCH results of operations ($
in millions).
Years Ended Three Months
December 31, Ended Year Ended
------------------ December 31, September 30,
2004 2003 2002 2002
------ ------ ------------- -------------
Net Income (Loss)
Specialty Finance -- commercial .... $268.3 $225.3 $ 64.9 $ 271.6
Specialty Finance -- consumer ...... 48.9 35.6 8.8 78.2
------ ------ ------ ---------
Total Specialty Finance ......... 317.2 260.9 73.7 349.8
------ ------ ------ ---------
Commercial Finance ................. 295.5 245.0 71.0 228.5
Equipment Finance .................. 77.7 38.5 13.4 121.1
Capital Finance .................... 105.0 72.6 29.1 116.5
------ ------ ------ ---------
Total Commercial Finance ........ 478.2 356.1 113.5 466.1
------ ------ ------ ---------
Total Segments .................. 795.4 617.0 187.2 815.9
Corporate, including certain charges (41.8) (50.1) (45.9) (6,791.1)
------ ------ ------ ---------
Total ........................... $753.6 $566.9 $141.3 $(5,975.2)
====== ====== ====== =========
Return on AEA
Specialty Finance -- commercial .... 2.55% 2.21% 2.90% 2.85%
Specialty Finance -- consumer ...... 1.26% 1.73% 2.58% 3.56%
Total Specialty Finance ......... 2.21% 2.13% 2.86% 2.98%
Commercial Finance ................. 3.58% 3.15% 4.64% 3.27%
Equipment Finance .................. 1.12% 0.56% 0.65% 1.24%
Capital Finance .................... 1.14% 0.85% 1.52% 1.65%
Total Commercial Finance ........ 1.96% 1.53% 2.06% 1.96%
Total Segments .................. 2.05% 1.74% 2.32% 2.29%
Corporate, including certain charges (0.12)% (0.16)% (0.59)% (18.99)%
Total ........................... 1.93% 1.58% 1.73% (16.69)%
Beginning in 2005, management will be measuring segment performance using
risk-adjusted capital, applying different leverage ratios to each business using
market and risk criteria.
Our segment reporting was modified in two ways in 2004. First, in order to
align better with the market place and improve efficiency, the former Structured
Finance segment was merged with Capital Finance, and at the same time the
telecommunications and media portfolio was moved to the Business Credit unit of
Commercial Finance. Secondly, our Specialty Finance -- consumer unit was broken
out as a separate segment. All prior periods have been conformed to these
changes and this updated presentation is consistent with the reporting to
management during 2004.
2004 versus 2003 Results
Results by segment were as follows:
o Specialty Finance -- commercial reflected profitability improvement
in the small / mid-ticket leasing and the continuation of strong
returns in the vendor programs, which were offset in part by the
loss related to the accelerated liquidation of the manufactured
housing portfolio.
o Specialty Finance -- consumer results reflected higher net income
and the continuation of good returns in the home lending unit. Home
lending profitability also reflected lower securitization gains in
2004.
o Commercial Finance earnings benefited from continued high returns in
both the factoring and asset-based lending businesses. The
improvement from the prior year was particularly strong in the
factoring unit, as current year results benefited from acquisitions
completed in the latter part of 2003.
17
o Equipment Finance returns, while still below management's
expectations, improved from the low 2003 level, reflecting lower
charge-offs, improved funding costs and higher equipment gains.
Profitability improvement was across business lines in both the U.S.
and Canada.
o Similar to Equipment Finance, Capital Finance returns rebounded from
disappointing results in 2003, reflecting some improvement in
aerospace rentals and continued strong rail rentals, as well as
increased non-spread revenue.
2003 versus 2002 Results
The improvement in the bottom-line return on AEA in 2003 versus 2002 was
due to the goodwill impairment charge in 2002 and reduced corporate charges in
2003. Segment returns for 2003 versus the 2002 periods were reduced by the
allocation of all borrowing costs to the segments in 2003. Noteworthy 2003
trends by segment are as follows:
o Specialty Finance return on AEA, while below 2002, was in line with
the Corporate return on equity targets for 2003. Specialty Finance
performance for 2003 included improved earnings in International
operations and strong earnings from vendor programs, offset by
slightly higher charge-offs and reduced securitization gains from
2002 levels.
o Commercial Finance earnings remained very strong, benefiting from
continued high returns in both the factoring and asset-based lending
businesses.
o Equipment Finance returns reflected soft margins, offset in part by
reduced charge-offs in relation to 2002.
o Capital Finance earnings were dampened by the lower aerospace rental
rates and the waste-to-energy project charge-off.
Corporate included amounts as shown in the table below (after tax):
Years Ended Three Months
December 31, Ended Year Ended
---------------- December 31, September 30,
2004 2003 2002 2002
------- ------- ------------ -------------
Unallocated expenses .................... $(78.2) $ (3.3) $(36.3) $ (27.3)
Specific telecommunication & Argentine
provisions ............................ 26.4 -- -- (207.7)
Gain on debt redemption ................. 25.5 30.8 -- --
Venture capital operating losses, net(1) (15.5) (77.6) (9.6) (44.4)
Goodwill impairment ..................... -- -- -- (6,511.7)
------ ------ ------ ---------
Total ................................. $(41.8) $(50.1) $(45.9) $(6,791.1)
====== ====== ====== =========
- --------------------------------------------------------------------------------
(1) Venture capital operating -- net losses include realized and unrealized
gains and losses related to venture capital investments as well as
interest costs and other operating expenses associated with these
portfolios.
The increase in unallocated corporate operating expense in 2004 was due
primarily to increased performance-based compensation, professional services and
other compliance-related costs as well as higher unallocated funding costs.
18
Net Finance Margin
An analysis of net finance margin is set forth below ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
----------------------- December 31, September 30,
2004 2003 2002 2002
--------- --------- ------------ ------------
Finance income -- loans and capital leases $ 2,363.8 $ 2,249.2 $ 582.0 $ 2,609.4
Rental income on operating leases ........ 1,421.9 1,480.3 389.7 1,733.4
Interest expense ......................... 1,260.1 1,348.7 349.5 1,464.7
--------- --------- --------- ---------
Net finance income .................... 2,525.6 2,380.8 622.2 2,878.1
Depreciation on operating lease equipment 956.0 1,053.0 277.3 1,241.0
--------- --------- --------- ---------
Net finance margin .................... $ 1,569.6 $ 1,327.8 $ 344.9 $ 1,637.1
========= ========= ========= =========
Average Earnings Asset ("AEA") ........... $39,011.3 $35,813.4 $32,693.2 $35,796.4
========= ========= ========= =========
As a % of AEA:
Finance income -- loans and capital leases 6.06% 6.28% 7.12% 7.29%
Rental income on operating leases ........ 3.64% 4.13% 4.77% 4.84%
Interest expense ......................... 3.23% 3.76% 4.28% 4.09%
--------- --------- --------- ---------
Net finance income .................... 6.47% 6.65% 7.61% 8.04%
Depreciation on operating lease equipment 2.45% 2.94% 3.39% 3.47%
--------- --------- --------- ---------
Net finance margin .................... 4.02% 3.71% 4.22% 4.57%
========= ========= ========= =========
As a % of AOL:
Rental income on operating leases ........ 18.18% 20.44% 23.60% 26.44%
Depreciation on operating lease equipment 12.22% 14.54% 16.79% 18.93%
--------- --------- --------- ---------
Net operating lease margin ............ 5.96% 5.90% 6.81% 7.51%
========= ========= ========= =========
Average Operating Lease Equipment ("AOL") $ 7,821.2 $ 7,241.1 $ 6,605.0 $ 6,554.8
========= ========= ========= =========
2004 versus 2003 Results
o For the year ended December 31, 2004, net finance margin
improved by $241.8 million or 31 basis points (as a percentage
of AEA) from 2003, due primarily to reduced borrowing costs.
o Finance income on loans and capital leases, while up in amount
from 2003, declined as a percentage of assets, as the
portfolio continued to reprice in the relatively low rate
environment.
o 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, primarily due to the narrowing (improvement) of our
credit spreads and the refinancing of higher-cost debt. The
increase in AEA reflects growth in the latter part of 2003 and
in 2004.
o Operating lease rentals decreased by $58.4 million or 226
basis points (as a percentage of average operating leases)
from the prior year period, reflecting a higher proportion of
aerospace and rail assets in Capital Finance and the continued
soft aerospace rentals (though we have experienced some recent
improvement). These longer-lived assets have lower rental
rates as a percentage of the asset base than small to
mid-ticket leasing assets in Specialty Finance and Equipment
Finance.
o Depreciation expense declined similarly from 2003, reflecting
the asset mix change to longer-lived from shorter-term assets.
As a result operating lease margin as a percentage of
operating lease assets was up modestly from the prior year.
See "Concentrations -- Operating Leases" for additional
information regarding our operating lease assets.
19
2003 versus 2002 Results
o Finance income for 2003 reflected the continued decline in
market interest rates. However, interest expense did not
decline proportionally with the drop in market interest rates
due to the use of bank lines (drawn in 2002) for part of 2003,
term debt issued in 2002 at wider credit spreads and excess
cash maintained for liquidity purposes. Therefore, net finance
margin as percentage of AEA decreased in 2003 from the prior
periods.
o Finance income as a percentage of AEA declined in each period
since 2001. This primarily reflected the drop in U.S. treasury
rates of approximately 275 basis points from the first quarter
of 2002 through the second quarter of 2003. Reduced operating
lease rentals also contributed to the decline.
o Interest expense as a percentage of AEA also declined since
2001, as the favorable impact of lower market interest rates
was partially offset by wider borrowing spreads and the
resultant higher cost of funding transactions executed
following the funding base disruption in 2002. At December 31,
2003, $4.2 billion in outstanding commercial paper was fully
supported by undrawn bank facilities. At December 31, 2002 and
September 30, 2002, commercial paper outstanding was $5.0
billion and $4.7 billion, respectively, while drawn commercial
bank lines were $2.1 billion and $4.0 billion, respectively.
We regularly monitor and simulate our degree of interest rate sensitivity
by measuring the repricing characteristics of interest-sensitive assets,
liabilities, and derivatives. The Capital Committee reviews the results of this
modeling periodically. The interest rate sensitivity modeling techniques we
employ include the creation of prospective twelve month "baseline" and "rate
shocked" net interest income simulations.
At the date that interest rate sensitivity is modeled, "baseline" net
interest income is derived considering the current level of interest-sensitive
assets, the current level of interest-sensitive liabilities and related
maturities, and the current level of derivatives. The "baseline" simulation
assumes that, over the next successive twelve months, market interest rates (as
of the date of simulation) are held constant and that no new loans or leases are
extended. Once the "baseline" net interest income is calculated, market interest
rates, which were previously held constant, are raised instantaneously 100 basis
points across the entire yield curve, and a "rate shocked" simulation is run.
Interest rate sensitivity is then measured as the difference between calculated
"baseline" and "rate shocked" net interest income.
An immediate hypothetical 100 basis point increase in the yield curve on
January 1, 2005 would reduce net income by an estimated $20 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. A 100 basis point increase in
the yield curve on January 1, 2004 would have reduced net income by an estimated
$24 million after tax, while a corresponding decrease in the yield curve would
have increased net income by a like amount. Although management believes that
this measure provides an estimate of our interest rate sensitivity, it does not
account for potential changes in the credit quality, size, composition and
prepayment characteristics of the balance sheet and other business developments
that could affect net income. Accordingly, no assurance can be given that actual
results would not differ materially from the estimated outcomes of our
simulations. Further, such simulations do not represent management's current
view of future market interest rate movements.
20
A comparative analysis of the weighted average principal outstanding and
interest rates on our debt before and after the effect of interest rate swaps is
shown in the following table ($ in millions).
Before Swaps After Swaps
---------------- ----------------
Year Ended December 31, 2004
Commercial paper, variable-rate senior
notes and bank credit facilities .... $15,138.8 1.88% $18,337.9 2.59%
Fixed-rate senior and subordinated notes 19,755.6 5.64% 16,556.5 5.08%
--------- ---------
Composite .............................. $34,894.4 4.01% $34,894.4 3.77%
========= =========
Year Ended December 31, 2003
Commercial paper, variable-rate senior
notes and bank credit facilities .... $12,352.1 1.83% $15,942.0 2.63%
Fixed-rate senior and subordinated notes 20,002.0 6.06% 16,412.1 5.82%
--------- ---------
Composite .............................. $32,354.1 4.45% $32,354.1 4.25%
========= =========
Three Months Ended December 31, 2002
Commercial paper, variable-rate senior
notes and bank credit facilities .... $12,344.2 2.09% $13,103.1 2.82%
Fixed-rate senior and subordinated notes 18,055.3 6.20% 17,296.4 5.87%
--------- ---------
Composite .............................. $30,399.5 4.54% $30,399.5 4.56%
========= =========
Year Ended September 30, 2002
Commercial paper, variable-rate senior
notes and bank credit facilities .... $17,087.2 2.34% $14,813.2 2.55%
Fixed-rate senior and subordinated notes 16,764.8 6.11% 19,038.8 5.90%
--------- ---------
Composite .............................. $33,852.0 4.21% $33,852.0 4.43%
========= =========
The weighted average interest rates before swaps do not necessarily
reflect the interest expense that would have been incurred over the life of the
borrowings had the interest rate risk been managed without the use of such
swaps.
Net Finance Margin after Provision for Credit Losses (Risk Adjusted Margin)
The following table summarizes risk adjusted margin, both in amount and as
a percentage of AEA ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
-------- -------- ------------ -------------
Net finance margin .......................... $1,569.6 $1,327.8 $344.9 $1,637.1
Provision for credit losses ................. 214.2 387.3 133.4 788.3
-------- -------- ------ --------
Net finance margin after provision for credit
losses (risk adjusted margin) ............. $1,355.4 $ 940.5 $211.5 $ 848.8
======== ======== ====== ========
As a % of AEA:
Net finance margin .......................... 4.02% 3.71% 4.22% 4.57%
Provision for credit losses ................. 0.55% 1.08% 1.64% 2.20%
-------- -------- ------ --------
Net finance margin after provision for credit
losses (risk adjusted margin) ............. 3.47% 2.63% 2.58% 2.37%
======== ======== ====== ========
The improvement in 2004 primarily reflects the previously discussed
improvement in net finance margin, as well as a benefit from lower charge-offs,
which is discussed further in "Credit Metrics". Excluding the impact of the
reduction to the specific telecommunications reserve in the fourth quarter of
2004, the risk adjusted margin as a percentage of AEA was 3.36% for the year
ended December 31, 2004. Excluding the additional credit provisions in 2002 to
establish reserves for the telecommunications and Argentine exposures, risk
adjusted margin as a percentage of AEA was 3.38% for the twelve months ended
September 30, 2002.
21
Other Revenue
The components of other revenue are set forth in the following table ($ in
millions).
Years Ended Three Months
December 31, Ended Year Ended
----------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------ -------------
Fees and other income .......... $502.9 $586.2 $169.2 $644.5
Factoring commissions .......... 227.0 189.8 55.1 165.5
Gains on sales of leasing
equipment 101.6 70.7 8.7 13.6
Gains on securitizations ....... 59.1 100.9 30.5 149.0
------ ------ ------ ------
Total other revenue .......... $890.6 $947.6 $263.5 $972.6
====== ====== ====== ======
Other revenue as a
percentage of AEA 2.28% 2.65% 3.22% 2.72%
====== ====== ====== ======
We continue to emphasize growth and diversification of other revenues to
improve our overall profitability.
o Fees and other income include securitization-related servicing fees
and accretion, syndication fees, miscellaneous fees and gains from
asset sales. Securitization-related fees declined in 2004. Other
fees in 2004 were essentially flat with the prior year. The drop in
securitization-related fees, which includes accretion related to our
retained interest (net of impairment charges) and servicing fees,
corresponds to the 14% decline in securitized assets during 2004.
The emphasis on funding home lending receivables on-balance sheet
results in a shift of securitization-related revenues to both
interest margin and provision for credit losses. Fees and other
income were reduced by a $15.7 million loss related to accelerated
liquidation of the manufactured housing portfolio in the fourth
quarter of 2004.
o The trend of higher factoring commissions reflects strong volumes,
benefiting from two large acquisitions completed during the latter
part of 2003.
o Gains on sales of equipment improved sharply from prior periods as
we saw some firming of equipment prices, and higher gains across
virtually all leasing businesses. The improvement was most notable
in Equipment Finance and in the international unit of Specialty
Finance-commercial.
o Securitization gains decreased in 2004, due to both a lower volume
of receivables securitized and reduced gains on amounts securitized.
The volume decline included a $262 million drop in Specialty Finance
-- commercial assets sold. Additionally, in 2004, we continued to
fund home lending growth entirely on-balance sheet, versus $489
million of home lending assets that were securitized in 2003. The
lower gain as a percentage of volume in 2004 is primarily due to a
higher proportion of, and tighter spreads on, vendor receivables
sold. Securitization gains were 4.8% of pretax income in 2004, down
from 10.8% in 2003. We continue to target securitization gains at a
maximum of 15% of pretax income.
The following table presents information regarding gains on
securitizations ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
------------------ December 31, September 30,
2004 2003 2002 2002
-------- -------- ------------ -------------
Total volume securitized .................. $4,434.5 $5,320.2 $ 1,189.3 $ 7,668.5
Gains ..................................... $ 59.1 $ 100.9 $ 30.5 $ 149.0
Gains as a percentage of volume securitized 1.33% 1.90% 2.57% 1.94%
Gains as a percentage of pre-tax income ... 4.8% 10.8% 12.9% 16.9%
Securitized assets ........................ $8,309.7 $9,651.7 $10,482.4 $11,234.7
Retained interest in securitized assets ... $1,155.6 $1,309.3 $ 1,355.9 $ 1,313.7
22
Reserve for Credit Losses
The provision for credit losses and reserve for credit losses is presented
in the following table ($ in millions).
Years Ended Three Months
December 31, Ended Year Ended
--------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------ -------------
Balance beginning of period ..................... $643.7 $760.8 $777.8 $492.9
------ ------ ------ ------
Provision for credit losses -- finance
receivables ................................... 270.0 408.8 133.4 453.3
Provision for credit losses -- specific
reserving actions(1) .......................... (55.8) (21.5) -- 335.0
------ ------ ------ ------
Total provision for credit losses ............... 214.2 387.3 133.4 788.3
Reserves relating to acquisitions, other(2) ..... 60.5 17.5 4.1 (11.1)
------ ------ ------ ------
Additions to reserve for credit losses, net ... 274.7 404.8 137.5 777.2
------ ------ ------ ------
Net credit losses -- excluding
telecommunications and Argentine charge-offs:
Specialty Finance -- commercial ................. 111.8 135.6 28.3 102.3
Specialty Finance -- consumer ................... 41.0 27.2 6.1 24.4
Commercial Finance .............................. 41.3 69.4 33.5 88.2
Equipment Finance ............................... 53.2 125.7 69.8 246.3
Capital Finance ................................. 13.8 16.0 1.3 0.2
------ ------ ------ ------
Net credit losses -- prior to telecommunication
and Argentine charge-offs ..................... 261.1 373.9 139.0 461.4
Telecommunications .............................. 40.1 47.0 15.5 30.9
Argentine charge-offs ........................... -- 101.0 -- --
------ ------ ------ ------
Total net credit losses ....................... 301.2 521.9 154.5 492.3
Balance end of period ........................... $617.2 $643.7 $760.8 $777.8
====== ====== ====== ======
Reserve for credit losses as a percentage of
finance receivables ........................... 1.76% 2.06% 2.75% 2.73%
====== ====== ====== ======
Reserve for credit losses as a percentage of past
due receivables (60 days or more)(3) .......... 101.5% 95.2% 76.0% 72.7%
====== ====== ====== ======
Reserve for credit losses as a percentage of
non-performing assets(4) ...................... 114.4% 95.2% 70.1% 68.2%
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) The 2002 amount consists of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2003 amount reflects a reduction of the Argentine reserve
after substantial work-out efforts were completed. This amount was offset
by an increase to the provision for credit losses -- finance receivables.
The 2004 amount includes a $43.3 million reduction to the
telecommunications specific reserve and a $12.5 million reduction of the
Argentine reserve following the sale of the remaining assets in this
portfolio. The Argentine reduction was offset by an increase to the
provision for credit losses -- finance receivables.
(2) Reserves related to acquisitions, other in 2004 includes of provisions
relating to bulk portfolio purchases ($34.7 million) and the European
Vendor Finance acquisition ($19.2 million).
(3) 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 98.0% at December 31, 2004, 80.6% at
December 31, 2003, 49.0% at December 31, 2002 and 45.3% at September 30,
2002.
(4) The reserve for credit losses as a percentage of non-performing assets,
excluding telecommunication and Argentine reserves and corresponding
non-performing assets, was 114.5% at December 31, 2004, 84.7% at December
31, 2003, 48.9% at December 31, 2002 and 47.2% at September 30, 2002.
The decreased provision for 2004 in relation to 2003 reflects a $43.3
million reduction in the specific telecommunications reserve, lower charge-offs
and improving credit metrics. The increase in reserves relating to acquisitions
during 2004 is due primarily to the European vendor leasing business and home
lending bulk portfolio purchases. The decreased provision for the year ended
December 31, 2003 in relation to 2002 reflects lower charge-offs (excluding
Argentina) and improving credit metrics. The increased provision for the year
ended September 30, 2002 reflects higher charge-off levels and reserving actions
relating to exposures in the telecommunications portfolio ($200 million)
primarily related to Competitive Local Exchange Carriers ("CLECs"), and our
Argentine exposure ($135 million, detailed further below). See "Credit Metrics"
for further discussion.
23
The following table presents the components of the reserve for credit
losses, both in amount and as a percentage of corresponding finance receivables
($ in millions):
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Finance receivables . $594.0 1.71% $524.6 1.71% $472.2 1.77%
Telecommunications(1) 23.2 6.92% 106.6 19.16% 153.6 22.40%
Argentina(2) ........ -- -- 12.5 55.07% 135.0 73.11%
------ ------ ------
Total ............... $617.2 1.76% $643.7 2.06% $760.8 2.75%
====== ====== ======
- --------------------------------------------------------------------------------
(1) Percentage of finance receivables in telecommunications portfolio.
(2) Percentage of finance receivables in Argentina.
Reserve for Credit Losses -- Finance Receivables
The reserve for credit losses is determined based on three key components
(1) specific reserves for collateral and cash flow dependent loans that 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
economic environment and other factors.
The reserve included specific reserves, excluding telecommunication
accounts, relating to impaired loans of $42.4 million, $66.4 million, and $52.9
million at December 31, 2004, 2003 and 2002. The portion of the reserve related
to inherent estimated loss and estimation risk reflects our evaluation of trends
in our key credit metrics, as well as our assessment of risk in certain industry
sectors, including commercial aerospace.
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
In light of the improved performance of CIT's Competitive Local Exchange
Carriers ("CLEC") portfolio and the telecommunications industry generally, as
well as the continued reduction in outstanding receivables, the specific reserve
related to the telecommunications portfolio was reduced by $43.3 million during
the quarter ended December 31, 2004, reflecting lower non-performing loans,
lower risk of loss remaining in the portfolio and improved market valuations.
The December 2004 quarter marked the first period since the establishment of the
specific telecommunications reserve that there were no charge-offs recorded
against that reserve during a quarter.
CIT originally added $200.0 million to its reserve for credit losses
during the quarter ended June 30, 2002 in light of deterioration in the
telecommunications sector, particularly with respect to CIT's CLEC portfolio. In
subsequent periods, CIT recorded net charge-offs of $134 million against this
specific reserve.
24
Our telecommunications portfolio is included in "Communications" in the
industry composition table included in Note 5 -- Concentrations to the
Consolidated Financial Statements. This portfolio includes lending and leasing
transactions to the telecommunications sector. Lending and leasing of
telecommunication equipment to non-telecom companies is conducted in our
Specialty Finance business and is categorized according to the customer's
("obligor's") industry in the industry composition table. Certain statistical
data is presented in the following table ($ in millions).
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
CLEC accounts ......................... $112.7 $197.8 $262.3
Other telecommunication accounts ...... 222.5 381.2 447.8
------ ------ ------
Total telecommunication portfolio ..... $335.2 $579.0 $710.1
====== ====== ======
Portfolio as a % of total financing
and leasing assets .................. 0.7% 1.5% 2.0%
Number of accounts .................... 26 44 52
Top 10 accounts ....................... $202.8 $253.4 $264.5
Largest account exposure .............. $ 29.7 $ 31.0 $ 32.9
Accounts 60+ days past due ............ $ 2.1 $ 25.7 $ 37.3
Non-performing accounts ............... $ 21.0 $ 57.2 $120.2
Number of non-performing accounts ..... 5 6 10
Non-performing accounts as a
percentage of portfolio ............. 6.3% 9.9% 16.9%
Reserve for Credit Losses -- Argentina
During the second quarter of 2004, we completed the previously announced
sale of our Argentine portfolio to an Argentine bank at a modest gain. With the
completion of this transaction, we transferred the remaining specific reserve of
$12.5 million to the Reserve for Credit Losses -- Finance Receivables.
In the first half of 2002, we established a $135.0 million specific
reserve for Argentine exposure 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 $21.5 million to the
Reserve for Credit Losses -- Finance Receivables.
25
Credit Metrics
Net Charge-offs
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown in total and for the liquidating, Argentine and
telecommunications portfolios in the following tables ($ in millions):
Before Liquidating, Liquidating,
Argentine and Argentine and
Total Telecommunications Telecommunications
--------------- ------------------ ------------------
Year Ended December 31, 2004
Specialty Finance -- commercial .... $111.0 1.32% $ 85.2 1.10% $ 25.8 3.97%
Commercial Finance ................. 82.2 0.69% 41.3 0.36% 40.9 9.59%
Equipment Finance .................. 53.2 0.84% 51.0 0.82% 2.2 1.79%
Capital Finance .................... 13.8 0.50% 13.8 0.50% -- --
------ ------ ------
Total Commercial Segments ....... 260.2 0.88% 191.3 0.68% 68.9 5.75%
Specialty Finance -- consumer ...... 41.0 1.11% 41.0 1.11% -- --
------ ------ ------
Total ........................... $301.2 0.91% $232.3 0.73% $ 68.9 5.75%
====== ====== ======
Year Ended December 31, 2003
Specialty Finance -- commercial .... $239.8 2.96% $111.8 1.56% $128.0 13.58%
Commercial Finance ................. 107.9 1.02% 69.4 0.71% 38.5 4.85%
Equipment Finance .................. 125.7 2.03% 94.8 1.62% 30.9 8.34%
Capital Finance .................... 21.3 0.75% 16.0 0.56% 5.3 --
------ ------ ------
Total Commercial Segments ....... 494.7 1.79% 292.0 1.14% 202.7 9.62%
Specialty Finance -- consumer ...... 27.2 1.53% 27.2 1.53% -- --
------ ------ ------
Total ........................... $521.9 1.77% $319.2 1.17% $202.7 9.62%
====== ====== ======
Three Months Ended December 31, 2002
Specialty Finance -- commercial .... $ 28.3 1.62% $ 21.2 1.38% $ 7.1 3.28%
Commercial Finance ................. 49.0 2.38% 33.5 1.78% 15.5 8.75%
Equipment Finance .................. 69.8 3.78% 56.5 3.32% 13.3 9.25%
Capital Finance .................... 1.3 0.18% 1.3 0.18% -- --
------ ------ ------
Total Commercial Segments ....... 148.4 2.32% 112.5 1.92% 35.9 6.68%
Specialty Finance -- consumer ...... 6.1 2.46% 6.1 2.46% -- --
------ ------ ------
Total ........................... $154.5 2.32% $118.6 1.94% $ 35.9 6.68%
====== ====== ======
Year Ended September 30, 2002
Specialty Finance -- commercial .... $102.3 1.42% $ 70.7 1.13% $ 31.6 3.36%
Commercial Finance ................. 106.6 1.19% 88.2 1.06% 18.4 2.78%
Equipment Finance .................. 258.8 2.97% 168.5 2.22% 90.3 8.02%
Capital Finance .................... 0.2 0.01% 0.2 0.01% -- --
------ ------ ------
Total Commercial Segments ....... 467.9 1.68% 327.6 1.31% 140.3 5.15%
Specialty Finance -- consumer ...... 24.4 1.36% 24.4 1.36% -- --
------ ------ ------
Total ........................... $492.3 1.67% $352.0 1.32% $140.3 5.15%
====== ====== ======
2004 Trends
o Specialty Finance -- commercial charge-offs declined from 2003 due
to higher recoveries overall and improved credit in the vendor
programs and in Europe. These improvements were in part offset by
approximately $15 million in charge-offs taken with respect to
customers of NorVergence, Inc., a bankrupt vendor.
o Commercial Finance charge-offs were below the prior year reflecting
the stronger economy. While occurring in both the asset-based
lending and factoring businesses, the decline was particularly
notable in Business Credit. In conjunction with the combination of
the former Structured Finance into Capital Finance, the
communications and media portfolio was transferred to the Commercial
Finance segment. As a result, charge-offs against the specific
telecommunications reserve are reflected in this segment. See
discussion in "Reserve for Credit Losses" regarding the specific
reserve for telecommunications.
o Equipment Finance improvement continued throughout 2004. Reduced
charge-offs across all product lines in both the U.S. and Canada
reflected lower non-performing assets and strengthening collateral
values.
26
o Capital Finance charge-offs for 2004 were primarily in the project
finance portfolio.
o Specialty Finance -- consumer home lending charge-offs, while up in
amount, were down as a percentage of average finance receivables
from the prior year, reflecting portfolio growth.
2003 Trends
o Specialty Finance 2003 commercial charge-offs include a $101.0
million Argentine write-off, which reflected the substantial
progress of collection and work out efforts in the Argentine
portfolio. Excluding Argentina and liquidating portfolios, Specialty
Finance -- commercial charge-offs were 1.56% as a percentage of
average finance receivables for 2003.
o Commercial Finance charge-offs fell below 2002 levels. Charge-offs
in 2002 included amounts associated with several loan work-outs due
to the weaker economic trends, while 2003 amounts included
significant charge-offs in the telecommunication portfolio.
o Equipment Finance improvement was considerable in relation to 2002
due to reductions across all product lines in both the U.S. and
Canada.
o The increased Capital Finance charge-offs were primarily the result
of an $11.3 million charge-off recorded to write down the value of a
waste-to-energy project following bankruptcy proceedings and the
renegotiation of the related contracts.
The following table sets forth certain information concerning our net
charge-offs on a managed basis, including both owned and securitized
receivables, both in amount and as a percentage of average managed finance
receivables ($ in millions):
Year Ended Year Ended Three Months Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ----------------- ------------------
Specialty Finance -- commercial $155.5 1.25% $299.5 2.44% $ 43.7 1.44% $185.8 1.44%
Commercial Finance ............ 82.2 0.69% 107.9 1.02% 49.0 2.38% 106.6 1.19%
Equipment Finance ............. 97.7 1.06% 210.8 2.14% 105.4 3.63% 457.3 3.49%
Capital Finance ............... 13.8 0.50% 21.3 0.75% 1.3 0.18% 0.2 0.01%
------ ------ ------ ------
Total Commercial Segments ... 349.2 0.96% 639.5 1.80% 199.4 2.30% 749.9 2.05%
Specialty Finance -- consumer . 60.7 1.17% 40.6 1.02% 6.8 1.03% 30.5 0.83%
------ ------ ------ ------
Total ....................... $409.9 0.99% $680.1 1.72% $206.2 2.21% $780.4 1.94%
====== ====== ====== ======
The trends over the periods shown in the table above are driven largely by
the fluctuations in the owned portfolio as discussed previously. In addition,
charge-offs on a managed basis reflected the following with respect to the
securitized portfolios:
o Specialty Finance -- commercial charge-offs declined sequentially in
both amount and percentage in all periods in the table above.
Charge-offs related to the securitized portfolios for 2004 declined
approximately $15 million or 35 basis points from 2003, reflecting
the higher proportion of vendor assets sold.
o Equipment Finance charge-offs on securitized portfolios similarly
declined both in amount and percentage for all periods shown above.
Charge-off rates in these portfolios remained higher than in the
owned portfolio, as the 2004 percentage improved roughly 80 basis
points from 2003.
o Specialty Finance -- consumer home lending securitization-related
charge-offs increased approximately $6 million or 70 basis points as
a percentage of securitized assets from 2003.
27
Past Due Loans and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets and the related percentages of
finance receivables ($ in millions):
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Past Dues:
Specialty Finance -- commercial $ 283.3 3.22% $ 287.3 3.59% $ 240.8 3.44%
Commercial Finance ............ 124.7 1.06% 131.9 1.14% 222.7 2.38%
Equipment Finance(1) .......... 50.1 0.79% 137.9 2.18% 359.3 4.88%
Capital Finance ............... 33.5 1.13% 30.5 1.11% 102.7 3.48%
------- --------- --------
Total Commercial Segments .. 491.6 1.64% 587.6 2.05% 925.5 3.47%
Specialty Finance -- consumer . 116.4 2.27% 88.7 3.33% 75.8 7.87%
------- --------- --------
Total ...................... $ 608.0 1.73% $ 676.3 2.16% $1,001.3 3.63%
======= ========= ========
Non-performing Assets:
Specialty Finance -- commercial $ 165.9 1.88% $ 179.7 2.25% $ 156.7 2.24%
Commercial Finance ............ 112.1 0.95% 132.5 1.15% 279.9 2.99%
Equipment Finance(1) .......... 131.2 2.06% 218.3 3.46% 403.5 5.48%
Capital Finance ............... 11.1 0.38% 49.7 1.81% 162.8 5.52%
------- --------- --------
Total Commercial Segments .. 420.3 1.40% 580.2 2.03% 1,002.9 3.76%
Specialty Finance -- consumer . 119.3 2.32% 96.3 3.61% 82.9 8.61%
------- --------- --------
Total ...................... $ 539.6 1.54% $ 676.5 2.16% $1,085.8 3.93%
======= ========= ========
Non accrual loans ............. $ 458.4 $ 566.5 $ 946.4
Repossessed assets ............ 81.2 110.0 139.4
------- --------- --------
Total non-performing assets $ 539.6 $ 676.5 $1,085.8
======= ========= ========
- --------------------------------------------------------------------------------
(1) Equipment Finance non-performing assets include accounts that are less
than sixty days past due.
2004 Trends
The 2004 delinquency levels improved at a lower rate year over year than
in 2003.
o Specialty Finance -- commercial delinquency was essentially flat in
dollar amount with last year, but down in percentage due to
portfolio growth. Improvement in the Small Business Lending
portfolio was offset by an increase in the vendor programs.
o Commercial Finance past due levels were down modestly from 2003 due
to improvement in the Business Credit (asset-based lending) unit and
in the telecommunications portfolio. An increase in factoring
delinquency (primarily one large credit) offset these declines.
o Equipment Finance delinquency reflected continued improvement across
virtually all product lines in relation to 2003.
o Capital Finance improvement from 2003 included lower delinquency in
the project finance portfolio, though delinquency was up in the
regional aerospace portfolio.
o Specialty Finance -- consumer home lending delinquency was up in
dollar amount but down as a percentage of finance receivables from
2003, reflecting a return to on-balance sheet funding of the home
lending portfolio. Delinquency on a managed basis has been
relatively stable in percentage terms over the periods presented.
Similarly, the rate of improvement in non-performing assets slowed in
2004, reflecting the same trends discussed above. The more dramatic improvement
in Capital Finance non-performing assets reflected the work-out of a significant
project finance account. Non-performing telecommunications accounts (in
Commercial Finance) totaled $21.0 million and $57.2 million at December 31, 2004
and 2003, respectively.
28
2003 Trends
The December 31, 2003 delinquency rate of 2.16% marked the fifth
consecutive quarter of improvement and was the lowest level since December 1999.
Past due loans were down across virtually all segments with the greatest
improvement in Equipment Finance. The fluctuations in Equipment Finance and
Specialty Finance -- commercial also reflect the transfer in March 2003 of small
business loans and leases from Equipment Finance to Specialty Finance --
commercial. Past due accounts related to these transferred portfolios
approximated $66 million, $79 million and $65 million at December 31, 2003,
December 31, 2002 and September 30, 2002, respectively. Prior periods have not
been restated to reflect this transfer.
o Absent the transfer, Specialty Finance -- commercial delinquency
improved, reflecting the continued decline in past dues in
International portfolios, including European operations where
servicing was centralized during 2003.
o The Commercial Finance decline from both 2002 periods was due to
improvements in both the Commercial Services (factoring) and
Business Credit (asset-based lending) units.
o Capital Finance delinquency improved $76.0 million during 2003, due
to the return to earning status of a waste-to-energy project and
lower delinquency in the aerospace portfolio.
o Though up in amount from 2002, Specialty Finance -- consumer home
lending delinquency as a percentage of finance receivables improved,
reflecting a return to on-balance sheet growth in this portfolio
during 2003. This is in contrast to 2002 when higher quality
consumer assets were securitized to meet funding requirements. As
shown in the table below, consumer delinquency on a managed basis
has been relatively stable in percentage over the periods presented.
Non-performing assets also declined and reached the lowest level since
1999, reflecting the same trends discussed above, namely considerable
improvement in the Equipment Finance and Capital Finance segments. In addition
to the above mentioned waste-to-energy project, the Capital Finance reduction
from December 31, 2002 also reflected the conversion of United Airlines
receivables ($95.7 million) to short-term operating leases following the
carrier's December 2002 Chapter 11 bankruptcy filing. Non-performing
telecommunications accounts (in Commercial Finance) totaled $57.2 million and
$120.2 million at December 31, 2003, and December 31, 2002, respectively.
Managed past due loans in dollar amount and as a percentage of managed
financial assets are shown in the table below ($ in millions).
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Specialty Finance -- commercial $402.1 2.82% $ 418.4 3.19% $ 371.7 3.07%
Commercial Finance .............. 124.7 1.06% 131.9 1.14% 222.7 2.38%
Equipment Finance ............... 90.3 0.96% 243.6 2.49% 545.7 4.78%
Capital Finance ................. 33.5 1.13% 30.5 1.11% 102.7 3.48%
------ -------- --------
Total Commercial Segments ..... 650.6 1.69% 824.4 2.22% 1,242.8 3.47%
Specialty Finance -- consumer ... 227.8 3.45% 197.6 4.22% 152.8 4.36%
------ -------- --------
Total ......................... $878.4 1.95% $1,022.0 2.44% $1,395.6 3.55%
====== ======== ========
Managed past due loans decreased both in dollar amount and as a percentage
of managed financial assets, reflecting the same factors that are discussed in
the owned delinquency analysis.
29
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are summarized in the following table
($ in millions).
Years Ended Three Months
December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002(3)
---------- --------- ------------ -------------
Salaries and employee benefits ............. $ 612.2 $ 529.6 $ 126.8 $ 517.4
Other general operating expenses ........... 434.2 383.3 105.8 380.6
---------- --------- --------- ---------
Salaries and general operating expenses .... $ 1,046.4 $ 912.9 $ 232.6 $ 898.0
========== ========= ========= =========
Efficiency ratio(1) ........................ 42.6% 41.7% 38.6% 34.9%
Salaries and general operating expenses as a
percentage of AMA(2) .................... 2.20% 1.99% 0.52% 1.91%
Average Managed Assets ..................... $ 47,519.3 $45,809.3 $44,361.8 $47,126.9
- --------------------------------------------------------------------------------
(1) Efficiency ratio is the ratio of salaries and general operating expenses
to operating margin, excluding the provision for credit losses.
(2) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by CIT.
(3) The September 30, 2002 data excludes expenses relating to TCH, a Tyco
acquisition company that had temporary status with respect to Tyco's
acquisition of CIT.
Salaries and general operating expenses for the year ended December 31,
2004 increased from 2003 primarily due to the following: higher incentive-based
compensation (including restricted stock awards); increase in professional fees,
including higher compliance-related costs related to the Sarbanes-Oxley Act;
increased benefit expense; increased maintenance expenses related to operating
lease equipment and higher marketing expenses. Salaries and general operating
expenses for the year ended December 31, 2003 increased from the prior periods
primarily due to incentive-based compensation and other employee benefit
expenses, as well as from expenses associated with our return to public
ownership.
Personnel totaled approximately 5,860 at December 31, 2004 compared to
5,800 at December 31, 2003, 5,835 at December 31, 2002, and 5,850 at September
30, 2002. The increase during 2004 was primarily due to the European vendor
finance business acquisition.
The efficiency ratio deteriorated for the year ended December 31, 2004
compared to 2003, as the rate of expense increase outpaced revenue growth.
Efficiency ratio improvements in both Specialty Finance segments in 2004 were
offset by a modest increase in the other segments and higher corporate expense.
The deterioration in the efficiency ratio for the year ended December 31, 2003
and three months ended December 31, 2002 compared to September 30, 2002 is
principally the result of lower revenues in the respective periods. Similarly,
the deterioration in the ratio of salaries and general operating expenses to AMA
from the September 30, 2002 fiscal year reflects reduced levels of average
managed assets.
Business unit and corporate management monitor expenses closely, and
actual results are reviewed monthly in comparison to business plan and forecast.
An approval and review procedure is in place for major capital expenditures,
such as computer equipment and software, including post-implementation
evaluations.
Improvement in the efficiency ratio is one of management's primary goals
for 2005 and several initiatives are underway to reduce costs, including system
consolidations and process efficiency improvements. We have the capacity to grow
assets without commensurate expense increases, and we expect compliance-related
expenses to decline from 2004. Additionally, we remain focused on growing
non-spread revenue.
Gain on Redemption of Debt
In January 2004 and December 2003, we called at par $1.25 billion of
long-term debt securities. These notes were listed on the New York Stock
Exchange under the ticker symbols CIC and CIP and were commonly known as PINEs
("Public Income Notes"). The securities 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
30
prospectuses. The call of $512 million of notes on January 15, 2004 resulted in
a pretax gain of $41.8 million ($25.5 million after tax) in the first quarter of
2004. The December 2003 call of $735 million of notes resulted in a pretax gain
of $50.4 million ($30.8 million after tax) during the fourth quarter of 2003.
Income Taxes
The following table sets forth the certain information concerning our
income taxes ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
-------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------ -------------
Provision for income taxes .......... $483.2 $365.0 $92.0 $374.0
Effective tax rate .................. 39.0% 39.0% 39.0% (5.9%)
Effective tax rate excluding goodwill
impairment and TCH results ........ 39.0% 39.0% 39.0% 38.1%
The effective tax rate exceeds the U.S. Federal tax rate of 35% primarily
due to state and local, and foreign income taxes.
At December 31, 2004, CIT had U.S. federal net operating losses of
approximately $2.0 billion, which expire in various years beginning in 2011. In
addition, CIT has various state net operating losses that will expire in various
years beginning in 2005. Federal and state operating losses may be subject to
annual use limitations under section 382 of the Internal Revenue Code of 1986,
as amended, and other limitations under certain state laws. Management believes
that CIT will have sufficient taxable income in future years and can avail
itself of tax planning strategies in order to utilize these federal losses
fully. Accordingly, we do not believe a valuation allowance is required with
respect to these federal net operating losses. As of December 31, 2004, based on
management's assessment as to realizability, the net deferred tax liability
includes a valuation allowance of approximately $7.4 million relating to state
net operating losses.
CIT has open tax years in the U.S., Canada and other jurisdictions that
are currently under examination by the applicable taxing authorities, and
certain tax years that may in the future be subject to examination. Management
periodically evaluates the adequacy of our related tax reserves, taking into
account our open tax return positions, tax assessments received, tax law changes
and third party indemnifications. We believe that our tax reserves are
appropriate. The final determination of tax audits could affect our tax
reserves.
We are currently evaluating certain provisions included in the American
Jobs Creation Act of 2004 that could result in an increase in our business
activity in certain foreign jurisdictions. These provisions, if implemented,
could result in a reduction in our future effective tax rate.
See Item 9A. Controls and Procedures for a discussion of internal controls
relating to income taxes.
31
Financing and Leasing Assets
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions).
Percentage Change
--------------------------
December 31, December 31, December 31, Dec. '04 vs. Dec. '03 vs.
2004 2003 2002 Dec '03 Dec. '02
----------- ----------- ----------- ------------ ------------
Specialty Finance -- commercial Segment
Finance receivables ................ $ 8,805.7 $ 7,996.5 $ 7,002.5 10.1% 14.2%
Operating lease equipment, net ..... 1,078.7 959.5 1,257.3 12.4 (23.7)
Finance receivables held for sale .. 1,288.4 548.1 764.3 135.1 (28.3)
--------- --------- ---------
Owned assets ..................... 11,172.8 9,504.1 9,024.1 17.6 5.3
Finance receivables securitized and
managed by CIT ................... 4,165.5 4,557.9 4,332.6 (8.6) 5.2
--------- --------- ---------
Managed assets ..................... 15,338.3 14,062.0 13,356.7 9.1 5.3
--------- --------- ---------
Specialty Finance -- consumer Segment
Finance receivables -- home lending 4,896.8 2,513.1 962.7 94.9 161.0
Finance receivables -- other ....... 236.0 151.2 -- 56.1 --
Finance receivables held for sale .. 241.7 150.0 330.0 61.1 (54.5)
--------- --------- ---------
Owned assets ..................... 5,374.5 2,814.3 1,292.7 91.0 117.7
Home lending receivables
securitized and managed by CIT ... 1,228.7 1,867.6 2,213.6 (34.2) (15.6)
--------- --------- ---------
Managed assets ..................... 6,603.2 4,681.9 3,506.3 41.0 33.5
--------- --------- ---------
Commercial Finance Segment
Commercial Services
Finance receivables .............. 6,204.1 6,325.8 4,392.5 (1.9) 44.0
Business Credit
Finance receivables .............. 5,576.3 5,247.1 4,912.7 6.3 6.8
--------- --------- ---------
Owned assets ................... 11,780.4 11,572.9 9,305.2 1.8 24.4
--------- --------- ---------
Equipment Finance Segment
Finance receivables ................ 6,373.1 6,317.9 7,357.8 0.9 (14.1)
Operating lease equipment, net ..... 440.6 419.6 668.3 5.0 (37.2)
Finance receivables held for sale .. 110.7 220.2 119.1 (49.7) 84.9
--------- --------- ---------
Owned assets ..................... 6,924.4 6,957.7 8,145.2 (0.5) (14.6)
Finance receivables securitized
and managed by CIT ............... 2,915.5 3,226.2 3,936.2 (9.6) (18.0)
--------- --------- ---------
Managed assets ..................... 9,839.9 10,183.9 12,081.4 (3.4) (15.7)
--------- --------- ---------
Capital Finance Segment
Finance receivables ................ 2,956.2 2,748.6 2,993.1 7.6 (8.2)
Operating lease equipment, net ..... 6,771.6 6,236.4 4,779.0 8.6 30.5
--------- --------- ---------
Owned assets ..................... 9,727.8 8,985.0 7,772.1 8.3 15.6
--------- --------- ---------
Other -- Equity Investments ........... 181.0 249.9 335.4 (27.6) (25.5)
--------- --------- ---------
Total
Finance receivables ................ $35,048.2 $31,300.2 $27,621.3 12.0 13.3
Operating lease equipment, net ..... 8,290.9 7,615.5 6,704.6 8.9 13.6
Finance receivables held for sale .. 1,640.8 918.3 1,213.4 78.7 (24.3)
--------- --------- ---------
Financing and leasing assets
excluding equity investments ..... 44,979.9 39,834.0 35,539.3 12.9 12.1
Equity investments (included in
other assets) .................... 181.0 249.9 335.4 (27.6) (25.5)
--------- --------- ---------
Owned assets ..................... 45,160.9 40,083.9 35,874.7 12.7 11.7
Finance receivables securitized
and managed by CIT ............... 8,309.7 9,651.7 10,482.4 (13.9) (7.9)
--------- --------- ---------
Managed assets ................... $53,470.6 $49,735.6 $46,357.1 7.5% 7.3%
========= ========= =========
The increase in owned assets during 2004 was driven by: the combination of
a strong home lending refinancing market and bulk receivable purchases in the
Specialty Finance home lending portfolio; strategic acquisitions; and aerospace
deliveries in Capital Finance. The decline in receivables securitized reflects
our return to funding home lending growth on-balance sheet and a lower level of
commercial equipment securitizations.
32
The primary factors that fueled the increase in financing and leasing
portfolio assets during 2003 include: two factoring acquisitions in Commercial
Services, growth in Business Credit, the combination of a strong refinancing
market and our decision to limit securitization activity in the Specialty
Finance home lending portfolio, a rail acquisition and deliveries of aerospace
assets in Capital Finance.
The following table summarizes 2003 and 2004 significant acquisitions ($
in millions).
Asset Type Assets Closing Seller
- ---------- ------ ------- ------
Railcars ..... $ 410 2nd quarter 2003 Flex Leasing
Factoring .... 450 3rd quarter 2003 GECC
Factoring .... 1,000 4th quarter 2003 HSBC
Technology ... 520 2nd quarter 2004 GATX
Vendor finance 700 3rd quarter 2004 Citicapital
Student loans 4,300 1st quarter 2005 Education Lending Group Inc.
(public company tender offer)
Business Volumes
The following table presents new business origination volume (excluding
factoring) by segment ($ in millions).
Years Ended Three Months
December 31, Ended Year Ended
-------------------- December 31, September 30,
2004 2003 2002 2002
--------- --------- ------------ -------------
Specialty Finance -- commercial $ 9,962.2 $ 9,047.3 $2,120.7 $ 7,430.5
Specialty Finance -- consumer . 4,881.8 3,382.3 577.5 2,675.7
Commercial Finance ............ 2,339.1 2,480.3 657.6 2,112.4
Equipment Finance ............. 4,582.4 3,824.1 1,184.4 4,480.7
Capital Finance ............... 1,791.1 1,498.1 571.9 2,365.8
--------- --------- -------- ---------
Total new business volume ... $23,556.6 $20,232.1 $5,112.1 $19,065.1
========= ========= ======== =========
- --------------------------------------------------------------------------------
(1) During the March 2003 quarter, certain portfolios were transferred from
Equipment Finance to Specialty Finance. New business volumes associated
with the transferred portfolios were $208.6 million for the three months
ended December 31, 2002 and $1,743.0 million for the year ended September
30, 2002. Prior period data has not been restated to conform to present
period presentation.
New origination volume for 2004 included stronger volume from our
Specialty Finance vendor finance, international and home lending units, as well
as improved demand for financing in industries such as construction and
corporate aircraft in Equipment Finance. New origination volume for the year
ended December 31, 2003 included stronger volume from our Specialty Finance
vendor relationships and home lending units, the more traditional financing
transactions in Equipment Finance and working capital financings in Business
Credit.
For the year ended December 31, 2004, new business volume in Specialty
Finance -- consumer was $4.9 billion, up 44% from 2003, as the interest rate
environment remained relatively low, demand for first mortgage financing
remained strong, and that resulted in strong production from our broker
origination channel. Softness in the home lending securitization markets
afforded us the opportunity to purchase newly originated portfolios in bulk from
other home lending originators.
Non-strategic Business Lines
The table below summarizes the previously targeted non-strategic business
lines. In addition, we previously ceased making new venture capital investments
beyond existing commitments. See "Venture Capital Investments" below for more
information. ($ in millions)
December 31, December 31, December 31,
Portfolio 2004 2003 2002
- --------- ------------ ------------ ------------
Manufactured housing .................. $553(1) $584 $ 624
Franchise finance ..................... 25 102 322
Owner-operator trucking ............... 28 91 218
Recreational marine & vehicle, other .. 2 146 175
---- ---- ------
Total on-balance sheet financing
and leasing assets ............... $608(1) $923 $1,339
==== ==== ======
- --------------------------------------------------------------------------------
(1) Includes approximately $300 million of manufactured housing assets that
were sold in January 2005.
33
During 2004 we sold virtually all of the recreational marine and vehicle
receivables, as well as a significant portion of the franchise portfolio. During
the fourth quarter of 2004, we considered additional opportunities for more
rapid liquidation of certain non-strategic assets, and as a result, we entered
into an agreement to sell approximately $300 million of the manufactured housing
portfolio. The decision to sell manufactured housing receivables resulted in the
reclassification of the finance receivables to assets held for sale, along with
application of lower of cost or market value accounting, which resulted in a
fourth quarter pretax charge of $15.7 million, or $0.04 diluted EPS. The
manufactured housing sale closed in January 2005.
Venture Capital Investments
During the second quarter of 2004, we closed the sale of approximately $68
million of the direct investment portfolio. Our portfolio of direct and private
fund venture capital equity investments is summarized in the following table ($
in millions).
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Total investment balance ............. $181.1 $249.9 $335.4
Direct investments ................... 30.1 $101.1 $188.8
Number of companies .................. 8 47 57
Private equity funds
(includes funds sold in 2005) ...... 151.0 $148.8 $146.6
Number of funds ...................... 52 52 52
Remaining commitments ................ $ 79.8 $124.2 $169.3
During the fourth quarter of 2004 we also entered into an agreement to
sell the majority of the private equity funds. The venture capital investments
were marketed to prospective buyers and written down to an estimated sales value
which resulted in a fourth quarter pretax charge of $14.0 million or $0.04
diluted EPS. These actions are the continuation of our ongoing initiative to
re-deploy capital in higher return businesses. We will consider additional
opportunities for more rapid liquidation of non-strategic assets to the extent
available.
Concentrations
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate
represented 5.3% of our total financing and leasing assets at December 31, 2004
(the largest account being less than 1.0%), 5.7% at December 31, 2003, and 5.5%
at December 31, 2002.
Operating Leases
The following table summarizes the total operating lease portfolio by
segment ($ in millions).
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Capital Finance -- aerospace ....... $4,461.0 53.8% $4,141.1 54.4% $3,185.4 47.5%
Capital Finance -- rail and other .. 2,310.6 27.9% 2,095.3 27.5% 1,593.6 23.8%
Specialty Finance -- commercial .... 1,078.7 13.0% 959.5 12.6% 1,257.3 18.8%
Equipment Finance .................. 440.6 5.3% 419.6 5.5% 668.3 9.9%
-------- ----- -------- ----- -------- -----
Total ........................... $8,290.9 100.0% $7,615.5 100.0% $6,704.6 100.0%
======== ===== ======== ===== ======== =====
o The increases in the Capital Finance aerospace portfolio reflect
deliveries of new commercial aircraft.
o The increase in Capital Finance -- rail and other was due to strong
rail volume in 2004 and a rail acquisition in 2003.
o The Specialty Finance and Equipment Finance operating lease
portfolios reflect a general trend through 2003 toward financing
equipment through finance leases and loans, rather than operating
leases. Specialty Finance increased in 2004 due to a technology
financing business acquisition.
34
Management strives to maximize the profitability of the lease equipment
portfolio by balancing equipment utilization levels with market rental rates and
lease terms. Equipment not subject to lease agreements totaled $118.3 million,
$265.9 million and $385.9 million at December 31, 2004, 2003 and 2002,
respectively. The 2004 reduction was due to fewer commercial aerospace and rail
assets off lease as well as the sale of a test equipment rental business. The
higher December 31, 2002 off lease equipment balance primarily reflects the
higher level of commercial aircraft and rail assets off lease in Capital Finance
at that time. Weakness in the commercial airline industry could adversely impact
prospective rental and utilization rates.
Leveraged Leases
The major components of net investments in leveraged leases include:
commercial aerospace transactions, including tax-optimized leveraged leases,
which generally have increased risk of loss in default for lessors in relation
to conventional lease structures due to additional leverage and the third party
lender priority recourse to the equipment in these transactions, project finance
transactions, primarily in the power and utility sectors, and rail transactions.
The balances are as follows ($ in millions):
December 31, December 31, December 31,
2004 2003 2002
-------- -------- --------
Transaction Component
Commercial aerospace -- non-tax optimized .. $ 336.6 $ 232.5 $ 251.5
Commercial aerospace -- tax optimized ...... 221.0 217.9 215.7
Project finance ............................ 334.9 325.0 293.5
Rail ....................................... 233.9 225.4 237.8
Other ...................................... 115.4 122.1 153.7
-------- -------- --------
Total leveraged lease transactions ......... $1,241.8 $1,122.9 $1,152.2
======== ======== ========
As a percentage of finance receivables ..... 3.5% 3.6% 4.2%
======== ======== ========
Joint Venture Relationships
Our strategic relationships with industry-leading equipment vendors are a
significant origination channel for our financing and leasing activities. These
vendor alliances include traditional vendor finance programs, joint ventures and
profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya Inc.
are among our largest alliances. On September 8, 2004, CIT and Dell agreed to
extend and modify the terms of the relationship. The new agreements grants Dell
the option to purchase CIT's 30% interest in Dell Financial Services L.P.
("DFS") in February 2008 and extends CIT's right to purchase a percentage of
DFS's finance receivables through January 2010. The joint venture agreement with
Snap-on runs until January 2006. The Avaya agreement, which relates to profit
sharing on a CIT direct origination program, extends through September 2006.
Our financing and leasing assets include amounts related to the Dell,
Snap-on and Avaya joint venture programs. These amounts include receivables
originated directly by CIT as well as receivables purchased from joint venture
entities. The asset balances for these programs are as follows ($ in millions):
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Owned Financing and Leasing Assets
Dell .................................. $3,389.4 $2,578.2 $2,608.1
Snap-on ............................... 1,114.7 1,093.4 975.6
Avaya Inc. ............................ 620.7 828.6 965.1
Securitized Financing and
Leasing Assets
Dell .................................. $2,489.2 $2,488.6 $1,663.5
Snap-on ............................... 64.8 68.2 87.4
Avaya Inc. ............................ 599.6 781.0 968.0
International Financing and Leasing
Assets Included Above
Dell -- owned ......................... $1,408.7 $1,170.1 $ 909.9
Dell -- securitized ................... 5.1 17.0 --
35
Returns relating to the joint venture relationships (i.e., net income as a
percentage of average managed assets) for 2004 were somewhat in excess of CIT's
consolidated returns. 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 20 -- Certain Relationships and Related Transactions.
Home Lending Portfolio
The Specialty Finance home lending portfolio totaled $5.1 billion (owned)
and $6.3 billion (managed) at December 31, 2004, representing 11.2% and 11.8% of
owned and managed assets, respectively. Selected statistics for our managed home
lending portfolio are as follows:
o 91% first mortgages.
o Average loan size of approximately $94.5 thousand.
o Top 5 state concentrations (California, Texas, Florida, Ohio, and
Pennsylvania) represented an aggregate 45% of the managed portfolio.
o 63% fixed-rate with an average loan-to-value of 77% and an average
FICO score of 633.
o Delinquencies (sixty days or more) were 3.59%, 4.21%, and 4.36% at
December 31, 2004, 2003 and 2002.
o Charge-offs on a managed basis were 1.12%, 0.95%, 1.03% and 0.83%
for the years ended December 31, 2004 and 2003, the three months
ended December 31, 2002 and the year ended September 30, 2002,
respectively.
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. For each period presented, our managed asset
geographic composition did not differ significantly from our owned asset
geographic composition.
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
State
California .................... 10.3% 10.2% 9.8%
Texas ......................... 7.8% 7.7% 7.0%
New York ...................... 6.8% 7.4% 7.9%
All other states .............. 52.8% 54.0% 54.6%
---- ---- ----
Total U.S. ................. 77.7% 79.3% 79.3%
==== ==== ====
Country
Canada ........................ 5.5% 5.1% 5.0%
England ....................... 3.9% 2.8% 3.2%
France ........................ 1.4% 1.1% 1.0%
Australia ..................... 1.3% 1.3% 1.3%
China ......................... 1.2% 0.9% 1.2%
Germany ....................... 1.2% 1.0% 1.1%
Mexico ........................ 1.1% 1.0% 1.0%
All other countries ........... 6.7% 7.5% 6.9%
---- ---- ----
Total Outside U.S. ......... 22.3% 20.7% 20.7%
==== ==== ====
Industry Composition
The following discussions provide information with respect to selected
industry compositions.
36
Aerospace
Our commercial and regional aerospace portfolios reside in the Capital
Finance segment.
The commercial aircraft all comply with Stage III noise regulations. The
increase during 2003 was due to new aircraft deliveries from both Airbus and
Boeing. The following table summarizes the composition of the commercial
aerospace portfolio ($ in millions):
December 31, 2004 December 31, 2003 December 31, 2002
--------------------- -------------------- -------------------
Net Net Net
Investment Number Investment Number Investment Number
---------- ------ ---------- ------ ---------- ------
By Region:
Europe .......................... $2,160.0 72 $1,991.0 65 $1,506.5 51
North America(1) ................ 1,057.7 66 1,029.7 72 1,042.2 75
Asia Pacific .................... 1,242.4 46 1,013.6 40 853.6 35
Latin America ................... 611.3 25 612.7 28 595.9 29
Africa / Middle East ............ 54.2 3 69.1 4 74.6 4
-------- --- -------- --- -------- ---
Total .............................. $5,125.6 212 $4,716.1 209 $4,072.8 194
======== === ======== === ======== ===
By Manufacturer:
Boeing .......................... $2,558.8 133 $2,581.7 140 $2,388.1 135
Airbus .......................... 2,536.9 70 2,114.6 57 1,647.9 42
Other ........................... 29.9 9 19.8 12 36.8 17
-------- --- -------- --- -------- ---
Total .............................. $5,125.6 212 $4,716.1 209 $4,072.8 194
======== === ======== === ======== ===
By Body Type(2):
Narrow .......................... $3,894.9 168 $3,415.7 159 $2,799.4 142
Intermediate .................... 842.7 18 877.0 18 859.2 17
Wide ............................ 358.1 17 403.6 20 377.4 18
Other ........................... 29.9 9 19.8 12 36.8 17
-------- --- -------- --- -------- ---
Total .............................. $5,125.6 212 $4,716.1 209 $4,072.8 194
======== === ======== === ======== ===
By Product:
Operating lease ................. $4,324.6 167 $4,011.7 159 $3,123.0 131
Leverage lease (other)(3) ....... 336.6 12 232.5 12 251.5 13
Leverage lease (tax optimized)(3) 221.0 9 217.9 9 215.7 9
Capital lease ................... 137.4 6 135.6 7 267.8 13
Loan ............................ 106.0 18 118.4 22 214.8 28
-------- --- -------- --- -------- ---
Total .............................. $5,125.6 212 $4,716.1 209 $4,072.8 194
======== === ======== === ======== ===
Other Data:
Off-lease aircraft(4) .............. 2 5 9
Number of accounts ................. 92 84 78
Weighted average age of
fleet (years)(5) ................ 6 6 7
Largest customer net investment .... $ 286.4 $ 268.6 $ 193.0
- --------------------------------------------------------------------------------
(1) Comprised of net investments in the U.S. and Canada of $877 million (60
aircraft) and $180.7 million (6 aircraft) at December 31, 2004, $822.7
million (66 aircraft) and $207.0 million (6 aircraft) at December 31,
2003, and $832.7 million (69 aircraft) and $209.5 million (6 aircraft) at
December 31, 2002, 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 Douglas DC10
series aircraft.
(3) 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.
(4) At December 31, 2004, 1 of the 2 aircraft has been remarketed with a lease
pending.
(5) Based on dollar value weighted assets.
The top five commercial aerospace exposures totaled $1,076.0 million at
December 31, 2004. All top five are to carriers outside of the U.S. The largest
exposure to a U.S. carrier at December 31, 2004 was $136.7 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.
37
The regional aircraft portfolio at December 31, 2004 consisted of 121
planes and a net investment of $302.6 million. The carriers are primarily
located in North America and Europe. Operating leases account for about 42% of
the portfolio, with the remainder capital leases or loans. At December 31, 2003
the portfolio consisted of 119 planes and a net investment of $291.6 million.
The following is a list of our exposure to current or previously-announced
aerospace carriers that have filed for bankruptcy protection and the current
status of the related aircraft at December 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 $81.3 million. 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 $46.4 million. As of
December 31, 2004, in connection with United Airlines' filing under
Chapter 11, we have an outstanding balance of $28.3 million (with a
commitment of $75 million) relating to a debtor-in-possession
facility. During the third quarter of 2004, as co-arranger with
three other lenders, CIT committed to $250 million of an aggregate
$1.0 billion facility, which is secured by unencumbered aircraft,
among other collateral. Subsequent to year end, CIT syndicated its
exposure down to $50 million.
o US Airways -- On September 11, 2004, US Airways Group, Inc.
announced that it had filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Under an existing agreement, CIT has an
operating leases where US Airways is the lessee of one 737-300, for
a total net investment of $6.1 million.
o Air Canada -- Emerged from bankruptcy during the last quarter of
2004. Our net investment in aircraft is approximately $46.7 million,
relating to one CIT-owned Boeing 767 aircraft.
o Avianca Airlines -- Emerged from bankruptcy during the last quarter
of 2004. Avianca is a lessee of one MD 80 aircraft and one Boeing
757, with a combined net investment of $30.4 million.
Our aerospace assets include both operating leases and capital leases.
Management monitors economic conditions affecting equipment values, trends in
equipment values, and periodically obtains third party appraisals of commercial
aerospace equipment, which include projected rental rates. We adjust the
depreciation schedules of commercial aerospace equipment on operating leases or
residual values underlying capital leases when required. Aerospace assets are
reviewed for impairment annually, or more often when events or circumstances
warrant. An aerospace asset is 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. Aerospace depreciation
expense for the year ended December 31, 2004 totaled $215.8 million and included
a $14.8 million impairment charge taken in the second quarter to reduce certain
older, out of production aircraft to estimated fair value. The additional
depreciation expense primarily related to aircraft with a single lessee with
upcoming lease terminations and for which market rental rates have recently
declined. Therefore, the projected cash flows no longer supported the
corresponding carrying value, resulting in the additional depreciation charge.
Commercial airline equipment utilization is high, with only two aircraft
off-lease (with a book value of $12.9 million) at December 31, 2004, which
demonstrates our ability to place aircraft. Despite some recent improvement in
rental rates, current placements remain at compressed rental rates, which
reflects current market conditions. Generally, leases are being written for
terms between three and five years. Within the regional aircraft portfolio at
December 31, 2004, there were 6 aircraft off-lease with a total book value of
approximately $22.0 million.
38
See table in "Risk Management" section for additional information
regarding commitments to purchase additional aircraft. See Note 17 --
Commitments and Contingencies for additional information regarding commitments
to purchase additional aircraft. See Note 5 -- Concentrations for further
discussion on concentrations.
Risk Management
Our business activities involve various elements of risk. We consider the
principal types of risk to be credit risk (including credit, collateral and
equipment risk) and market risk (including interest rate, foreign currency and
liquidity risk). Managing risks is essential to conducting our commercial and
consumer businesses and to our profitability. Accordingly, our risk management
systems and procedures are designed to identify and analyze key business risks,
to set appropriate policies and limits, and to continually monitor these risks
and limits by means of reliable administrative and information systems, along
with other policies and programs. During 2003, we further elevated the
prominence of risk management throughout the organization with the establishment
of the position of Vice Chairman & Chief Risk Officer within the Office of the
Chairman.
We review and monitor credit exposures, both owned and managed, on an
ongoing basis to identify, as early as possible, customers that may be
experiencing declining creditworthiness or financial difficulty, and
periodically evaluate the performance of our finance receivables across the
entire organization. We monitor concentrations by borrower, industry, geographic
region and equipment type, and we set or modify exposure limits as conditions
warrant, to minimize credit concentrations and the risk of substantial credit
loss. We have maintained a standard practice of reviewing our aerospace
portfolio regularly and, in accordance with SFAS No. 13 and SFAS No. 144, we
test for asset impairment based upon projected cash flows and relevant market
data with any impairment in value charged to earnings. Given the developments in
the aerospace sector during 2002 and 2003, performance, profitability and
residual values relating to aerospace assets have been reviewed more frequently
with the Executive Credit Committee. In conjunction with our capital allocation
initiatives, we are in the process of enhancing our credit risk management
practices, including portfolio modeling, probability of default analysis,
further development of risk-based pricing tools, and reserve for credit loss
analysis.
Our Asset Quality Review Committee is comprised of members of senior
management, including the Vice Chairman & Chief Risk Officer, the Vice Chairman
& Chief Financial Officer, the Chief Credit Officer, the Controller and the
Director of Credit Audit. Periodically, this committee meets with senior
executives of our business units and corporate credit risk management group to
review portfolio performance, including the status of individual financing and
leasing assets, owned and managed, to obligors with higher risk profiles. In
addition, this committee periodically meets with the Chief Executive Officer of
CIT to review overall credit risk, including geographic, industry and customer
concentrations, and the reserve for credit losses.
Credit Risk Management
We have developed systems specifically designed to manage credit risk in
each of our business segments. We evaluate financing and leasing assets for
credit and collateral risk during the credit granting process and periodically
after the advancement of funds. The Corporate Credit Risk Management group,
which reports to the Vice Chairman and Chief Risk Officer, oversees and manages
credit risk throughout CIT. This group includes senior credit executives in each
of the business units. Our Executive Credit Committee includes the Chief
Executive Officer, the Chief Risk Officer and members of the Corporate Credit
Risk Management group. The committee approves transactions which are outside of
established target market definitions and risk acceptance criteria, corporate
exceptions as delineated within the individual business unit credit authority
and transactions that exceed the strategic business units' credit authority. The
Corporate Credit Risk Management group also includes an independent credit audit
function.
Each of our strategic business units has developed and implemented a
formal credit management process in accordance with formal uniform guidelines
established by the credit risk management group. These guidelines set forth risk
acceptance criteria for:
o acceptable maximum credit lines;
o selected target markets and products;
39
o creditworthiness of borrowers, including credit history, financial
condition, adequacy of cash flow, financial performance and quality
of management; and
o the type and value of underlying collateral and guarantees
(including recourse from dealers and manufacturers).
Compliance with established corporate policies and procedures, along with
the credit management processes at each strategic business unit are reviewed by
the credit audit group. The credit audit group examines adherence with
established credit policies and procedures and tests for inappropriate credit
practices, including whether potential problem accounts are being detected and
reported on a timely basis.
Commercial Credit Risk Management -- The commercial credit management process
(other than small ticket leasing transactions) begins with the initial
evaluation of credit risk and underlying collateral at the time of origination
and continues over the life of the finance receivable or operating lease,
including collecting past due balances and liquidating underlying collateral.
Credit personnel review a potential borrower's financial condition,
results of operations, management, industry, customer base, operations,
collateral and other data, such as third party credit reports, to thoroughly
evaluate the customer's borrowing and repayment ability. Borrowers are graded
according to credit quality based upon our uniform credit grading system, which
considers both the borrower's financial condition and the underlying collateral.
Credit facilities are subject to approval within our overall credit approval and
underwriting guidelines and are issued commensurate with the credit evaluation
performed on each borrower.
Consumer and Small Ticket Leasing/Lending -- For consumer transactions and
small-ticket leasing/lending transactions, we employ proprietary automated
credit scoring models by loan type that include customer demographics and credit
bureau characteristics. The profiles emphasize, among other things, occupancy
status, length of residence, employment, debt to income ratio (ratio of total
installment debt and housing expenses to gross monthly income), bank account
references, credit bureau information, combined loan to value ratio, length of
time in business, industry category and geographic location. The models are used
to assess a potential borrower's credit standing and repayment ability
considering the value or adequacy of property offered as collateral. Our credit
criteria include reliance on credit scores, including those based upon both our
proprietary internal credit scoring model and external credit bureau scoring,
combined with judgment. The credit scoring models are regularly reviewed for
effectiveness utilizing statistical tools.
We regularly evaluate the consumer loan portfolio and the small ticket
leasing portfolio using past due, vintage curve and other statistical tools to
analyze trends and credit performance by loan type, including analysis of
specific credit characteristics and other selected subsets of the portfolios.
Adjustments to credit scorecards and lending programs are made when deemed
appropriate. Individual underwriters are assigned credit authority based upon
their experience, performance and understanding of the underwriting policies and
procedures of our consumer and small-ticket leasing operations. A credit
approval hierarchy also exists to ensure that an underwriter with the
appropriate level of authority reviews all applications.
Equipment/Residual Risk Management
We have developed systems, processes and expertise to manage the equipment
and residual risk in our commercial segments. Our process consists of the
following: 1) setting residual value at transaction inception; 2) systematic
residual reviews; and 3) monitoring of residual realizations. Reviews for
impairment are performed at least annually. Residual realizations, by business
unit and product, are reviewed as part of our ongoing financial and asset
quality review, both within the business units and by senior management.
Market Risk Management
Market risk is the risk of loss arising from changes in values of
financial instruments, and includes interest rate risk, foreign exchange risk,
derivative counterparty credit risk and liquidity risk. We engage in
transactions in the normal course of business that expose us to market risks. We
conduct what we believe are appropriate management practices and maintain
policies designed to effectively mitigate such risks. The objectives of our
market risk management efforts are to preserve the economic and accounting
returns of our assets by matching the
40
repricing and maturity characteristics of our assets with that of our
liabilities. Strategies for managing market risks associated with changes in
interest rates and foreign exchange rates are an integral part of the process,
because those strategies affect our future expected cash flows as well as our
cost of capital.
Our Capital Committee sets policies, oversees and guides the interest rate
and currency risk management process, including the establishment and monitoring
of risk metrics, and ensures the implementation of those policies. Other risks
monitored by the Capital Committee include derivative counterparty credit risk
and liquidity risk. The Capital Committee meets periodically and includes the
Chief Executive Officer, Vice Chairman and Chief Financial Officer, Vice
Chairman and Chief Risk Officer, Vice Chairman -- Specialty Finance, Vice
Chairman -- Commercial Finance, Treasurer, and Controller, with business unit
executives serving on a rotating basis.
Interest Rate and Foreign Exchange Risk Management
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 Margin at Risk (MAR), which measures the impact of changing interest
rates upon interest income over the subsequent twelve months. See
Net Finance Margin section for discussion and results of this
simulation.
o Value at Risk (VAR), which measures the net economic value of assets
by assessing the duration of assets and liabilities.
We offer a variety of financing products to our customers, including fixed
and floating-rate loans of various maturities and currency denominations, and a
variety of leases, including operating leases. Changes in market interest rates,
relationships between short-term and long-term market interest rates, or
relationships between different interest rate indices (i.e., basis risk) can
affect the interest rates charged on interest-earning assets differently than
the interest rates paid on interest-bearing liabilities, and can result in an
increase in interest expense relative to finance income. We measure our
asset/liability position in economic terms through duration measures and
sensitivity analysis, and we measure the effect on earnings using maturity gap
analysis. 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 December 31, 2004,
our liability portfolio duration was slightly longer than our asset portfolio
duration.
A matched asset/liability position is generally achieved through a
combination of financial instruments, including commercial paper, medium-term
notes, long-term debt, interest rate and currency swaps, foreign exchange
contracts, and through securitization. We do not speculate on interest rates or
foreign exchange rates, but rather seek to mitigate the possible impact of such
rate fluctuations encountered in the normal course of business. This process is
ongoing due to prepayments, refinancings and actual payments varying from
contractual terms, as well as other portfolio dynamics.
We periodically enter into structured financings (involving the issuance
of both debt and an interest rate swap with corresponding notional principal
amount and maturity) to manage liquidity and reduce interest rate risk at a
lower overall funding cost than could be achieved by solely issuing debt.
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 counterparties.
Derivatives are utilized for economic hedging purposes only, and our 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.
41
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 effectively recorded as an adjustment to the carrying
value of the hedged item, as the offsetting changes in fair value of the swaps
and the hedged items are recorded in earnings.
The following table summarizes the composition of our interest rate
sensitive assets and liabilities before and after swaps:
Before Swaps After Swaps
------------------------- -------------------------
Fixed rate Floating rate Fixed rate Floating rate
---------- ------------- ---------- -------------
December 31, 2004
Assets ................. 55% 45% 55% 45%
Liabilities ............ 60% 40% 46% 54%
December 31, 2003
Assets ................. 57% 43% 57% 43%
Liabilities ............ 63% 37% 49% 51%
Total interest sensitive assets were $41.7 billion and $36.7 billion at
December 31, 2004 and 2003. Total interest sensitive liabilities were $35.9
billion and $31.5 billion at December 31, 2004 and 2003.
Foreign Exchange Risk Management -- To the extent local foreign currency
borrowings are not raised, CIT utilizes foreign currency exchange forward
contracts to hedge or mitigate 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. Translation gains and losses of the underlying foreign net investment, as
well as offsetting derivative gains and losses on designated hedges, are
reflected in other comprehensive income in the Consolidated Balance Sheet. CIT
also utilizes cross currency swaps to hedge currency risk underlying foreign
currency debt and selected foreign currency assets. These swaps are designated
as foreign currency cash flow hedges or foreign currency fair value hedges and
changes in fair value of these contracts are recorded in other comprehensive
income (for cash flow hedges), or effectively as a basis adjustment (including
the impact of the offsetting adjustment to the carrying value of the hedged
item) to the hedged item (for fair value hedges) along with the transaction
gains and losses on the underlying hedged items.
Other Market Risk Management -- CIT also utilizes Treasury locks (bond forwards)
to hedge interest rate risk associated with planned debt issuances and asset
sales. These derivatives are designated as cash flow hedges of a forecasted
transaction, with changes in fair value of these contracts recorded in other
comprehensive income. Gains and losses recorded in other comprehensive income
are reclassified to earnings in the same period that the forecasted transaction
impacts earnings. During 2004, CIT entered into credit default swaps to
economically hedge certain CIT credit exposures. These swaps do not meet the
requirements for hedge accounting treatment and therefore are recorded at fair
value, with both realized and unrealized gains or losses recorded in other
revenue in the consolidated statement of income. See Note 9 -- Derivative
Financial Instruments for further discussion, including notional principal
balances of interest rate swaps, foreign currency exchange forward contracts,
cross currency swaps, Treasury locks, and credit default swaps.
Derivative Risk Management
We enter into interest rate and currency swaps and foreign exchange
forward contracts as part of our overall market risk management practices. We
assess and manage the external and internal risks associated with these
derivative instruments in accordance with the overall operating goals
established by our Capital Committee.
42
External risk is defined as those risks outside of our direct control, including
counterparty credit risk, liquidity risk, systemic risk, legal risk and market
risk. Internal risk relates to those operational risks within the management
oversight structure and includes actions taken in contravention of CIT policy.
The primary external risk of derivative instruments is counterparty credit
exposure, which is defined as the ability of a counterparty to perform its
financial obligations under a derivative contract. We control the credit risk of
our derivative agreements through counterparty credit approvals, pre-established
exposure limits and monitoring procedures.
The Capital Committee, in conjunction with Corporate Risk Management,
approves each counterparty and establishes exposure limits based on credit
analysis and market value. All derivative agreements are entered into with major
money center financial institutions rated investment grade by nationally
recognized rating agencies, with the majority of our counterparties rated "AA"
or better. Credit exposures are measured based on the current market value and
potential future exposure of outstanding derivative instruments. Exposures are
calculated for each derivative contract and are aggregated by counterparty to
monitor credit exposure.
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. Additionally, we target our debt issuance
strategy to achieve a maturity pattern designed to reduce refinancing risk. 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 $4.2 billion at December 31, 2004,
compared with $4.2 billion at December 31, 2003, and $5.0 billion at December
31, 2002. Our targeted U.S. program size remains at $5.0 billion with modest
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. We have aggregate bank facilities of $6.3 billion with $4.2
billion in multi-year facilities.
We maintain registration statements with the Securities and Exchange
Commission ("SEC") covering debt securities that we may sell in the future. At
December 31, 2004, we had $12.7 billion of registered, but unissued, debt
securities available under which we may issue debt securities and other capital
market securities. Term-debt issued during 2004 totaled $12.5 billion: $6.8
billion in variable-rate medium-term notes and $5.7 billion in fixed-rate notes.
Consistent with our strategy of managing debt refinancing risk, the weighted
average maturity of term-debt issued in 2004 was approximately five years.
Included with the fixed rate notes are issuances under a retail note program in
which we offer fixed-rate senior, unsecured notes utilizing numerous
broker-dealers for placement to retail accounts. During the year, we issued $0.4
billion under this program having maturities of between 2 and 10 years. As part
of our strategy to further diversify our funding sources, $3.1 billion of
foreign currency denominated debt was issued during 2004. We plan on continuing
to utilize diversified sources of debt funding to meet our strategic global
growth initiatives.
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 lending receivables and trade accounts
receivable. While these are predominately in the U.S., we also maintain
facilities for Canadian domiciled assets. As of December 31, 2004, we had
approximately $4.2 billion of availability in our committed asset-backed
facilities and $2.4 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.
43
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.
December 31, December 31, December 31,
Liquidity Measurement Current Target 2004 2003 2002
- --------------------- -------------- ------------ ------------ ------------
Commercial paper to total debt .......... Maximum of 15% 11% 13% 16%
Short-term debt to total debt ........... Maximum of 45% 31% 36% 47%
Bank lines to commercial paper .......... Minimum of 100% 150% 149% 148%
Aggregate alternate liquidity* to
short-term debt ...................... Minimum of 75% 108% 93% 75%
- --------------------------------------------------------------------------------
* Aggregate alternative liquidity includes available bank facilities,
asset-backed conduit facilities and cash.
Our credit ratings are an important factor in meeting our earnings and
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 requirement of $4.0 billion.
The following tables summarize significant contractual obligations and
projected cash receipts, and contractual commitments at December 31, 2004 ($ in
millions):
Payments and Collections by Period(3)
--------------------------------------------------------------------
Total 2005 2006 2007 2008 2009+
--------- --------- -------- --------- -------- ---------
Commercial paper ................... $ 4,210.9 $ 4,210.9 $ -- $ -- $ -- $ --
Variable-rate term debt ............ 11,545.0 3,355.4 3,946.3 3,169.0 50.9 1,023.4
Fixed-rate term debt ............... 21,715.1 4,589.4 2,723.6 3,907.6 1,959.0 8,535.5
Preferred capital securities ....... 253.8 1.7 1.7 0.4 -- 250.0
Lease rental expense ............... 149.8 46.7 38.5 30.5 25.5 8.6
--------- --------- -------- --------- -------- ---------
Total contractual obligations ... 37,874.6 12,204.1 6,710.1 7,107.5 2,035.4 9,817.5
--------- --------- -------- --------- -------- ---------
Finance receivables(1) ............. 35,048.2 11,799.5 4,827.0 3,720.8 2,465.3 12,235.6
Operating lease rental income ...... 3,068.2 1,099.9 742.7 445.3 301.9 478.4
Finance receivables held for sale(2) 1,640.8 1,640.8 -- -- -- --
Cash -- current balance ............ 2,210.2 2,210.2 -- -- -- --
Retained interest in securitizations
and other investments(1) ........ 1,228.2 611.5 308.7 155.5 57.4 95.1
--------- --------- -------- --------- -------- ---------
Total projected cash receipts ... 43,195.6 17,361.9 5,878.4 4,321.6 2,824.6 12,809.1
--------- --------- -------- --------- -------- ---------
Net projected cash inflow (outflow) $ 5,321.0 $ 5,157.8 $ (831.7) $(2,785.9) $ 789.2 $ 2,991.6
========= ========= ======== ========= ======== =========
- --------------------------------------------------------------------------------
(1) Based upon contractual cash flows; amount 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.
44
Commitment Expiration by Period
-------------------------------------------------------------
Total 2005 2006 2007 2008 2009+
--------- -------- -------- -------- ------ --------
Credit extensions .............. $ 8,428.3 $1,467.5 $1,047.4 $ 933.2 $863.2 $4,117.0
Aircraft purchases ............. 2,168.0 906.0 1,002.0 260.0 -- --
Letters of credit .............. 1,206.6 1,199.3 7.2 0.1 -- --
Sale-leaseback payments ........ 495.4 31.0 31.0 31.0 31.0 371.4
Other equipment purchases
(primarily rail) ............ 397.0 397.0 -- -- -- --
Venture capital commitments(1) . 79.8 0.5 -- 3.1 5.1 71.1
Guarantees ..................... 133.1 120.9 -- -- 10.5 1.7
Acceptances .................... 16.4 16.4 -- -- -- --
--------- -------- -------- -------- ------ --------
Total contractual commitments $12,924.6 $4,138.6 $2,087.6 $1,227.4 $909.8 $4,561.2
========= ======== ======== ======== ====== ========
- --------------------------------------------------------------------------------
(1) Including amounts relating to venture capital investments sold in 2005.
Internal Controls
The Internal Controls Committee is responsible for monitoring and
improving internal controls and overseeing the internal controls attestation
mandated by Section 404 of the Sarbanes-Oxley Act of 2002 ("SARBOX"), for which
the implementation year is 2004. The committee, which is chaired by the
Controller, includes the CFO, the Director of Internal Audit and other senior
executives in finance, legal, risk management and information technology.
See Item 9A. Controls and Procedures for Management's Report on Internal
Control over Financial Reporting.
Off-balance Sheet Arrangements
Securitization Program
We fund asset originations on our balance sheet by accessing various
sectors of the capital markets, including the term debt and commercial paper
markets. In an effort to broaden funding sources and provide an additional
source of liquidity, we use an array of securitization programs, including both
asset-backed commercial paper and term structures, to access both the public and
private asset-backed securitization markets. Current products in these programs
include receivables and leases secured by equipment as well as consumer loans
secured by residential real estate. The following table summarizes data relating
to our securitization balance and activity ($ in millions).
At or for
At or for the Three At or for the
the Years Ended Months Ended Year Ended
December 31, December 31, September 30,
2004 2003 2002 2002
-------- -------- ------------ -------------
Securitized Assets:
Specialty Finance -- commercial ........ $4,165.5 $4,557.9 $ 4,332.6 $ 4,734.7
Specialty Finance -- home lending ...... 1,228.7 1,867.6 2,213.6 2,115.9
Equipment Finance ...................... 2,915.5 3,226.2 3,936.2 4,384.1
-------- -------- --------- ---------
Total securitized assets ............. $8,309.7 $9,651.7 $10,482.4 $11,234.7
======== ======== ========= =========
Securitized assets as a % of managed assets 15.5% 19.4% 22.6% 23.6%
======== ======== ========= =========
Volume Securitized:
Specialty Finance -- commercial ........ $3,153.8 $3,416.2 $ 590.6 $ 2,602.0
Specialty Finance -- home lending ...... -- 489.2 288.1 2,738.6
Equipment Finance ...................... 1,280.7 1,414.8 310.6 2,327.9
-------- -------- --------- ---------
Total volume securitized ............. $4,434.5 $5,320.2 $ 1,189.3 $ 7,668.5
======== ======== ========= =========
45
During 2004, economics relating to commercial finance receivables
securitization activity declined compared to 2003, resulting in some decrease in
volume. Also, we continued to grow the home lending portfolio on-balance sheet.
Though we were well below this level in 2004, at 4.8%, management targets a
maximum of 15% of pre-tax income from securitization gains.
Under our typical asset-backed securitization, we sell a "pool" of secured
loans or leases to a special-purpose entity ("SPE"), typically a trust. 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." 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. Accordingly, CIT has
no legal obligations to repay the securities in the event of a default by the
SPE. CIT retains the servicing rights 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. Assets securitized are shown in our managed assets and our capitalization
ratios on a managed basis.
During 2003, we successfully completed a consent solicitation to amend the
negative pledge provision in our 1994 debt indenture. This action conforms the
1994 debt indenture to our other agreements and provides flexibility in
structuring our securitizations as accounting sales or secured financings.
In estimating residual cash flows and the value of the retained interests,
we make a variety of financial assumptions, including pool credit losses,
prepayment speeds and discount rates. These assumptions are supported by both
our historical experience and anticipated trends relative to the particular
products securitized. Subsequent to recording the retained interests, we review
them quarterly for impairment based on estimated fair value. These reviews are
performed on a disaggregated basis. Fair values of retained interests are
estimated utilizing current pool demographics, actual note/certificate
outstandings, current and anticipated credit losses, prepayment speeds and
discount rates.
Our retained interests had a carrying value at December 31, 2004 of
$1,155.6 million, including interests in commercial securitized assets of
$1,062.0 million and consumer securitized assets of $93.6 million. The total
retained interest as of December 31, 2004 is comprised of $522.8 million in
over-collateralization, $309.4 million of interest only strips, and $323.4
million of cash reserve accounts. Retained interests are subject to credit and
prepayment risk. As of December 31, 2004, approximately 50% of our outstanding
securitization pool balances are in conduit structures. These assets are subject
to the same credit granting and monitoring processes which are described in the
"Credit Risk Management" section.
Joint Venture Activities
We utilize joint ventures organized through distinct legal entities to
conduct financing activities with certain strategic vendor partners. Receivables
are originated by the joint venture and purchased by CIT. The vendor partner and
CIT jointly own these distinct legal entities, and there is no third-party debt
involved. These arrangements are accounted for using the equity method, with
profits and losses distributed according to the joint venture agreement. See
disclosure in Item 8. Financial Statements and Supplementary Data, Note 20 --
Certain Relationships and Related Transactions.
46
Capitalization
The following table presents information regarding our capital structure
($ in millions).
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Commercial paper ..................................... $ 4,210.9 $ 4,173.9 $ 4,974.6
Bank credit facilities ............................... -- -- 2,118.0
Term debt ............................................ 33,260.1 29,239.2 24,588.7
Preferred capital securities ......................... 253.8 255.5 257.2
Stockholders' equity(1) .............................. 6,073.7 5,427.8 4,968.5
Goodwill and other intangible assets ................. (596.5) (487.7) (400.9)
--------- --------- ---------
Total tangible stockholders' equity and preferred
capital securities .............................. 5,731.0 5,195.6 4,824.8
--------- --------- ---------
Total tangible capitalization ........................ $43,202.0 $38,608.7 $36,506.1
========= ========= =========
Tangible stockholders' equity(1) and Preferred Capital
Securities to managed assets ...................... 10.72% 10.45% 10.41%
- --------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 9 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 European vendor finance acquisition increased goodwill and acquired
intangibles by approximately $80 million.
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. Also see Note 1 -- Summary of Significant
Accounting Policies for information regarding the accounting and reporting for
these securities.
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. The following accounting
estimates, which are based on relevant information available at the end of each
period, include inherent risks and uncertainties related to judgments and
assumptions made by management. We consider the following accounting estimates
to be critical in applying our accounting policies due to the existence of
uncertainty at the time the estimate is made, the likelihood of changes in
estimates from period to period and the potential impact that these estimates
can have on the financial statements.
Investments -- Investments for which CIT does not have the ability to
exercise significant influence and for which there is not a readily determinable
market value, are accounted for at fair value. The majority of these investments
are in our venture capital portfolio. Accordingly, management uses judgment in
determining fair value. Pretax write-downs of $14.0 million and $63.0 million
were taken in 2004 and in 2003 on our venture capital investment portfolio based
on management's estimates of fair value, reflecting our decision to accelerate
the liquidation of these assets via sale and additional fair value data obtained
in the marketing of the portfolio to prospective buyers. As of December 31,
2004, venture capital investments totaled $181.0 million. A 10% fluctuation in
value of venture capital investments equates to $0.05 in diluted earnings per
share.
Charge-off of Finance Receivables -- Finance receivables are reviewed
periodically to determine the probability of loss. Charge-offs are taken after
substantial collection efforts are conducted, considering such factors as the
borrower's financial condition and the value of underlying collateral and
guarantees (including recourse to dealers and manufacturers). Charge-offs for
the year ended December 31, 2004 were $301.2 million.
47
Impaired Loans -- Loan impairment is measured as any shortfall between the
estimated value and the recorded investment for those loans defined as impaired
loans in the application of SFAS 114. The estimated value is determined using
the fair value of the collateral or other cash flows, if the loan is collateral
dependent, or the present value of expected future cash flows discounted at the
loan's effective interest rate. The determination of impairment involves
management's judgment and the use of market and third party estimates regarding
collateral values. Valuations in the level of impaired loans and corresponding
impairment as defined under SFAS 114 affect the level of the reserve for credit
losses. At December 31, 2004, the reserve for credit losses includes a $60.4
million impairment valuation component. A 10% fluctuation in this valuation
equates to $0.02 in diluted earnings per share.
Reserve for Credit Losses -- The 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 reserve for credit
losses.
The reserve for credit losses is reviewed for adequacy based on portfolio
collateral values and credit quality indicators, including charge-off
experience, levels of past due loans and non-performing assets, evaluation of
portfolio diversification/concentration and economic conditions. We review
finance receivables periodically to determine the probability of loss, and
record charge-offs after considering such factors as delinquencies, the
financial condition of obligors, the value of underlying collateral, as well as
third party credit enhancements such as guarantees and recourse from
manufacturers. This information is reviewed formally on a quarterly basis with
senior management, including the CEO, CFO, Chief Risk Officer and Controller,
among others, in conjunction with setting the reserve for credit losses.
The reserve for credit losses is determined based on three key components:
(1) specific reserves for collateral dependent loans which are impaired, based
upon the value of underlying collateral or projected cash flows (2) reserves for
estimated losses inherent in the portfolio based upon historical and projected
credit trends and (3) reserves for economic environment and other factors.
Historical loss rates are based on a three-year average, which is consistent
with our portfolio life and provides what we believe to be appropriate weighting
to current loss rates. The process involves the use of estimates and a high
degree of management judgment. As of December 31, 2004, the reserve for credit
losses was $617.2 million or 1.76% of finance receivables. A hypothetical 5%
change to the three-year historic loss rates utilized in our reserve
determination at December 31, 2004 equates to the following variances: $22.7
million, or 6 basis points (0.06%) in the percentage of reserves to finance
receivables; and $0.06 in diluted earnings per share.
Retained Interests in Securitizations -- Significant financial
assumptions, including loan pool credit losses, prepayment speeds and discount
rates, are utilized to determine the fair values of retained interests, both at
the date of the securitization and in the subsequent quarterly valuations of
retained interests. These assumptions reflect both the historical experience and
anticipated trends relative to the products securitized. Any resulting losses,
representing the excess of carrying value over estimated fair value, are
recorded against current earnings. However, unrealized gains are reflected in
stockholders' equity as part of other comprehensive income. See Note 6 --
Retained Interests in Securitizations and Other Investments for additional
information regarding securitization retained interests and related sensitivity
analysis.
Lease Residual Values -- Operating lease equipment is carried at cost less
accumulated depreciation and is depreciated to estimated residual value using
the straight-line method over the lease term or projected economic life of the
asset. Direct financing leases are recorded at the aggregated future minimum
lease payments plus estimated residual values less unearned finance income. We
generally bear greater risk in operating lease transactions (versus finance
lease transactions) as the duration of an operating lease is shorter relative to
the equipment useful life than a finance lease. Management performs periodic
reviews of the estimated residual values, with non-temporary impairment
recognized in the current period as an increase to depreciation expense for
operating lease residual impairment, or as an adjustment to yield for residual
value adjustments on finance leases. Data regarding equipment values, including
appraisals, and our historical residual realization experience are among the
factors considered in evaluating estimated residual values. As of December 31,
2004, our direct financing lease residual balance was $2,389.7 million and our
operating lease equipment balance was $8,290.9 million. A hypothetical 10 basis
points (0.1%) fluctuation in the total of these amounts equates to $0.03 in
diluted earnings per share.
48
Goodwill and Intangible Assets -- CIT adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," effective October 1, 2001. The Company determined at
October 1, 2001 that there was no impact of adopting this new standard under the
transition provisions of SFAS No. 142. Since adoption, goodwill is no longer
amortized, but instead is assessed for impairment at least annually. During this
assessment, management relies on a number of factors, including operating
results, business plans, economic projections, anticipated future cash flows,
and market place data. See "Note 23 -- Goodwill and Intangible Assets" for a
discussion of our impairment analysis.
Intangible assets consist primarily of customer relationships acquired
with 2004 and 2003 acquisitions, with amortization lives up to 20 years, and
computer software and related transaction processes, which are being amortized
over a 5-year life. An evaluation of the remaining useful lives and the
amortization methodology of the intangible assets is performed periodically to
determine if any change is warranted. Goodwill and Other Intangibles Assets was
$596.5 million at December 31, 2004. A hypothetical 10% fluctuation in the value
equates to $0.28 in diluted earnings per share.
Income Tax Reserves and Deferred Income Taxes --We have open tax years in
the U.S. and Canada and other jurisdictions that are currently under examination
by the applicable taxing authorities, and certain later tax years that may in
the future be subject to examination. We periodically evaluate the adequacy of
our related tax reserves, taking into account our open tax return positions, tax
assessments received, tax law changes and third party indemnifications. The
process of evaluating tax reserves involves the use of estimates and a high
degree of management judgment. The final determination of tax audits could
affect our tax reserves.
Deferred tax assets and liabilities are recognized for the future tax
consequences of transactions that have been reflected in the Consolidated
Financial Statements. Our ability to realize deferred tax assets is dependent on
prospectively generating taxable income by corresponding tax jurisdiction, and
in some cases on the timing and amount of specific types of future transactions.
Management's judgment, regarding uncertainties and the use of estimates and
projections, is required in assessing our ability to realize net operating loss
("NOL's") and other tax benefit carry-forwards, as these assets begin to expire
at various dates beginning in 2005, and they may be subject to annual use
limitations under the Internal Revenue Code and other limitations under certain
state laws. Management utilizes historical and projected data, budgets and
business plans in making these estimates and assessments. Deferred tax assets
relating to NOL's were $852 million at December 31, 2004. A hypothetical 1%
fluctuation in the value of deferred tax assets relating to NOL's equates to
$0.04 in diluted earnings per share.
See Item 9A. Controls and Procedures for discussion regarding internal
controls related to income tax accounting and reporting. See Item 8. Financial
Statements and Supplementary Data, Note 1 for a discussion on the impact of
recent accounting pronouncements.
Non-GAAP Financial Measurements
The U.S. Securities and Exchange Commission ("SEC") adopted Regulation G,
which applies to any public disclosure or release of material information that
includes a non-GAAP financial measure. The accompanying Management's Discussion
and Analysis of Financial Condition and Results of Operations and Quantitative
and Qualitative Disclosure about Market Risk contain certain non-GAAP financial
measures. The SEC defines a non-GAAP financial measure as a numerical measure of
a company's historical or future financial performance, financial position, or
cash flows that excludes amounts, or is subject to adjustments that have the
effect of excluding amounts, that are included in the most directly comparable
measure calculated and presented in accordance with GAAP in the financial
statements or includes amounts, or is subject to adjustments that have the
effect of including amounts, that are excluded from the most directly comparable
measure so calculated and presented.
Non-GAAP financial measures disclosed in this report are meant to provide
additional information and insight relative to historical operating results and
financial position of the business and in certain cases to provide financial
information that is presented to rating agencies and other users of financial
information. These measures are not in accordance with, or a substitute for,
GAAP and may be different from or inconsistent with non-GAAP financial measures
used by other companies.
49
Selected non-GAAP disclosures are presented and reconciled in the table
below ($ in millions):
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ -----------
Managed assets(1)
Finance receivables ............................... $35,048.2 $31,300.2 $27,621.3
Operating lease equipment, net .................... 8,290.9 7,615.5 6,704.6
Finance receivables held for sale ................. 1,640.8 918.3 1,213.4
Equity and venture capital investments (included in
other assets) .................................. 181.0 249.9 335.4
--------- --------- ---------
Total financing and leasing portfolio assets ... 45,160.9 40,083.9 35,874.7
Securitized assets ................................ 8,309.7 9,651.7 10,482.4
--------- --------- ---------
Managed assets ................................. $53,470.6 $49,735.6 $46,357.1
========= ========= =========
Earning assets(2)
Total financing and leasing portfolio assets ...... $45,160.9 $40,083.9 $35,874.7
Credit balances of factoring clients .............. (3,847.3) (3,894.6) (2,270.0)
--------- --------- ---------
Earning assets .................................... $41,313.6 $36,189.3 $33,604.7
========= ========= =========
Tangible equity(3)
Total equity ...................................... $ 6,055.1 $ 5,394.2 $ 4,870.7
Other comprehensive loss relating to derivative
financial instruments .......................... 27.1 41.3 118.3
Unrealized gain on securitization investments ..... (8.5) (7.7) (20.5)
Goodwill and intangible assets .................... (596.5) (487.7) (400.9)
--------- --------- ---------
Tangible common equity ............................ 5,477.2 4,940.1 4,567.6
Preferred capital securities ...................... 253.8 255.5 257.2
--------- --------- ---------
Tangible equity ................................ $ 5,731.0 $ 5,195.6 $ 4,824.8
========= ========= =========
Debt, net of overnight deposits(4)
Total Debt ........................................ $37,724.8 $33,668.6 $31,681.3
Overnight deposits ................................ (1,507.3) (1,529.4) (1,578.7)
Preferred capital securities ...................... (253.8) (255.5) --
--------- --------- ---------
Debt, net of overnight deposits ................ $35,963.7 $31,883.7 $30,102.6
========= ========= =========
- --------------------------------------------------------------------------------
(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 amount 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.
50
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 ability to remediate the material weakness in internal controls
related to income taxes,
o our growth rates,
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.
51
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
CIT Group Inc.:
We have completed an integrated audit of CIT Group Inc.'s December 31,
2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its December 31, 2003,
December 31, 2002 and September 30, 2002 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of CIT Group Inc. and its subsidiaries at December 31, 2004
and 2003, and the results of their operations and their cash flows for the years
ended December 31, 2004 and 2003, the three months ended December 31, 2002 and
the fiscal year ended September 30, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that CIT Group Inc. did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the Company not
maintaining effective controls over the reconciliations of the differences
between the tax basis and book basis of each component of the Company's balance
sheet with the deferred tax asset and liability accounts, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made
52
only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2004, the Company did not maintain
effective controls over the reconciliations of the differences between the tax
basis and book basis of each component of the Company's balance sheet with the
deferred tax asset and liability accounts. The control deficiency did not result
in any adjustments to the 2004 annual or interim consolidated financial
statements. However, this control deficiency results in more than a remote
likelihood that a material misstatement to the deferred tax asset and liability
accounts and income tax provision will not be prevented or detected in the
annual or interim financial statements. Accordingly, management has determined
that this condition constitutes a material weakness. This material weakness was
considered in determining the nature, timing, and extent of audit tests applied
in our audit of the December 31, 2004 consolidated financial statements, and our
opinion regarding the effectiveness of the Company's internal control over
financial reporting does not affect our opinion on those consolidated financial
statements.
In our opinion, management's assessment that CIT Group Inc. did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, CIT Group Inc. has not
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control - Integrated
Framework issued by the COSO.
PricewaterhouseCoopers LLP
New York, New York
March 4, 2005
53
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions -- except share data)
December 31, December 31,
2004 2003
------------ -------------
ASSETS
Financing and leasing assets:
Finance receivables ........................................... $35,048.2 $31,300.2
Reserve for credit losses ....................................... (617.2) (643.7)
--------- ---------
Net finance receivables ...................................... 34,431.0 30,656.5
Operating lease equipment, net ............................... 8,290.9 7,615.5
Finance receivables held for sale ............................ 1,640.8 918.3
Cash and cash equivalents ....................................... 2,210.2 1,973.7
Retained interests in securitizations
and other investments ......................................... 1,228.2 1,380.8
Goodwill and intangible assets, net ............................. 596.5 487.7
Other assets .................................................... 2,713.7 3,310.3
--------- ---------
Total Assets .................................................... $51,111.3 $46,342.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ............................................. $ 4,210.9 $ 4,173.9
Variable-rate senior notes ................................... 11,545.0 9,408.4
Fixed-rate senior notes ...................................... 21,715.1 19,830.8
Preferred capital securities ................................. 253.8 255.5
--------- ---------
Total debt ...................................................... 37,724.8 33,668.6
Credit balances of factoring clients ............................ 3,847.3 3,894.6
Accrued liabilities and payables ................................ 3,443.7 3,346.4
--------- ---------
Total Liabilities ............................................... 45,015.8 40,909.6
--------- ---------
Commitments and Contingencies (Note 17)
Minority interest ............................................... 40.4 39.0
Stockholders' Equity:
Preferred stock: $0.01 par value, 100,000,000
authorized, none issued .................................... -- --
Common stock: $0.01 par value,
600,000,000 authorized,
Issued: 212,112,203 and 211,848,997 ........................ 2.1 2.1
Outstanding: 210,440,170 and 211,805,468
Paid-in capital, net of deferred compensation
of $39.3 and $30.6 ......................................... 10,674.3 10,677.0
Accumulated deficit .......................................... (4,499.1) (5,141.8)
Accumulated other comprehensive loss ......................... (58.4) (141.6)
Less: Treasury stock, 1,672,033 and 43,529 shares, at cost ...... (63.8) (1.5)
--------- ---------
Total Stockholders' Equity ...................................... 6,055.1 5,394.2
--------- ---------
Total Liabilities and Stockholders' Equity ...................... $51,111.3 $46,342.8
========= =========
See Notes to Consolidated Financial Statements.
54
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in millions -- except per share data)
Years Ended Three Months
December 31, Ended Years Ended
------------------------- December 31, September 30,
2004 2003 2002 2002
---------- ---------- ---------- ----------
Finance income ........................... $ 3,785.7 $ 3,729.5 $ 971.7 $ 4,342.8
Interest expense ......................... 1,260.1 1,348.7 349.5 1,464.7
---------- ---------- ---------- ----------
Net finance income ....................... 2,525.6 2,380.8 622.2 2,878.1
Depreciation on operating lease equipment 956.0 1,053.0 277.3 1,241.0
---------- ---------- ---------- ----------
Net finance margin ....................... 1,569.6 1,327.8 344.9 1,637.1
Provision for credit losses .............. 214.2 387.3 133.4 788.3
---------- ---------- ---------- ----------
Net finance margin after provision
for credit losses ....................... 1,355.4 940.5 211.5 848.8
Other revenue ............................ 890.6 947.6 263.5 972.6
Net loss on venture capital investments .. (3.5) (88.3) (6.4) (40.3)
---------- ---------- ---------- ----------
Operating margin ......................... 2,242.5 1,799.8 468.6 1,781.1
---------- ---------- ---------- ----------
Salaries and general operating expenses .. 1,046.4 912.9 232.6 921.0
Goodwill impairment ...................... -- -- -- 6,511.7
Interest expense -- TCH .................. -- -- -- 662.6
---------- ---------- ---------- ----------
Operating expenses ....................... 1,046.4 912.9 232.6 8,095.3
---------- ---------- ---------- ----------
Gain on redemption of debt ............... 41.8 50.4 -- --
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes ............................ 1,237.9 937.3 236.0 (6,314.2)
Provision for income taxes ............... (483.2) (365.0) (92.0) (374.0)
Minority interest, after tax ............. (1.1) -- -- --
Dividends on preferred capital securities,
after tax ................................ -- (5.4) (2.7) (10.5)
---------- ---------- ---------- ----------
Net income (loss) ........................ $ 753.6 $ 566.9 $ 141.3 $ (6,698.7)
========== ========== ========== ==========
Per share data
Basic earnings (loss) per share .......... $ 3.57 $ 2.68 $ 0.67 $ (31.66)
Diluted earnings (loss) per share ........ $ 3.50 $ 2.66 $ 0.67 $ (31.66)
Number of shares -- basic (thousands) .... 211,017 211,681 211,573 211,573
Number of shares -- diluted (thousands) .. 215,054 213,143 211,826 211,695
Dividends per common share ............... $ 0.52 $ 0.48 $ 0.12 $ --
See Notes to Consolidated Financial Statements.
55
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in millions)
Accumulated
Accumulated Other Total
Common Paid-in Contributed Treasury Earnings/ Comprehensive Stockholders'
Stock Capital Capital Stock (Deficit) Income/(Loss) Equity
------ --------- ----------- -------- ----------- ------------- -------------
September 30, 2001 ....................... $ -- $ -- $ 5,842.5 $ -- $ 181.9 $ (76.8) $ 5,947.6
Net loss ................................. (6,698.7) (6,698.7)
Foreign currency translation adjustments . (62.4) (62.4)
Change in fair values of derivatives
qualifying as cash flow hedges ......... (57.1) (57.1)
Unrealized gain on equity and
securitization investments, net ........ 21.0 21.0
Minimum pension liability adjustment ..... (21.0) (21.0)
---------
Total comprehensive loss ................. (6,818.2)
---------
Issuance of common stock in connection
with the initial public offering ....... 2.0 10,420.4 (10,422.4) --
Common stock issued -- overallotment ..... 0.1 249.2 249.3
Capital contribution from Tyco for TCH ... 4,579.9 794.0 5,373.9
Restricted common stock grants ........... 5.2 5.2
---- --------- ---------- ------- --------- ------- ---------
September 30, 2002 ....................... 2.1 10,674.8 -- -- (5,722.8) (196.3) 4,757.8
Net income ............................... 141.3 141.3
Foreign currency translation adjustments . 0.2 0.2
Change in fair values of derivatives
qualifying as cash flow hedges ......... 2.2 2.2
Unrealized gain on equity and
securitization investments, net ........ (6.8) (6.8)
---------
Total comprehensive income ............... 136.9
---------
Cash dividends ........................... (25.4) (25.4)
Restricted common stock grants ........... 1.4 1.4
---- --------- ---------- ------- --------- ------- ---------
December 31, 2002 ........................ 2.1 10,676.2 -- -- (5,606.9) (200.7) 4,870.7
Net income ............................... 566.9 566.9
Foreign currency translation adjustments . (30.2) (30.2)
Change in fair values of derivatives
qualifying as cash flow hedges ......... 77.0 77.0
Unrealized gain on equity and
securitization investments, net ........ (7.4) (7.4)
Minimum pension liability adjustment ..... 19.7 19.7
---------
Total comprehensive income ............... 626.0
---------
Cash dividends ........................... (101.8) (101.8)
Restricted common stock grants ........... 8.8 8.8
Treasury stock purchased, at cost ........ (28.9) (28.9)
Exercise of stock option awards .......... (7.3) 27.4 20.1
Employee stock purchase plan
participation .......................... (0.7) (0.7)
---- --------- ---------- ------- --------- ------- ---------
December 31, 2003 ........................ 2.1 10,677.0 -- (1.5) (5,141.8) (141.6) 5,394.2
Net income ............................... 753.6 753.6
Foreign currency translation adjustments . 68.6 68.6
Change in fair values of derivatives
qualifying as cash flow hedges ......... 14.2 14.2
Unrealized gain on equity and
securitization investments, net ........ 2.3 2.3
Minimum pension liability adjustment ..... (1.9) (1.9)
---------
Total comprehensive income ............... 836.8
---------
Cash dividends ........................... (110.9) (110.9)
Restricted common stock grants ........... 23.5 23.5
Treasury stock purchased, at cost ........ (174.8) (174.8)
Exercise of stock option awards .......... (25.6) 111.6 86.0
Employee stock purchase plan
participation .......................... (0.6) 0.9 0.3
---- --------- ---------- ------- --------- ------- ---------
December 31, 2004 ........................ $2.1 $10,674.3 $ -- $ (63.8) $(4,499.1) $ (58.4) $ 6,055.1
==== ========= ========== ======= ========= ======= =========
See Notes to Consolidated Financial Statements.
56
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Years Ended Three Months
December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---------- ---------- ------------ -------------
Cash Flows From Operations
Net income (loss) ...................................... $ 753.6 $ 566.9 $ 141.3 $ (6,698.7)
Adjustments to reconcile net income (loss)
to net cash flows from operations:
Depreciation and amortization .......................... 998.8 1,086.6 287.5 1,286.5
Provision for deferred federal income taxes ............ 321.0 265.1 71.9 276.9
Provision for credit losses ............................ 214.2 387.3 133.4 788.3
Gains on equipment, receivable and investment sales, net (208.8) (164.7) (51.8) (203.1)
Gain on debt redemption ................................ (41.8) (50.4) -- --
(Increase) decrease in finance receivables
held for sale ....................................... (394.5) 295.1 (193.9) (261.6)
(Increase) decrease in other assets .................... (282.2) (174.2) 26.7 (626.7)
Increase in accrued liabilities and payables ........... 328.9 279.2 55.4 57.0
Goodwill impairment .................................... -- -- -- 6,511.7
Other .................................................. (71.5) (8.7) (52.0) 4.0
---------- ---------- ---------- ----------
Net cash flows provided by operations .................. 1,617.7 2,482.2 418.5 1,134.3
---------- ---------- ---------- ----------
Cash Flows From Investing Activities
Loans extended ......................................... (57,062.0) (53,157.8) (12,873.8) (48,300.6)
Collections on loans ................................... 48,944.1 45,123.9 12,089.7 42,584.2
Proceeds from asset and receivable sales ............... 8,491.4 7,419.0 1,279.3 11,254.0
Purchase of finance receivable portfolios .............. (3,180.0) (1,097.5) (254.7) (372.7)
Purchases of assets to be leased ....................... (1,489.2) (2,096.3) (449.1) (1,877.2)
Acquisitions, net of cash acquired ..................... (726.8) -- -- --
Goodwill and intangibles assets acquired ............... (122.1) (92.6) -- --
Net decrease (increase) in short-term
factoring receivables ............................... 48.3 (396.1) 391.7 (651.9)
Other .................................................. 41.6 14.8 (4.3) (52.5)
---------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................................. (5,054.7) (4,282.6) 178.8 2,583.3
---------- ---------- ---------- ----------
Cash Flows From Financing Activities
Proceeds from the issuance of variable and
fixed-rate notes .................................... 13,005.6 13,034.6 2,463.2 13,093.4
Repayments of variable and fixed-rate notes ............ (8,824.1) (10,265.6) (3,558.3) (12,148.8)
Cash dividends paid .................................... (110.9) (101.8) (25.4) --
Net repayments of non-recourse leveraged
lease debt .......................................... (367.2) (125.4) (35.0) (187.7)
Net increase (decrease) in commercial paper ............ 37.0 (800.7) 320.4 (4,186.2)
Capital contribution from former parent ................ -- -- -- 923.5
Proceeds from issuance of common stock ................. -- -- -- 254.6
Other .................................................. (66.9) (3.6) -- --
---------- ---------- ---------- ----------
Net cash flows provided by (used for)
financing activities ................................... 3,673.5 1,737.5 (835.1) (2,251.2)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ... 236.5 (62.9) (237.8) 1,466.4
Cash and cash equivalents, beginning of period ......... 1,973.7 2,036.6 2,274.4 808.0
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period ............... $ 2,210.2 $ 1,973.7 $ 2,036.6 $ 2,274.4
========== ========== ========== ==========
Supplementary Cash Flow Disclosure
Interest paid .......................................... $ 1,241.5 $ 1,517.6 $ 418.5 $ 1,713.9
Federal, foreign, state and local income taxes paid,
(received) net ...................................... $ 115.0 $ 80.6 $ 44.2 $ (43.9)
See Notes to Consolidated Financial Statements.
57
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Business and Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a leading global source of financing and leasing capital for companies in a wide
variety of industries, including many of today's leading industries and growing
economic sectors, offering vendor, equipment, commercial, factoring, home
mortgage, small business, educational lending and structured financing products.
CIT operates primarily in North America, with locations in Europe, Latin
America, Australia and the Asia-Pacific region.
Basis of Presentation
The Consolidated Financial Statements include the results of CIT and its
subsidiaries and have been prepared in U.S. dollars in accordance with
accounting principles generally accepted in the United States. Certain prior
period amounts have been reclassified to conform to the current presentation. On
June 1, 2001, The CIT Group, Inc. was acquired by a wholly-owned subsidiary of
Tyco International Ltd. ("Tyco"), in a purchase business combination recorded
under the "push-down" method of accounting, resulting in a new basis of
accounting for the "successor" period beginning June 2, 2001 and the recognition
of related goodwill. On July 8, 2002, Tyco completed a sale of 100% of CIT's
outstanding common stock in an initial public offering ("IPO"). Immediately
prior to the offering, CIT was merged with its parent Tyco Capital Holding, Inc.
("TCH"), a company used to acquire CIT. As a result, the historical financial
results of TCH are included in the historical consolidated CIT financial
statements.
Following the acquisition by Tyco, our fiscal year end was changed from
December 31 to September 30, to conform to Tyco's fiscal year end. On November
5, 2002, the CIT Board of Directors approved the return to a calendar year end
effective December 31, 2002. Accordingly, the three months ended December 31,
2002 constitutes a transitional fiscal period.
In accordance with the provisions of FASB Interpretation No. 46R ("FIN
46"), "Consolidation of Variable Interest Entities," CIT consolidates variable
interest entities for which management has concluded that CIT is the primary
beneficiary. Entities that do not meet the definition of a variable interest
entity are subject to the provisions of Accounting Research Bulletin No. 51
("ARB 51"), "Consolidated Financial Statements" and are consolidated when
management has determined that it has the controlling financial interest.
Entities which do not meet the consolidation criteria in either FIN 46 or ARB 51
but which are significantly influenced by the Company, generally those entities
that are twenty to fifty percent owned by CIT, are included in other assets at
cost for securities not readily marketable and presented at the corresponding
share of equity plus loans and advances. Investments in entities which
management does not have significant influence are included in other assets at
cost, less declines in value that are other than temporary. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
qualifying special purpose entities utilized in securitizations are not
consolidated. Inter-company transactions have been eliminated.
Financing and Leasing Assets
CIT provides funding through a variety of financing arrangements,
including term loans, lease financing and operating leases. The amounts
outstanding on loans and direct financing leases are referred to as finance
receivables and, when combined with finance receivables held for sale, net book
value of operating lease equipment, and certain investments, represent financing
and leasing assets.
At the time of designation for sale, securitization or syndication by
management, assets are classified as finance receivables held for sale. These
assets are carried at the lower of cost or fair value.
Income Recognition
Finance income includes interest on loans, the accretion of income on
direct financing leases, and rents on operating leases. Related origination and
other nonrefundable fees and direct origination costs are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance
58
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
receivables other than leveraged leases is recognized on an accrual basis
commencing in the month of origination. Leveraged lease income is recognized on
a basis calculated to achieve a constant after-tax rate of return for periods in
which CIT has a positive investment in the transaction, net of related deferred
tax liabilities. Rental income on operating leases is recognized on an accrual
basis.
The accrual of finance income on commercial finance receivables is
generally suspended and an account is placed on non-accrual status when payment
of principal or interest is contractually delinquent for 90 days or more, or
earlier when, in the opinion of management, full collection of all principal and
interest due is doubtful. Given the nature of revolving credit facilities,
including those combined with term loan facilities (advances and interest
accruals increase revolving loan balances and payments reduce revolving loan
balances), the placement of revolving credit facilities on non-accrual status
includes the review of other qualitative and quantitative credit-related
factors, and generally does not result in the reversal of significant amounts of
accrued interest. To the extent the estimated fair value of collateral does not
satisfy both the principal and accrued interest outstanding, accrued but
uncollected interest at the date an account is placed on non-accrual status is
reversed and charged against income. Subsequent interest received is applied to
the outstanding principal balance until such time as the account is collected,
charged-off or returned to accrual status. The accrual of finance income on
consumer loans is suspended, and all previously accrued but uncollected income
is reversed, when payment of principal and/or interest is contractually
delinquent for 90 days or more.
Other revenue includes the following: (1) factoring commissions, (2)
commitment, facility, letters of credit and syndication fees, (3) servicing
fees, (4) gains and losses from sales of leasing equipment and sales of finance
receivables, (5) gains from and fees related to securitizations including
accretion related to retained interests (net of impairment) and (6) equity in
earnings of joint ventures and unconsolidated subsidiaries.
Lease Financing
Direct financing leases are recorded at the aggregate future minimum lease
payments plus estimated residual values less unearned finance income. Operating
lease equipment is carried at cost less accumulated depreciation and is
depreciated to estimated residual value using the straight-line method over the
lease term or projected economic life of the asset. Equipment acquired in
satisfaction of loans and subsequently placed on operating lease is recorded at
the lower of carrying value or estimated fair value when acquired. Lease
receivables include leveraged leases, for which a major portion of the funding
is provided by third party lenders on a nonrecourse basis, with CIT providing
the balance and acquiring title to the property. Leveraged leases are recorded
at the aggregate value of future minimum lease payments plus estimated residual
value, less nonrecourse third party debt and unearned finance income. Management
performs periodic reviews of the estimated residual values with impairment,
other than temporary, recognized in the current period.
Reserve for Credit Losses on Finance Receivables
The reserve for credit losses is intended to provide for losses inherent
in the portfolio and is periodically reviewed for adequacy considering economic
conditions, collateral values and credit quality indicators, including
historical and expected charge-off experience and levels of and trends in past
due loans, non-performing assets and impaired loans. Changes in economic
conditions or other events affecting specific obligors or industries may
necessitate additions or deductions to the reserve for credit losses.
The reserve for credit losses is determined based on three key components:
(1) specific reserves for collateral dependent loans that are impaired, based
upon the value of underlying collateral or projected cash flows, (2) reserves
for estimated losses inherent in the portfolio based upon the value of
underlying collateral or projected cash flows and (3) reserves for economic
environment and other factors. In management's judgment, the reserve for credit
losses is adequate to provide for credit losses inherent in the portfolio.
Charge-off of Finance Receivables
Finance receivables are reviewed periodically to determine the probability
of loss. Charge-offs are taken after considering such factors as the borrower's
financial condition and the value of underlying collateral and
59
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
guarantees (including recourse to dealers and manufacturers). Such charge-offs
are deducted from the carrying value of the related finance receivables. To the
extent that an unrecovered balance remains due, a final charge-off is taken at
the time collection efforts are deemed no longer useful. Charge-offs are
recorded on consumer and certain small ticket commercial finance receivables
beginning at 180 days of contractual delinquency based upon historical loss
severity. Collections on accounts previously charged off are recorded as
recoveries.
Impaired Loans
Impaired loans include any loans for $500 thousand or greater, other than
homogeneous pools of loans, that are placed on non-accrual status and are
subject to periodic individual review by CIT's Asset Quality Review Committee
("AQR"). The AQR, which is comprised of members of senior management, reviews
overall portfolio performance, as well as individual accounts meeting certain
credit risk grading parameters. Excluded from impaired loans are: 1) certain
individual commercial non-accrual loans for which the collateral value supports
the outstanding balance and the continuation of earning status, 2) home lending
and other homogeneous pools of loans, which are subject to automatic charge-off
procedures, and 3) short-term factoring customer receivables, generally having
terms of no more than 30 days. Loan impairment occurs when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Loan
impairment is measured as any shortfall between the estimated value and the
recorded investment in the loan, with the estimated value determined using the
fair value of the collateral and other cash flows if the loan is collateral
dependent, or the present value of expected future cash flows discounted at the
loan's effective interest rate.
Long-Lived Assets
A review for impairment of long-lived assets, such as certain operating
lease equipment, is performed at least annually and whenever events or changes
in circumstances indicate that the carrying amount of long-lived assets may not
be recoverable. Impairment of assets is determined by comparing the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Fair value is based
upon discounted cash flow analysis and available market data. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Goodwill and Other Identified Intangibles
SFAS No. 141 "Business Combinations" requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method. The purchase method of accounting requires that the cost of an acquired
entity be allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The difference between
the fair values and the purchase price is recorded to goodwill. Also under SFAS
141, identified intangible assets acquired in a business combination must be
separately valued and recognized on the balance sheet if they meet certain
requirements.
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets acquired, less the fair value of liabilities assumed from
business combinations. CIT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. The Company determined that there was no
impact of adopting this standard under the transition provisions of SFAS No.
142. Since adoption, goodwill is no longer amortized, but instead is assessed
for impairment at least annually. During this assessment, management relies on a
number of factors, including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and market place
data.
Intangible assets consist primarily of customer relationships acquired in
2004 and 2003 acquisitions, which have amortizable lives up to 20 years, and
computer software and related transaction processes, which are being amortized
over a 5-year life. An evaluation of the remaining useful lives and the
amortization methodology of the intangible assets is performed periodically to
determine if any change is warranted.
60
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets
Assets received in satisfaction of loans are carried at the lower of
carrying value or estimated fair value less selling costs, with write-downs at
the time of receipt recognized by recording a charge-off. Subsequent write-downs
of such assets, which may be required due to a decline in estimated fair market
value after receipt, are reflected in general operating expenses.
Realized and unrealized gains (losses) on marketable equity securities
included in CIT's venture capital portfolios are recognized currently in
operations. Unrealized gains and losses, representing the difference between
carrying value and estimated current fair market value, for all other debt and
equity securities are recorded in other accumulated comprehensive income, a
separate component of equity.
Investments in joint ventures are accounted for using the equity method,
whereby the investment balance is carried at cost and adjusted for the
proportionate share of undistributed earnings or losses. Unrealized intercompany
profits and losses are eliminated until realized, as if the joint venture were
consolidated.
Investments in debt and equity securities of non-public companies are
carried at fair value. Gains and losses are recognized upon sale or write-down
of these investments as a component of operating margin.
Securitization Sales
Pools of assets are originated and sold to special purpose entities which,
in turn, issue debt securities backed by the asset pools or sell individual
interests in the assets to investors. CIT retains the servicing rights and
participates in certain cash flows from the pools. The present value of expected
net cash flows (after payment of principal and interest to certificate and/or
note holders and credit-related disbursements) that exceeds the estimated cost
of servicing is recorded at the time of sale as a "retained interest." Retained
interests in securitized assets are classified as available-for-sale securities
under SFAS No. 115. CIT, in its estimation of those net cash flows and retained
interests, employs a variety of financial assumptions, including loan pool
credit losses, prepayment speeds and discount rates. These assumptions are
supported by both CIT's historical experience, market trends and anticipated
performance relative to the particular assets securitized. Subsequent to the
recording of retained interests, estimated cash flows underlying retained
interests are periodically updated based upon current information and events
that management believes a market participant would use in determining the
current fair value of the retained interest. An 'other-than temporary'
impairment is recorded and included in net income to write down the retained
interest to estimated fair value if the analysis indicates that an adverse
change in estimated cash flows has occurred. Unrealized gains are not credited
to current earnings, but are reflected in stockholders' equity as part of other
comprehensive income.
Servicing assets or liabilities are established when the fees for
servicing securitized assets are more or less than adequate compensation to CIT
for servicing the assets. Servicing assets or liabilities are recognized over
the servicing period and are periodically evaluated for impairment. CIT
securitization transactions generally do not result in servicing assets or
liabilities, as typically the contractual fees are adequate compensation in
relation to the associated servicing costs.
Derivative Financial Instruments
CIT uses interest rate swaps, bond forwards, currency swaps and foreign
exchange forward contracts as part of a worldwide market risk management program
to hedge against the effects of future interest rate and currency fluctuations.
CIT does not enter into derivative financial instruments for trading or
speculative purposes.
On January 1, 2001, CIT adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Derivative instruments are recognized in
the balance sheet at their fair values in other assets and accrued liabilities
and payables, and changes in fair values are recognized immediately in earnings,
unless the derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in accumulated other comprehensive income as
a separate component of equity, and contractual cash flows, along with the
related impact of the hedged items, continue to be recognized in earnings. Any
ineffective portion of a hedge is reported in current earnings. Amounts
accumulated in other comprehensive income are reclassified to earnings in the
same period that the hedged transaction impacts earnings.
61
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net interest differential, including premiums paid or received, if
any, on interest rate swaps, is recognized on an accrual basis as an adjustment
to finance income or as interest expense to correspond with the hedged position.
In the event of early termination of a derivative instrument classified as a
cash flow hedge, the gain or loss remains in accumulated other comprehensive
income until the hedged transaction is recognized in earnings.
CIT utilizes foreign exchange forward contracts or cross-currency swaps to
convert U.S. dollar borrowings into local currency when local borrowings are not
cost effective or available. CIT also utilizes foreign exchange forward
contracts to hedge its net investments in foreign operations. These instruments
are designated as hedges and resulting gains and losses are reflected in
accumulated other comprehensive income as a separate component of equity.
CIT is exposed to credit risk to the extent that the counterparty fails to
perform under the terms of a derivative instrument. This risk is measured as the
market value of derivative transactions with a positive fair value, reduced by
the effects of master netting agreements. We manage this credit risk by
requiring that all derivative transactions be conducted with counterparties
rated investment grade by nationally recognized rating agencies, with the
majority of the counterparties rated "AA" or higher, and by setting limits on
the exposure with any individual counterparty. Accordingly, counterparty credit
risk is not considered significant.
Foreign Currency Translation
CIT has operations in Canada, Europe and other countries outside the
United States. The functional currency for these foreign operations is generally
the local currency. The value of the assets and liabilities of these operations
is translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenue and expense items are translated at the average exchange
rates effective during the year. The resulting foreign currency translation
gains and losses, as well as offsetting gains and losses on hedges of net
investments in foreign operations, are reflected in accumulated other
comprehensive loss.
Transaction gains and losses resulting from exchange rate changes on
transactions denominated in currencies other than the functional currency are
included in net income.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been reflected in the Consolidated
Financial Statements. Deferred tax liabilities and assets are determined based
on the differences between the book values and the tax basis of particular
assets and liabilities, using tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is provided to offset
any net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. U.S. income taxes are generally not provided on undistributed earnings
of foreign operations as such earnings are permanently invested. The
determination of the tax effect of such unremitted earnings is not practicable.
Income tax reserves reflect open tax return positions, tax assessments received,
tax law changes and third party indemnifications, and are included in current
taxes payable, which is reflected in accrued liabilities and payables.
Accounting for Costs Associated with Exit or Disposal Activities
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a
liability for costs associated with exit or disposal activities, other than in a
business combination, be recognized when the liability is incurred. Previous
generally accepted accounting principles provided for the recognition of such
costs at the date of management's commitment to an exit plan. In addition, SFAS
146 requires that the liability be measured at fair value and be adjusted for
changes in estimated cash flows. This statement did not have a material impact
on the Company's consolidated financial statements.
Other Comprehensive Income/Loss
Other comprehensive income/loss includes unrealized gains on
securitization retained interests and other investments, foreign currency
translation adjustments pertaining to both the net investment in foreign
operations and the related derivatives designated as hedges of such investments,
the changes in fair values of derivative instruments designated as hedges of
future cash flows and minimum pension liability adjustments.
62
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Statements of Cash Flows
Cash and cash equivalents includes cash and interest-bearing deposits,
which generally represent overnight money market investments of excess cash
maintained for liquidity purposes. Cash inflows and outflows from commercial
paper borrowings and most factoring receivables are presented on a net basis in
the Statements of Cash Flows, as their original term is generally less than 90
days.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make extensive use of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" in accounting for its
stock-based compensation plans. Under APB 25, CIT does not recognize
compensation expense on the issuance of its stock options because the option
terms are fixed and the exercise price equals the market price of the underlying
stock on the grant date. The following table presents the pro forma information
required by SFAS 123 as if CIT had accounted for stock options granted under the
fair value method of SFAS 123, as amended ($ in millions, except per share
data):
Years Ended Three Months
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Net income (loss) as reported....................... $753.6 $566.9 $141.3 $(6,698.7)
Stock-based compensation expense -- fair value
method, after tax................................ (20.6) (23.0) (5.7) (5.7)
------ ------ ------ ---------
Pro forma net income (loss)......................... $733.0 $543.9 $135.6 $(6,704.4)
====== ====== ====== =========
Basic earnings (loss) per share as reported......... $ 3.57 $ 2.68 $ 0.67 $ (31.66)
Basic earnings (loss) per share pro forma........... $ 3.47 $ 2.57 $ 0.64 $ (31.69)
Diluted earnings (loss) per share as reported....... $ 3.50 $ 2.66 $ 0.67 $ (31.66)
Diluted earnings (loss) per share pro forma......... $ 3.41 $ 2.55 $ 0.64 $ (31.69)
Compensation expense related to restricted stock awards is recognized over
the respective vesting periods and totalled (net of tax) $14.3 million, $5.5
million, $0.6 million and $3.2 million for the years ended December 31, 2004 and
2003, the three months ended December 31, 2002 and the year ended September 30,
2002, respectively.
Accounting Pronouncements
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
Payment" ("FAS 123R"). FAS 123R requires the recognition of compensation expense
for all stock-based compensation plans as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. The current
accounting for employee stock options is most impacted by this new standard, as
costs associated with restricted stock awards are already recognized in net
income and amounts associated with employee stock purchase plans are not
significant. Similar to the proforma amounts disclosed historically, the
compensation cost relating to options will be based upon the grant-date fair
value of the award and will be recognized over the vesting period. FAS 123R
allows for both prospective and retrospective adoption. The financial statement
impact of adopting FAS 123R is not expected to differ materially from historical
proforma disclosures. Management is evaluating the transition alternatives, all
of which require compensation expense to be included in net income in 2005, and
valuation methodologies allowed under the new standard.
63
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"). Given
the lack of clarification of certain provisions and the timing of the Act, FSP
109-2 allows for time beyond the year ended December 31, 2004 (the period of
enactment) to evaluate the effect of the Act on plans for reinvestment or
repatriation of foreign earnings for purposes of applying income tax accounting
under SFAS No. 109.
In March 2004, the SEC issued Staff Accounting Bulletin 105, "Application
of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 requires that
certain mortgage loan commitments issued after March 31, 2004 are accounted for
as derivatives until the loan is made or they expire unexercised. The adoption
of SAB 105 did not have a material financial statement impact.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003" ("FSP 106-1"). For the third
quarter of 2004, the Company accounted for the effects of the Medicare
Prescription Drug and Modernization Act of 2003 by recognizing the impact of the
Medicare prescription drug subsidy prospectively from July 1, 2004. The subsidy
reduced the July 1, 2004 Accumulated Post Retirement Benefit Obligation and 2004
annual related expense by $3.5 million and $0.3 million, respectively.
In December 2003, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3, which is
effective for fiscal years beginning after December 15, 2004, requires acquired
loans to be carried at fair value and prohibits the establishment of acquisition
credit loss reserves related to business combinations or portfolio acquisitions
that have evidence of credit deterioration since origination. At our recent
level and type of acquisitions, the adoption of SOP 03-3 is not expected to have
a material financial statement impact.
In December 2003, the SEC issued Staff Accounting Bulletin 104, "Revenue
Recognition" ("SAB 104"), which revises or rescinds portions of related
interpretive guidance in order to be consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The adoption of
SAB 104 as of January 1, 2004 did not have a material financial statement impact
on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
pronouncement establishes standards for classifying and measuring certain
financial instruments as a liability (or an asset in some circumstances). This
pronouncement requires CIT to display the Preferred Capital Securities
(previously described as "Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the Company") within
the debt section on the face of the Consolidated Balance Sheets and show the
related expense with interest expense on a pre-tax basis. There was no impact to
net income upon adoption. This pronouncement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Prior period restatement is not permitted. On November 7, 2003, certain
measurement and classification provisions of SFAS 150, relating to certain
mandatorily redeemable non-controlling interests, were deferred indefinitely.
The adoption of these delayed provisions, which relate primarily to minority
interests associated with finite-lived entities, is not expected to have a
material financial statement impact on the Company.
Note 2 -- Finance Receivables
The following table presents the breakdown of finance receivables by loans
and lease receivables, as well as finance receivables previously securitized and
still managed by CIT ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Loans.......................................... $27,566.2 $25,137.1
Leases......................................... 7,482.0 6,163.1
--------- ---------
Finance receivables......................... $35,048.2 $31,300.2
========= =========
Finance receivables securitized and
managed by CIT.............................. $ 8,309.7 $ 9,651.7
========= =========
64
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Finance receivables include the following ($ in billions)
December 31, December 31,
2004 2003
------------ ------------
Unearned income............................... $ (3.2) $ (3.3)
Equipment residual values..................... $ 2.4 $ 2.4
Leveraged leases.............................. $ 1.2 $ 1.1
Leveraged leases exclude the portion funded by third party non-recourse
debt payable of $2.9 billion at December 31, 2004, and $3.3 billion at December
31, 2003.
The following table sets forth the contractual maturities of finance
receivables due in the respective fiscal period. ($ in millions).
December 31, 2004 December 31, 2003
----------------- -----------------
Due Within Year:
1.............................. $11,799.5 33.7% $11,698.9 37.4%
2.............................. 4,827.0 13.8% 4,503.7 14.4%
3.............................. 3,720.8 10.6% 3,441.2 11.0%
4.............................. 2,465.3 7.0% 2,197.9 7.0%
5.............................. 2,066.8 5.9% 2,095.9 6.7%
Thereafter........................ 10,168.8 29.0% 7,362.6 23.5%
--------- ---------
Total............................. $35,048.2 100.0% $31,300.2 100.0%
========= =========
Non-performing assets reflect both finance receivables on non-accrual
status (primarily loans that are ninety days or more delinquent) and assets
received in satisfaction of loans (repossessed assets). The following table sets
forth certain information regarding total non-performing assets ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Non-accrual finance receivables.................. $ 458.4 $ 566.5
Assets received in satisfaction of loans......... 81.2 110.0
------- -------
Total non-performing assets...................... $ 539.6 $ 676.5
------- -------
Percentage of finance receivables................ 1.54% 2.16%
======= =======
The following table contains information on loans evaluated for impairment
and the reserve for credit losses associated with loans considered impaired.
After being classified as impaired, there is no finance income recognized on
these loans because the definition of an impaired loan is based upon non-accrual
status ($ in millions).
At or for the At or for the
Years Ended Three Months At or for the
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- -------------- --------------
Finance receivables evaluated for impairment........ $400.9 $516.5 $959.9 $1,001.2
Finance receivables considered impaired............. $235.4 $279.8 $522.3 $ 449.8
Associated reserve for credit losses(1)............. $ 60.4 $120.7 $156.9 $ 197.4
Finance receivables evaluated for impairment
with no reserve for credit losses required....... $165.5 $236.7 $437.6 $ 551.4
Average monthly investment in finance
receivables considered for impairment(2)......... $445.4 $690.5 $980.6 $ 818.9
- --------------------------------------------------------------------------------
(1) Impaired finance receivables are those loans whose estimated fair value,
based upon underlying collateral or estimated cash flows, is less than the
current recorded value. The allowance is the difference between these two
amounts and is included in the reserve for credit losses.
(2) Includes telecommunications related accounts totaling $224.3 million,
$316.0 million, $327.3 million and $185.5 million at December 31, 2004 and
2003, December 31, 2002 and September 30, 2002, respectively.
65
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Reserve for Credit Losses
The following table presents changes in the reserve for credit losses ($
in millions).
At or for the At or for the
Years Ended Three Months At or for the
December 31, Ended Year Ended
---------------------- December 31, September 30,
2004 2003 2002 2002
---- ---- -------------- -------------
Balance, beginning of period........................ $ 643.7 $ 760.8 $ 777.8 $ 492.9
------- ------- ------- -------
Provision for credit losses......................... 270.0 408.8 133.4 453.3
Provision for credit losses -- specific
reserving actions(1)............................. (55.8) (21.5) -- 335.0
Reserves relating to acquisitions,
dispositions and other(2)........................ 60.5 17.5 4.1 (11.1)
------- ------- ------- -------
Additions to the reserve for credit losses....... 274.7 404.8 137.5 777.2
------- ------- ------- -------
Charged-off -- finance receivables................... (340.3) (424.9) (157.7) (508.2)
Charged-off -- telecommunications.................... (40.1) (47.0) (15.5) (30.9)
Charged-off -- Argentine............................. -- (101.0) -- --
Recoveries on finance receivables
previously charged-off........................... 79.2 51.0 18.7 46.8
------- ------- ------- -------
Net credit losses................................ (301.2) (521.9) (154.5) (492.3)
------- ------- ------- -------
Balance, end of period.............................. $ 617.2 $ 643.7 $ 760.8 $ 777.8
======= ======= ======= =======
Reserve for credit losses as a percentage
of finance receivables........................... 1.76% 2.06% 2.75% 2.73%
- --------------------------------------------------------------------------------
(1) The 2002 amount consists of reserving actions relating to
telecommunications ($200.0 million) and Argentine exposures ($135.0
million). The 2003 amount reflects a reduction of the Argentine reserve
after substantial work-out efforts were completed. This amount was offset
by an increase to the provision for credit losses -- finance receivables.
The 2004 amount includes a $43.3 million reduction to the
telecommunications specific reserve and a $12.5 million reduction of the
Argentine reserve following the sale of the remaining assets in this
portfolio. The Argentine reduction was offset by an increase to the
provision for credit losses -- finance receivables.
(2) The higher 2004 balance reflects increased portfolio purchase and business
acquisition activity.
Note 4 -- Operating Lease Equipment
The following table provides an analysis of the net book value (net of
accumulated depreciation of $1.9 billion and $1.5 billion) of operating lease
assets, by equipment type, at December 31, 2004 and 2003 ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Commercial aircraft (including regional
aircraft)...................................... $4,461.0 $4,141.1
Railcars and locomotives......................... 2,212.8 1,987.3
Information technology........................... 430.4 229.3
Office equipment................................. 274.2 235.0
Communications................................... 237.8 320.6
Business aircraft................................ 189.1 242.5
Other............................................ 485.6 459.7
-------- --------
Total......................................... $8,290.9 $7,615.5
======== ========
Off-lease equipment.............................. $ 118.3 $ 265.9
======== ========
66
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental income on operating leases, which is included in finance income,
totaled $1.4 billion for the year ended December 31, 2004, $1.5 billion for the
year ended December 31, 2003, $0.4 billion for the three months ended December
31, 2002, and $1.7 billion for the year ended September 30, 2002. The following
table presents future minimum lease rentals on non-cancelable operating leases
at December 31, 2004. Excluded from this table are variable rentals calculated
on the level of asset usage, re-leasing rentals, and expected sales proceeds
from remarketing operating lease equipment at lease expiration, all of which are
components of operating lease profitability ($ in millions).
Years Ended December 31, Amount
- ------------------------ ------
2005 .............................................................. $1,099.9
2006 .............................................................. 742.7
2007 .............................................................. 445.3
2008 .............................................................. 301.9
2009 .............................................................. 205.2
Thereafter 273.2
--------
Total .......................................................... $3,068.2
========
Note 5 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets ($ in millions):
December 31, 2004 December 31, 2003
------------------- ------------------
Geographic Amount Percent Amount Percent
------ ------- ------ -------
North America:
West........................................................... $ 8,595.3 19.0% $ 7,485.5 18.7%
Northeast...................................................... 8,463.4 18.7% 8,319.8 20.8%
Midwest........................................................ 6,907.0 15.3% 5,996.2 14.9%
Southeast...................................................... 6,283.3 14.0% 5,558.6 13.9%
Southwest...................................................... 4,848.3 10.7% 4,423.1 11.0%
Canada......................................................... 2,483.4 5.5% 2,055.5 5.1%
--------- ----- --------- -----
Total North America............................................ 37,580.7 83.2% 33,838.7 84.4%
Other foreign.................................................. 7,580.2 16.8% 6,245.2 15.6%
--------- ----- --------- -----
Total....................................................... $45,160.9 100.0% $40,083.9 100.0%
========= ===== ========= =====
Industry
Manufacturing(1)............................................... $ 6,932.0 15.4% $ 7,340.6 18.3%
Retail(2)...................................................... 5,859.4 13.0% 5,630.9 14.0%
Commercial airlines (including regional airlines).............. 5,512.4 12.2% 5,039.3 12.6%
Consumer based lending -- home lending.......................... 5,069.8 11.2% 2,663.1 6.6%
Transportation(3).............................................. 2,969.6 6.6% 2,934.9 7.3%
Service industries............................................. 2,854.5 6.3% 2,608.3 6.5%
Consumer based lending -- non-real estate(4).................... 2,480.1 5.5% 1,862.1 4.7%
Wholesaling.................................................... 1,727.5 3.8% 1,374.7 3.4%
Construction equipment......................................... 1,603.1 3.5% 1,571.2 3.9%
Communications(5).............................................. 1,292.1 2.9% 1,386.5 3.5%
Automotive Services............................................ 1,196.3 2.6% 1,152.3 2.9%
Other (no industry greater than 3.0%)(6)....................... 7,664.1 17.0% 6,520.0 16.3%
--------- ----- --------- -----
Total....................................................... $45,160.9 100.0% $40,083.9 100.0%
========= ===== ========= =====
- --------------------------------------------------------------------------------
(1) Includes manufacturers of apparel (2.7%), followed by food and kindred
products, textiles, transportation equipment, chemical and allied
products, rubber and plastics, industrial machinery and equipment, and
other industries.
(2) Includes retailers of apparel (5.6%) and general merchandise (4.0%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers for products in various industries
such as manufactured housing, recreational vehicles, marine and computers
and related equipment.
(5) Includes $335.2 million and $556.3 million of equipment financed for the
telecommunications industry at December 31, 2004 and 2003, respectively,
but excludes telecommunications equipment financed for other industries.
(6) Included in "Other" above are financing and leasing assets in the energy,
power and utilities sectors, which totaled $1.1 billion, or 2.5% of total
financing and leasing assets at December 31, 2004. This amount includes
approximately $805.1 million in project financing and $259.9 million in
rail cars on lease.
67
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6 -- Retained Interests in Securitizations and Other Investments
Retained interests in securitizations and other investments designated as
available for sale are shown in the following table ($ in millions).
December 31, December 31,
2004 2003
------------ ------------
Retained interests in commercial loans:
Retained subordinated securities....................................... $ 446.2 $ 558.8
Interest-only strips................................................... 292.4 367.1
Cash reserve accounts.................................................. 323.4 260.3
-------- --------
Total retained interests in commercial loans........................... 1,062.0 1,186.2
-------- --------
Retained interests in consumer loans:
Retained subordinated securities....................................... 76.6 64.5
Interest-only strips................................................... 17.0 58.6
Cash reserve accounts.................................................. -- --
-------- --------
Total retained interests in consumer loans............................. 93.6 123.1
-------- --------
Total retained interests in securitizations............................... 1,155.6 1,309.3
Aerospace equipment trust certificates and other(2)....................... 72.6 71.5
-------- --------
Total.................................................................. $1,228.2 $1,380.8
======== ========
- --------------------------------------------------------------------------------
(1) Comprised of amounts related to home lending receivables securitized.
(2) At December 31, 2004 other includes a $4.7 million investment in common
stock received as part of a loan work-out of an aerospace account.
The carrying value of the retained interests in securitized assets is
reviewed quarterly for valuation impairment. The following table summarizes the
net accretion recognized in pretax earnings, including the stated impairment
charges, and unrealized after-tax gains, reflected as a part of accumulated
other comprehensive loss ($ in millions):
Years Ended Three Months
December 31, Ended Year Ended
--------------------- December 31, September 30,
2004 2003 2002 2002
------ ------ ------------- -------------
Net accretion in pre-tax earnings................... $ 44.2 $ 81.5 $ 33.2 $ 97.1
Impairment charges, included in net accretion....... $ 62.4 $ 66.6 $ 10.6 $ 49.9
Unrealized after tax gains.......................... $ 8.4 $ 7.7 $ 20.5 $ 25.8
The securitization programs cover a wide range of products and collateral
types with different prepayment and credit risk characteristics. The prepayment
speed, in the tables below, is based on Constant Prepayment Rate, which
expresses payments as a function of the declining amount of loans at a compound
annual rate. Weighted average expected credit losses are expressed as annual
loss rates.
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2004 (there were no consumer
transactions during 2004) were as follows:
Commercial Equipment
--------------------------
Specialty Equipment
Finance Finance
--------- ---------
Weighted average prepayment speed................... 38.58% 12.04%
Weighted average expected credit losses............. 0.41% 0.78%
Weighted average discount rate...................... 7.18% 9.00%
Weighted average life (in years).................... 1.22 1.94
68
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Key assumptions used in calculating the fair value of the retained
interests in securitized assets by product type at December 31, 2004 were as
follows:
Commercial Equipment
--------------------- Manufactured Recreational
Specialty Equipment Housing and Vehicle and
Finance Finance Home Lending Boat
------- ------- ------------ ------------
Weighted average prepayment speed.................... 27.27% 11.82% 26.55% 20.25%
Weighted average expected credit losses.............. 1.19% 1.28% 1.55% 1.69%
Weighted average discount rate....................... 7.85% 9.49% 13.08% 14.48%
Weighted average life (in years)..................... 0.98 1.38 3.07 2.68
The impact of adverse changes to the key assumptions on the fair value of
retained interests as of December 31, 2004 is shown in the following tables ($
in millions).
Manufactured Recreational
Commercial Housing and Vehicle and
Equipment Home Lending Boat
---------- ----------- -----------
Prepayment speed:
10 percent adverse change .......... $ (10.6) $ (4.3) $ 0.1
20 percent adverse change .......... (20.2) (8.0) 0.2
Expected credit losses:
10 percent adverse change .......... (8.3) (5.4) (0.9)
20 percent adverse change .......... (16.4) (9.9) (1.7)
Weighted average discount rate:
10 percent adverse change .......... (8.1) (2.1) (0.3)
20 percent adverse change .......... (15.9) (4.1) (0.7)
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent or 20 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumptions to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
The following tables summarize static pool credit losses, which represent
the sum of actual losses (life to date) and projected future credit losses,
divided by the original balance of each pool of the respective assets for the
securitizations during the period.
Commercial Equipment Home Equity
Securitizations During: Securitizations During:
----------------------- -----------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Actual and projected losses at:
December 31, 2004 ............................ 1.25% 1.52% 1.77% 2.78% 3.24%
December 31, 2003 ............................ 1.74% 2.04% 3.07% 2.72%
December 31, 2002 ............................ 1.96% 2.65%
September 30, 2002 ........................... 1.92% 2.68%
69
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tables that follow summarize the roll-forward of retained interest
balances and certain cash flows received from and paid to securitization trusts
($ in millions).
Year Ended Year Ended
December 31, December 31,
2004 2003
------------ ------------
Retained Interests
- ------------------
Retained interest at beginning of period........... $1,309.3 $1,355.9
New sales.......................................... 499.5 640.9
Distributions from trusts.......................... (682.5) (728.6)
Change in fair value............................... 1.2 (21.1)
Other, including net accretion, and
clean-up calls................................... 28.1 62.2
-------- --------
Retained interest at end of period................. $1,155.6 $1,309.3
======== ========
Cash Flows During the Periods
- -----------------------------
Proceeds from new securitizations.................. $3,870.4 $4,589.5
Other cash flows received on retained interests.... 719.0 688.2
Servicing fees received............................ 80.3 80.2
Reimbursable servicing advances, net............... (6.0) 7.3
Repurchases of delinquent or foreclosed assets
and ineligible contracts........................ (16.1) (63.0)
Purchases of contracts through clean-up calls...... (164.5) (439.8)
Guarantee draws.................................... (3.2) (2.1)
-------- --------
Total, net...................................... $4,479.9 $4,860.3
======== ========
The following table presents net charge-offs and accounts past due 60 days
or more, on both an owned portfolio basis and managed receivable basis. Net
charge-off percentages are on average owned finance receivables or managed
receivables, while the past due percentages are on ending finance receivable or
managed receivable balances. Managed receivables include finance receivables
plus finance receivables previously securitized and still managed by CIT ($ in
millions).
At or for the At or for the At or for the At or for the
Year Ended Year Ended Three Months Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002 September 30, 2002
----------------- ----------------- ----------------- ------------------
Net Charge-offs of
Finance Receivables
- -------------------
Commercial........ $ 260.2 0.88% $ 494.7 1.79% $ 148.4 2.32% $ 467.9 1.68%
Consumer.......... 41.0 1.11% 27.2 1.53% 6.1 2.46% 24.4 1.36%
------- -------- -------- --------
Total........... $ 301.2 0.91% $ 521.9 1.77% $ 154.5 2.32% $ 492.3 1.67%
======= ======== ======== ========
Net Charge-offs of
Managed Receivables
- -------------------
Commercial........ $ 349.2 0.96% $ 639.5 1.80% $ 199.4 2.30% $ 749.9 2.05%
Consumer.......... 60.7 1.17% 40.6 1.02% 6.8 1.03% 30.5 0.83%
------- -------- -------- --------
Total........... $ 409.9 0.99% $ 680.1 1.72% $ 206.2 2.21% $ 780.4 1.94%
======= ======== ======== ========
Finance Receivables
Past Due 60 Days
or More
- -------------------
Commercial........ $ 491.6 1.64% $ 587.6 2.05% $ 925.5 3.47% $ 996.7 3.62%
Consumer.......... 116.4 2.27% 88.7 3.33% 75.8 7.87% 73.3 7.85%
------- -------- -------- --------
Total........... $ 608.0 1.73% $ 676.3 2.16% $1,001.3 3.63% $1,070.0 3.76%
======= ======== ======== ========
Managed Receivables
Past Due 60 Days
or More
- -------------------
Commercial........ $ 650.6 1.69% $ 824.4 2.22% $1,242.8 3.47% $1,392.6 3.74%
Consumer.......... 227.8 3.45% 197.6 4.22% 152.8 4.36% 146.0 4.26%
------- -------- -------- --------
Total........... $ 878.4 1.95% $1,022.0 2.44% $1,395.6 3.55% $1,538.6 3.78%
======= ======== ======== ========
70
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 -- Other Assets
Other assets consisted of the following ($ in millions):
December 31, December 31,
2004 2003
------------ ------------
Other Assets
- ------------
Accrued interest and receivables from derivative counterparties........... $ 390.0 $ 869.9
Investments in and receivables from non-consolidated subsidiaries......... 719.5 603.2
Deposits on commercial aerospace flight equipment......................... 333.1 283.2
Private fund and direct equity investments................................ 181.0 249.9
Prepaid expenses.......................................................... 105.3 154.7
Repossessed assets and off-lease equipment................................ 98.9 122.2
Furniture and fixtures, miscellaneous receivables and other assets........ 885.9 1,027.2
-------- --------
$2,713.7 $3,310.3
======== ========
Note 8 -- Debt
The following table presents data on commercial paper borrowings ($ in
millions).
December 31, December 31,
2004 2003
------------ ------------
Commercial paper -- outstanding.................. $ 4,210.9 $ 4,173.9
Weighted average interest rate................... 2.55% 1.19%
Weighted average number of days to maturity...... 45 days 50 days
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Commercial paper -- average
borrowings.......................... $4,831.3 $4,648.2 $4,758.7 $4,564.7
Maximum amount outstanding............. $5,326.1 $4,999.1 $4,994.1 $10,713.5
Weighted average interest rate......... 1.68% 1.25% 1.75% 2.25%
The consolidated weighted average interest rates on variable-rate senior
notes at December 31, 2004 and December 31, 2003 were 2.63% and 1.87%,
respectively. Fixed-rate senior debt outstanding at December 31, 2004 matures at
various dates through 2014. The consolidated weighted-average interest rates on
fixed-rate senior debt at December 31, 2004 and December 31, 2003 was 5.53% and
6.12%, respectively. Foreign currency-denominated debt (stated in U.S. Dollars)
totaled $5,017.5 million at December 31, 2004, of which $4,335.4 million was
fixed-rate and $682.1 million was variable-rate. Foreign currency-denominated
debt (stated in U.S. Dollars) totaled $1,601.4 million at December 31, 2003, all
of which was fixed-rate.
The following tables present calendar year contractual maturities and the
high and low interest rates for total variable-rate and fixed-rate debt ($ in
millions).
Commercial Variable-rate December 31, December 31,
Variable-Rate Term Debt Paper Senior Notes 2004 Total 2003
- ----------------------- ---------- ------------- ------------ ------------
Due in 2004............................ $ -- $ -- $ -- $ 8,980.3
Due in 2005 (rates ranging from
1.78% to 3.63%)..................... 4,210.9 3,355.4 7,566.3 3,333.3
Due in 2006 (rates ranging from
2.17% to 3.12%)..................... -- 3,946.3 3,946.3 985.3
Due in 2007 (rates ranging from
2.49% to 3.12%)..................... -- 3,169.0 3,169.0 37.5
Due in 2008 (rates ranging from
2.78% to 3.12%)..................... -- 50.9 50.9 39.8
Due in 2009 (rates ranging from
2.62% to 3.12%)..................... -- 836.0 836.0 --
Due after 2009 (rates ranging from
2.78% to 5.39%)..................... -- 187.4 187.4 206.1
-------- --------- --------- ---------
Total............................... $4,210.9 $11,545.0 $15,755.9 $13,582.3
======== ========= ========= =========
71
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, December 31,
Fixed-Rate Term Debt 2004 2003
- ------------------- ------------ ------------
Due in 2004.......................................... $ -- $ 3,930.2
Due in 2005 (rates ranging from 1.85% to 8.26%)...... 4,589.4 4,328.6
Due in 2006 (rates ranging from 1.70% to 7.75%)...... 2,723.6 2,639.4
Due in 2007 (rates ranging from 2.35% to 7.75%)...... 3,907.6 3,498.9
Due in 2008 (rates ranging from 2.70% to 7.75%)...... 1,959.0 1,920.7
Due in 2009 (rates ranging from 3.35% to 7.75%)...... 1,378.3 309.4
Due after 2009 (rates ranging from 4.25% to 7.75%)... 7,157.2 3,203.6
--------- ---------
Total............................................. $21,715.1 $19,830.8
========= =========
At December 31, 2004, $12.7 billion of unissued debt securities remained
under a shelf registration statement. The following table represents information
on unsecured committed lines of credit at December 31, 2004 that can be drawn
upon to support commercial paper borrowings ($ in millions).
Expiration Total Drawn Available
- ---------- ----- ----- ---------
April 13, 2005.......................... $2,100.0 $ -- $2,100.0
October 14, 2008(1)..................... 2,100.0 308.9 1,791.1
April 14, 2009.......................... 2,100.0 -- 2,100.0
-------- ------ --------
Total credit lines...................... $6,300.0 $308.9 $5,991.1
======== ====== ========
- --------------------------------------------------------------------------------
(1) CIT has the ability to issue up to $400 million of letters of credit under
the $2.1 billion facility expiring in 2008, which, when utilized, reduces
available borrowings under this facility.
The credit line agreements contain clauses that permit extensions beyond
the expiration dates upon written consent from the participating lenders. In
addition to the above lines, CIT has undrawn, unsecured committed lines of
credit of $156 million, which supports the Australia commercial paper program.
Certain foreign operations utilize local financial institutions to fund
operations. At December 31, 2004, local credit facilities totaled $91.7 million,
of which $62.5 million was undrawn and available.
In January 2004 and December 2003, CIT called at par a total of $1.25
billion in term debt securities. These notes were listed on the New York Stock
Exchange under the ticker symbols CIC and CIP and were commonly known as PINEs
("Public Income Notes"). The securities' coupon rates of 8.25% and 8.125% were
marked down to a market interest rate yield of approximately 7.5% in CIT's
financial statements through purchase accounting. In light of the high coupon
rates, we called the securities for redemption pursuant to the terms outlined in
the prospectuses. Once called, we recorded pre-tax gains totaling $50.4 million
in December 2003 and $41.8 million in January 2004 ($30.8 million and $25.5
million after-tax, respectively), as the cash outlay was less than the carrying
value of the securities.
Preferred Capital Securities
In February 1997, CIT Capital Trust I (the "Trust"), a wholly-owned
subsidiary of CIT, issued in a private offering $250.0 million liquidation value
of 7.70% Preferred Capital Securities (the "Capital Securities"), which were
subsequently registered with the Securities and Exchange Commission pursuant to
an exchange offer. Each capital security was recorded at the liquidation value
of $1,000. The Trust subsequently invested the offering proceeds in $250.0
million principal amount Junior Subordinated Debentures (the "Debentures") of
CIT, having identical rates and payment dates. The Debentures of CIT represent
the sole assets of the Trust. Holders of the Capital Securities are entitled to
receive cumulative distributions at an annual rate of 7.70% through either the
redemption date or maturity of the Debentures (February 15, 2027). Both the
Capital Securities issued by the Trust and the Debentures of CIT owned by the
Trust are redeemable in whole or in part on or after February 15, 2007 or at any
time in whole upon changes in specific tax legislation, bank regulatory
guidelines or securities law at the option of CIT at their liquidation value or
principal amount. The securities are redeemable at a specified premium through
February 15, 2017, at which time the redemption price will be at par, plus
accrued interest. Distributions by the Trust are guaranteed by CIT to the extent
that the Trust has funds available for distribution. The Capital Securities were
valued at $260.0 million on June 1, 2001, the date of acquisition by Tyco, in
new basis accounting and the current balance reflects accretion of the premium.
72
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9 -- Derivative Financial Instruments
As part of managing exposure to interest rate, foreign currency, and, in
limited instances, credit risk, CIT, as an end-user, enters into various
derivative transactions, all of which are transacted in over-the-counter markets
with other financial institutions. Derivatives are only utilized to hedge
exposures, and not for speculative purposes. To ensure both appropriate use as a
hedge and to achieve hedge accounting treatment, whenever possible,
substantially all derivatives entered into are designated according to a hedge
objective against a specific or forecasted liability or, in limited instances,
assets. The notional amounts, rates, indices, and maturities of our derivatives
closely match the related terms of the underlying hedged items.
CIT utilizes interest rate swaps to exchange variable-rate interest
underlying forecasted issuances of commercial paper, specific variable-rate debt
instruments, and, in limited instances, variable-rate assets for fixed-rate
amounts. These interest rate swaps are designated as cash flow hedges and
changes in fair value of these swaps, to the extent they are effective as a
hedge, are recorded in other comprehensive income. Ineffective amounts are
recorded in interest expense.
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows are presented in the
following table ($ in millions).
Fair Value Total
Adjustments of Income Unrealized
Derivatives Tax Effects Loss
-------------- ----------- ----------
Balance at December 31, 2002 -- unrealized loss.................... $ 190.8 $(72.5) $118.3
Changes in values of derivatives qualifying as cash flow hedges... (126.2) 49.2 (77.0)
------- ------ ------
Balance at December 31, 2003 -- unrealized loss.................... 64.6 (23.3) 41.3
Changes in values of derivatives qualifying as cash flow hedges... (23.3) 9.1 (14.2)
------- ------ ------
Balance at December 31, 2004 -- unrealized loss.................... $ 41.3 $(14.2) $ 27.1
======= ====== ======
The unrealized loss as of December 31, 2004, presented in the preceding
table, primarily reflects our use of interest rate swaps to convert
variable-rate debt to fixed-rate debt, followed by lower market interest rates.
Assuming no change in interest rates, approximately $6.6 million, net of tax, of
Accumulated Other Comprehensive Loss is expected to be reclassified to earnings
over the next twelve months as contractual cash payments are made. The
Accumulated Other Comprehensive Loss (along with the corresponding swap
liability) will be adjusted as market interest rates change over the remaining
life of the swaps.
The ineffective amounts, due to changes in the fair value of cash flow
hedges, are recorded as either an increase or decrease to interest expense as
presented in the following table ($ in millions).
Increase/Decrease
Ineffectiveness to Interest Expense
--------------- -------------------
For the year ended December 31, 2004.................... $1.4 Decrease
For the year ended December 31, 2003.................... $0.2 Increase
For the three months ended December 31, 2002............ $0.4 Decrease
For the year ended September 30, 2002................... $1.4 Increase
CIT also utilizes interest rate swaps to convert fixed-rate interest on
specific debt instruments to variable-rate amounts. These interest rate swaps
are designated as fair value hedges and changes in fair value of these swaps are
effectively recorded as an adjustment to the carrying value of the hedged item,
as the offsetting changes in fair value of the swaps and the hedged items are
recorded in earnings.
73
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged liability position ($ in
millions):
December 31,
----------------
2004 2003
---- ----
Floating to fixed-rate swaps -- Effectively converts the interest rate on an
cash flow hedges............................ $ 3,533.6 $2,615.0 equivalent amount of commercial paper,
variable-rate notes and selected assets to a
fixed rate.
Fixed to floating-rate swaps -- Effectively converts the interest rate on an
fair value hedges........................... 7,642.6 6,758.2 equivalent amount of fixed-rate notes and
--------- -------- selected assets to a variable rate.
Total interest rate swaps..................... $11,176.2 $9,373.2
========= ========
In addition to the swaps in the table above, in conjunction with
securitizations, at December 31, 2004, CIT has $2.7 billion in notional amount
of interest rate swaps outstanding with the related trusts to protect the trusts
against interest rate risk. CIT entered into offsetting swap transactions with
third parties totaling $2.7 billion in notional amount at December 31, 2004 to
insulate the related interest rate risk.
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid on U.S.
dollar interest rate swaps at December 31, 2004 ($ in millions).
Maturity Floating to Fixed-rate Fixed to Floating-rate
- -------- --------------------------------- --------------------------------
Years Ending Notional Receive Pay Notional Receive Pay
December 31, Amount Rate Rate Amount Rate Rate
- ------------ ------ ---- ---- ------ ---- ----
2005.......................... $1,408.8 2.38% 3.01% $ 11.0 7.85% 3.18%
2006.......................... 392.7 2.34% 3.80% 340.8 3.15% 3.11%
2007.......................... 295.4 2.30% 4.00% 1,112.7 5.62% 4.39%
2008.......................... 362.7 3.21% 6.29% 497.9 4.81% 3.84%
2009.......................... 154.6 2.43% 5.63% 1,300.0 4.47% 3.15%
2010 -- Thereafter............. 669.2 2.65% 5.90% 2,228.1 6.83% 3.96%
-------- --------
Total....................... $3,283.4 2.52% 4.27% $5,490.5 5.62% 3.79%
======== ========
The following table presents the maturity, notional principal amounts and
the weighted average interest rates expected to be received or paid, of foreign
currency interest rate swaps at December 31, 2004 ($ in million).
Floating to Fixed-rate Fixed to Floating-rate
------------------------- -------------------------
Notional Receive Pay Notional Receive Pay Maturity
Foreign Currency Amount Rate Rate Amount Rate Rate Range
- ---------------- ------ ---- ---- ------ ---- ---- -----
Euro............................... $ -- -- -- $ 866.3 4.25% 2.58% 2011
British Sterling................... 17.8 5.00% 5.43% 867.1 5.50% 5.42% 2014-2024
Canadian Dollar.................... 87.1 2.63% 6.34% 418.7 3.35% 1.80% 2005-2009
Australian Dollar.................. 145.3 5.41% 5.49% -- 2006-2009
------ --------
$250.2 $2,152.1
====== ========
Variable rates are based on the contractually determined rate or other
market rate indices and may change significantly, affecting future cash flows.
CIT utilizes foreign currency exchange forward contracts and
cross-currency swaps to hedge currency risk underlying foreign currency loans to
subsidiaries and the net investments in foreign operations. These contracts are
designated as foreign currency cash flow hedges or net investment hedges and
changes in fair value of these contracts are recorded in other comprehensive
income along with the transaction gains and losses on the underlying hedged
items. CIT utilizes cross currency swaps to hedge currency risk underlying
foreign currency debt and selected foreign currency assets. These swaps are
designated as foreign currency cash flow hedges or
74
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
foreign currency fair value hedges and changes in fair value of these contracts
are recorded in other comprehensive income (for cash flow hedges), or
effectively as a basis adjustment (including the impact of the offsetting
adjustment to the carrying value of the hedged item) to the hedged item (for
fair value hedges) along with the transaction gains and losses on the underlying
hedged items.
At December 31, 2004, CIT was party to foreign currency exchange forward
contracts and cross-currency swaps. The following table presents the maturity
and notional principal amounts at December 31, 2004 ($ in millions).
Maturity
Years Ending Foreign Currency Cross-Currency
December 31, Exchange Forwards Swaps
- ------------ ----------------- --------------
2005...................................... $1,832.3 $ 864.1
2006...................................... 760.1 56.6
2007...................................... 219.7 61.1
2008...................................... 7.0 234.8
2009...................................... -- 649.8
2010 -- Thereafter........................ -- 1,018.4
-------- --------
Total.................................. $2,819.1 $2,884.8
======== ========
During 2004, CIT entered into credit default swaps, with a combined
notional value of $98.0 million and terms of 5 years, to economically hedge
certain CIT credit exposures. These swaps do not meet the requirements for hedge
accounting treatment and therefore are recorded at fair value, with both
realized and unrealized gains or losses recorded in other revenue in the
consolidated statement of income. The cumulative fair value adjustment as of
December 31, 2004 amounted to a $5.4 million pretax loss.
CIT also utilizes Treasury locks (bond forwards), which have a notional
amount of $49.1 million at December 31, 2004 and mature in the first quarter of
2005, to hedge interest rate risk associated with planned debt issuances and
certain other forecasted transactions. These derivatives are designated as cash
flow hedges of a forecasted transaction, with changes in fair value of these
contracts recorded in other comprehensive income. Gains and losses recorded in
other comprehensive income are reclassified to earnings in the same period that
the forecasted transaction impacts earnings.
Note 10 -- Accumulated Other Comprehensive Loss
The following table details the components of accumulated other
comprehensive loss, net of tax ($ in millions):
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Changes in fair values of derivatives qualifying
as cash flow hedges............................ $(27.1) $(41.3) $(118.3) $(120.5)
Foreign currency translation adjustments.......... (37.2) (105.8) (75.6) (75.8)
Minimum pension liability adjustments............. (2.7) (0.8) (20.5) (21.0)
Unrealized gain on equity and securitization
investments.................................... 8.6 6.3 13.7 21.0
------ ------- ------- -------
Total accumulated other comprehensive loss........ $(58.4) $(141.6) $(200.7) $(196.3)
====== ======= ======= =======
Note 11 -- Earnings Per Share
Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. The diluted EPS computation
includes the potential impact of dilutive securities, including stock options
and restricted stock grants. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common shares
by CIT at the average market price for the period. Options that have an
anti-dilutive effect are not included in the denominator and averaged
approximately 17.0 million, 17.4 million, 15.4 million and 15.6 million shares
for the years ended December 31, 2004 and 2003, three months ended December 31,
2002 and year ended September 30, 2002.
75
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented ($ in millions, except per share amounts, which are
in whole dollars, shares in thousands).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year Ended December 31, 2004
Basic EPS:........................................... $ 753.6 211,017 $ 3.57
Income available to common stockholders
Effect of Dilutive Securities:
Restricted shares................................. -- 764
Stock options..................................... -- 3,273
--------- -------
Diluted EPS.......................................... $ 753.6 215,054 $ 3.50
========= =======
Year Ended December 31, 2003
Basic EPS:
Income available to common stockholders........... $ 566.9 211,681 $ 2.68
Effect of Dilutive Securities:
Restricted shares................................. -- 396
Stock options..................................... -- 1,066
--------- -------
Diluted EPS.......................................... $ 566.9 213,143 $ 2.66
========= =======
Three Months Ended December 31, 2002
Basic EPS:
Income available to common stockholders........... $141.3 211,573 $ 0.67
Effect of Dilutive Securities:
Restricted shares................................. -- 253
Stock options..................................... -- --
--------- -------
Diluted EPS.......................................... $ 141.3 211,826 $ 0.67
========= =======
Year Ended September 30, 2002
Basic EPS:
Loss attributable to common stockholders.......... $(6,698.7) 211,573 $ (31.66)
Effect of Dilutive Securities:
Restricted shares................................. -- 122
Stock options..................................... -- --
--------- -------
Diluted EPS.......................................... $(6,698.7) 211,695 $ (31.66)
========= =======
Note 12 -- Common Stock
The following table summarizes changes in common stock outstanding for the
respective periods:
Issued Less Treasury Outstanding
------ ------------- -----------
Balance at December 31, 2003...................... 211,848,997 (43,529) 211,805,468
Treasury shares purchased......................... -- (4,625,154) (4,625,154)
Stock options exercised........................... -- 2,970,754 2,970,754
Employee stock purchase plan participation........ -- 25,896 25,896
Restricted shares issued.......................... 263,206 -- 263,206
----------- ---------- -----------
Balance at December 31, 2004...................... 212,112,203 (1,672,033) 210,440,170
=========== ========== ===========
76
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13 -- Other Revenue
The following table sets forth the components of other revenue ($ in
millions).
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Fees and other income................................. $502.9 $586.2 $169.2 $644.5
Factoring commissions................................. 227.0 189.8 55.1 165.5
Gains on sale of leasing equipment.................... 101.6 70.7 8.7 13.6
Gains on securitizations.............................. 59.1 100.9 30.5 149.0
------ ------ ------ ------
Total other revenue................................. $890.6 $947.6 $263.5 $972.6
====== ====== ====== ======
Note 14 -- Salaries and General Operating Expenses
The following table sets forth the components of salaries and general
operating expenses (excluding goodwill amortization) ($ in millions).
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December 31, September 30,
2004 2003 2002 2002
---- ---- ------------- -------------
Salaries and employee benefits....................... $ 612.2 $529.6 $126.8 $517.4
Other operating expenses -- CIT....................... 434.2 383.3 105.8 380.6
Other operating expenses -- TCH....................... -- -- -- 23.0
-------- ------ ------ ------
Total.............................................. $1,046.4 $912.9 $232.6 $921.0
======== ====== ====== ======
Note 15 -- Income Taxes
The effective tax rate varied from the statutory federal corporate income
tax rate as follows:
Percentage of Pretax Income
---------------------------------------------------------------
Year Ended Year Ended Three Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Federal income tax rate....................... 35.0% 35.0% 35.0% 35.0%
Increase (decrease) due to:
State and local income taxes, net of
federal income tax benefit.................. 3.2 3.7 2.6 (0.3)
Foreign income taxes.......................... 1.4 1.0 1.6 (0.4)
Goodwill impairment........................... -- -- -- (36.1)
Interest expense -- TCH........................ -- -- -- (4.2)
Other......................................... (0.6) (0.7) (0.2) 0.1
---- ---- ---- ----
Effective tax rate............................ 39.0% 39.0% 39.0% (5.9)%
==== ==== ==== ====
The provision for income taxes is comprised of the following ($ in millions):
Year Ended Year Ended Three Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Current federal income tax provision.......... $ 1.5 $ -- $ -- $ --
Deferred federal income tax provision......... 321.0 265.1 71.9 276.9
------ ------ ----- ------
Total federal income taxes.................... 322.5 265.1 71.9 276.9
State and local income taxes.................. 69.1 53.5 9.4 30.4
Foreign income taxes.......................... 91.6 46.4 10.7 66.7
------ ------ ----- ------
Total provision for income taxes............ $483.2 $365.0 $92.0 $374.0
====== ====== ===== ======
77
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities are presented below
($ in millions):
December 31, December 31,
2004 2003
------------ ------------
Assets:
Net operating loss carryforwards................... $ 852.1 $ 834.1
Provision for credit losses........................ 190.5 202.4
Alternative minimum tax credits.................... 142.0 142.0
Purchase price adjustments......................... 15.0 67.9
Goodwill........................................... 45.5 65.6
Other comprehensive income items................... 9.8 47.6
Accrued liabilities and reserves................... 22.0 43.8
Other.............................................. 51.8 14.1
--------- --------
Total deferred tax assets........................ 1,328.7 1,417.5
--------- --------
Liabilities:
Leasing transactions (including securitizations)... (2,159.0) (1,944.7)
--------- --------
Net deferred tax (liability)....................... $ (830.3) $ (527.2)
========= ========
At December 31, 2004, CIT had U.S. federal net operating losses of
approximately $2.0 billion, which expire in various years beginning in 2011. In
addition, CIT has various state net operating losses that will expire in various
years beginning in 2005. Federal and state operating losses may be subject to
annual use limitations under section 382 of the Internal Revenue Code of 1986,
as amended, and other limitations under certain state laws. Management believes
that CIT will have sufficient taxable income in future years and can avail
itself of tax planning strategies in order to fully utilize these federal
losses. Accordingly, CIT does not believe a valuation allowance is required with
respect to these federal net operating losses. As of December 31, 2004, based on
management's assessment as to realizability, the net deferred tax liability
includes a valuation allowance of approximately $7.4 million relating to state
net operating losses.
Note 16 -- Postretirement and Other Benefit Plans
Retirement and Postretirement Medical and Life Insurance Benefit Plans
CIT has a number of funded and unfunded noncontributory defined benefit
pension plans covering certain of its U.S. and non-U.S. employees, designed in
accordance with the conditions and practices in the countries concerned. The
retirement benefits under the defined benefit pension plans are based on the
employee's age, years of service and qualifying compensation. CIT's funding
policy is to make contributions to the extent such contributions are not less
than the minimum required by applicable laws and regulations, are consistent
with our long-term objective of ensuring sufficient funds to finance future
retirement benefits, and are tax deductible as actuarially determined.
Contributions are charged to the salaries and employee benefits expense on a
systematic basis over the expected average remaining service period of employees
expected to receive benefits.
The largest plan is the CIT Group Inc. Retirement Plan (the "Plan"), which
accounts for 76% of the total benefit obligation at December 31, 2004. The Plan
covers U.S. employees of CIT who have completed one year of service and have
attained the age of 21. The Company also maintains a Supplemental Retirement
Plan for employees whose benefit in the Plan is subject to Internal Revenue Code
limitations.
The Plan has a "cash balance" formula that became effective January 1,
2001. Certain eligible members had the option of remaining under the Plan
formula as in effect prior to January 1, 2001. Under the cash balance formula,
each member's accrued benefits as of December 31, 2000 were converted to a lump
sum amount, and every year thereafter, the balance is credited with a percentage
(5% to 8% depending on years of service) of the member's "Benefits Pay"
(comprised of base salary, plus certain annual bonuses, sales incentives and
commissions). These balances also receive annual interest credits, subject to
certain government limits. The
78
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest credit was 5.11%, 5.01% and 5.76% for the plan years ended December 31,
2004, 2003 and 2002, respectively. Upon termination or retirement after five
years of employment, the amount credited to a member is to be paid in a lump sum
or converted into an annuity at the option of the member.
CIT also provides certain healthcare and life insurance benefits to
eligible retired U.S. employees. For most eligible retirees, the healthcare
benefit is contributory; the life insurance benefit is noncontributory. Salaried
participants generally become eligible for retiree healthcare benefits after
reaching age 55 with 11 years of continuous CIT service immediately prior to
retirement. Generally, the medical plan pays a stated percentage of most medical
expenses, reduced by a deductible as well as by payments made by government
programs and other group coverage. The retiree health care benefit includes a
limit on CIT's share of costs for all employees who retired after January 31,
2002. The plans are funded on a pay as you go basis.
CIT uses its disclosure date as the measurement date for all Retirement
and Postretirement Medical and Life Insurance Benefit Plans. The measurement
dates included in this report for the Retirement and Postretirement Medical and
Life Insurance Plans are December 31, 2004, 2003, and 2002.
79
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the change in benefit obligation, plan
assets and funded status of the retirement plans as well as the net periodic
benefit cost ($ in millions). All periods presented include amounts and
assumptions relating to the Plan, the unfunded Supplemental Retirement Plan, an
Executive Retirement Plan and various international plans.
Retirement Benefits
-----------------------------------------------------
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period............... $273.0 $225.2 $ 214.4 $184.4
Service cost............................................ 17.7 15.6 4.0 12.6
Interest cost........................................... 15.6 14.4 3.5 13.0
Actuarial loss.......................................... 18.0 23.9 6.2 15.6
Benefits paid........................................... (5.1) (4.6) (1.1) (4.2)
Plan settlements and curtailments....................... (6.2) (4.5) (2.3) (7.6)
Currency translation adjustment......................... 1.5 2.2 0.5 0.6
Other................................................... -- 0.8 -- --
------ ------ ------- ------
Benefit obligation at end of period..................... $314.5 $273.0 $ 225.2 $214.4
====== ====== ======= ======
Change in Plan Assets
Fair value of plan assets at beginning of period........ $212.8 $123.1 $ 119.6 $126.5
Actual return on plan assets............................ 25.5 28.7 6.1 (12.7)
Employer contributions.................................. 23.0 69.4 0.6 16.9
Plan settlements........................................ (6.2) (4.5) (2.3) (7.1)
Benefits paid........................................... (5.1) (4.6) (1.1) (4.2)
Currency translation adjustment......................... 0.6 0.7 0.2 0.2
------ ------ ------- ------
Fair value of plan assets at end of period.............. $250.6 212.8 $ 123.1 $119.6
====== ====== ======= ======
Reconciliation of Funded Status
Funded status........................................... $(63.9) $(60.2) $(102.1) $(94.8)
Unrecognized net actuarial loss......................... 63.9 57.8 56.5 54.7
Unrecognized prior service cost......................... -- -- -- --
------ ------ ------- ------
Net amount recognized................................... $ -- $ (2.4) $ (45.6) $(40.1)
====== ====== ======= ======
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost.................................... $ 51.3 $ 45.2 $ -- $ --
Accrued benefit liability............................... (55.1) (48.9) (79.2) (75.0)
Intangible asset........................................ -- -- -- --
Accumulated other comprehensive income.................. 3.8 1.3 33.6 34.9
------ ------ ------- ------
Net amount recognized................................... $ -- $ (2.4) $ (45.6) $(40.1)
====== ====== ======= ======
Weighted-average Assumptions Used to Determine
Benefit Obligations at Period End
Discount rate........................................... 5.70% 5.96% 6.45% 6.68%
Rate of compensation increase........................... 4.25% 4.26% 4.24% 4.22%
Weighted-average Assumptions Used to Determine
Net Periodic Pension Cost for Periods
Discount rate........................................... 5.96% 6.45% 6.68% 7.40%
Rate of compensation increase........................... 4.26% 4.24% 4.22% 4.70%
Expected long-term return on plan assets................ 7.95% 7.92% 7.90% 9.93%
Components of Net Periodic Benefit Cost
Service cost............................................ $ 17.7 $ 15.6 $ 4.0 $ 12.6
Interest cost........................................... 15.6 14.4 3.5 13.0
Expected return on plan assets.......................... (16.2) (9.4) (2.3) (11.9)
Amortization of net loss................................ 2.8 3.5 0.8 0.3
Amortization of prior service cost...................... -- -- -- --
------ ------ ------- ------
Total net periodic expense.............................. $ 19.9 $ 24.1 $ 6.0 $ 14.0
====== ====== ======= ======
80
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected long-term rate of return assumptions for pension assets are based
on projected asset allocation and historical and expected future returns for
each asset class. Independent analysis of historical and projected asset class
returns, inflation and interest rates are provided by our investment consultants
and reviewed as part of the process to develop our assumptions.
The accumulated benefit obligation for all defined benefit pension plans
was $271.2 million, $232.4 million, and $193.0 million at December 31, 2004,
2003, and, 2002, respectively. Plans with accumulated benefit obligations in
excess of plan assets relate primarily to non-qualified U.S. plans and certain
international plans. The following table presents additional data relating to
these plans ($ in millions).
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Information for Pension Plans with an Accumulated
Benefit Obligation in Excess of Plan Assets
Projected benefit obligation............................ $ 74.2 $ 61.2 $225.2 $214.4
Accumulated benefit obligation.......................... 59.0 47.4 193.0 184.6
Fair value of plan assets............................... 9.9 7.1 123.1 119.6
Additional Information
(Decrease) increase in Minimum Liability Included in
Other Comprehensive Income........................... $ 2.5 $(32.3) $ (1.3) $ 34.9
Expected Future Cashflows
Expected Company Contributions in the following
fiscal year.......................................... $ 4.0
Expected Benefit Payments
1st Year following the disclosure date............... $ 22.7
2nd Year following the disclosure date............... $ 13.5
3rd Year following the disclosure date............... $ 18.7
4th Year following the disclosure date............... $ 14.0
5th Year following the disclosure date............... $ 16.6
Years 6 thru 10 following the disclosure date........ $106.6
Pension Plan Weighted-average Asset Allocations
Equity securities....................................... 59.7% 67.6% 61.1% 58.2%
Debt securities......................................... 36.0% 32.1% 38.6% 41.7%
Real estate............................................. -- -- -- --
Other................................................... 4.3% 0.3% 0.3% 0.1%
----- ----- ----- -----
Total pension assets.................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Of the 4.3% identified as other, approximately 3.5%, or $8.75 million, was
temporarily being held in cash for investment in equity securities on the first
business day of the following year.
CIT maintains a "Statement of Investment Policies and Objectives" that
specifies investment guidelines pertaining to the investment, supervision and
monitoring of pension assets to ensure consistency with the long-term objective
of ensuring sufficient funds to finance future retirement benefits. The policy
asset allocation guidelines allows for assets to be allocated between 50% to 70%
in Equities and 30% to 50% in Fixed-Income investments. The guidelines provide
specific guidance related to asset class objectives, fund manager guidelines and
identification of both prohibited and restricted transactions, and are reviewed
on a periodic basis by both the Employee Benefits Plans Committee of CIT and the
Plans' external investment consultants to ensure the long-term investment
objectives are achieved. Members of the Committee are appointed by the Chief
Executive Officer of CIT and include the Chief Executive Officer, Chief
Financial Officer, General Counsel, and other senior executives.
There were no equity securities of CIT or its subsidiaries included in the
pension plan assets at December 31, 2004, 2003 and 2002, respectively. CIT
expects to contribute $4.0 million to its pension plans and $4.0 million to its
other postretirement benefit plans in 2005.
81
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth data relating to postretirement plans ($ in
millions).
Postretirement Benefits
-------------------------------------------------------
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Change in Benefit Obligation
Benefit obligation at beginning of period............... $ 58.0 $ 48.1 $ 46.7 $ 39.5
Service cost............................................ 1.9 1.5 0.3 1.2
Interest cost........................................... 3.2 3.0 0.8 2.9
Actuarial loss.......................................... .7 9.6 0.8 5.3
Net benefits paid....................................... (3.9) (4.2) (0.5) (2.2)
Plan amendments......................................... -- -- -- --
------ ------ ------ ------
Benefit obligation at end of period..................... $ 59.9 $ 58.0 $ 48.1 $ 46.7
====== ====== ====== ======
Change in Plan Assets
Fair value of plan assets at beginning of period........ $ -- $ -- $ -- $ --
Net benefits paid....................................... (3.9) (4.2) (0.5) (2.2)
Employer contributions.................................. 3.9 4.2 0.5 2.2
------ ------ ------ ------
Fair value of plan assets at end of period.............. $ -- $ -- $ -- $ --
====== ====== ====== ======
Reconciliation of Funded Status
Funded status........................................... $(59.9) $(58.0) $(48.1) $(46.7)
Unrecognized net actuarial loss......................... 15.6 15.5 6.0 5.2
------ ------ ------ ------
Accrued cost............................................ $(44.3) $(42.5) $(42.1) $(41.5)
====== ====== ====== ======
Amounts Recognized in the Consolidated Balance Sheets
Prepaid benefit cost.................................... $ -- $ -- $ -- $ --
Accrued benefit liability............................... (44.3) (42.5) (42.1) (41.5)
Intangible asset........................................ -- -- -- --
Accumulated other comprehensive income.................. -- -- -- --
------ ------ ------ ------
Net amount recognized................................... $(44.3) $(42.5) $(42.1) $(41.5)
====== ====== ====== ======
Weighted-average Assumptions Used to Determine
Benefit Obligations at Period End
Discount rate........................................... 5.50% 6.00% 6.50% 6.75%
Rate of compensation increase........................... 4.25% 4.25% 4.25% 4.25%
Weighted-average Assumptions Used to Determine Net
Periodic Benefit Cost for periods
Discount rate........................................... 6.00% 6.50% 6.75% 7.50%
Rate of compensation increase........................... 4.25% 4.25% 4.25% 4.50%
Components of Net Periodic Benefit Cost
Service cost............................................ $ 1.9 $ 1.5 $ 0.3 $ 1.2
Interest cost........................................... 3.2 3.0 0.8 2.9
Amortization of prior service cost...................... -- -- -- --
Amortization of net loss................................ 0.6 0.1 -- 0.1
------ ------ ------ ------
Total net periodic expense.............................. $ 5.7 $ 4.6 $ 1.1 $ 4.2
====== ====== ====== ======
Assumed Health Care Trend Rates at Period End
Healthcare cost trend rate assumed for next year
Pre-65............................................... 12.00% 12.00% 10.00% 11.00%
Post-65.............................................. 10.00% 12.00% 10.00% 11.00%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate).................... 5.00% 5.00% 5.00% 5.00%
Year that the rate reaches the ultimate trend rate...... 2018 2018 2008 2008
82
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following estimated effects
($ in millions).
Postretirement Benefits
-----------------------------------------------------
Year Year Three Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Effect of One-percentage Point Increase on:
Period end postretirement benefit obligation............ $ 2.8 $ 2.7 $ 2.3 $ 2.2
Total of service and interest
cost components......................................... $ 0.2 $ 0.1 $ -- $ 0.1
Effect of One-percentage Point Decrease on:
Period end postretirement benefit obligation............ $(2.7) $(2.6) $(2.2) $(2.1)
Total of service and interest cost components........... $(0.2) $(0.1) $ -- $(0.1)
On December 8, 2003, the President of the United States signed into law
the Medicare Prescription Drug Improvement and Modernization Act of 2003. The
Act introduces a prescription drug benefit under Medicare (Medicare Part D) as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with FASB Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003", CIT prospectively recognized the effects of the
subsidy in the third quarter 2004. In total, at the time of recognition, July 1,
2004, it was estimated that future subsidies would reduce the Company's
accumulated postretirement benefit obligation by approximately $3.5 million. As
a result, the 2004 net periodic postretirement benefit expense was reduced by
$0.3 million. Projected benefit payments and the effects of the Medicare Rx
subsidy recognition are as follows:
Medicare
Projected Benefit Payments Gross Rx Subsidy Net
- ------------------------ ------ ---------- ------
2005.......................................... $ 4.0 $ -- $ 4.0
2006.......................................... $ 4.2 $0.3 $ 3.9
2007.......................................... $ 4.5 $0.4 $ 4.1
2008.......................................... $ 4.7 $0.4 $ 4.3
2009.......................................... $ 4.8 $0.4 $ 4.4
2010 - 2014................................... $24.2 $1.8 $22.4
Savings Incentive Plan
CIT also has a number of defined contribution retirement plans covering
certain of its U.S. and non-U.S. employees, designed in accordance with
conditions and practices in the countries concerned. Employee contributions to
the plans are subject to regulatory limitations and the specific plan
provisions. The largest plan is the CIT Group Inc. Savings Incentive Plan, which
qualifies under section 401(k) of the Internal Revenue Code and accounts for 85%
of CIT's total Savings Incentive Plan expense for the year ended December 31,
2004. CIT's expense is based on specific percentages of employee contributions
and plan administrative costs and aggregated $19.9 million, $16.9 million and
$4.0 million and for the years ended December 31, 2004 and 2003 and the three
months ended December 31, 2002.
Corporate Annual Bonus Plan
The CIT Group Inc. Annual Bonus Plan and Discretionary Bonus Plan together
make-up CIT's annual cash bonus plan. The amount of awards depends on a variety
of factors, including corporate performance and individual performance during
the fiscal period for which awards are made and is subject to approval by the
Compensation Committee of the Board of Directors. Bonus payments of $74.4
million for the year ended December 31, 2004, were paid in February 2005. For
the year ended December 31, 2003, $59.0 million were awarded. A bonus of $20.1
million for the six months performance period from July 1, 2002 through December
31, 2002 was paid in February 2003.
83
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Equity Compensation Plan
CIT sponsors a Long-Term Equity Compensation Plan (the "ECP"). The ECP
allows CIT to issue to employees up to 36,000,000 shares of common stock through
grants of annual incentive awards, incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares and performance
units. Of the 36,000,000 shares, no more than 5,000,000 shares may be issued in
connection with awards of restricted stock, performance shares and performance
units. Common stock issued under the ECP may be either authorized but unissued
shares, treasury shares or any combination thereof. Options granted to employees
in 2004 have a vesting schedule of one third per year for three years, have a
10-year term from the date of grant and were issued with strike prices equal to
the fair market value of the common stock on the date of grant. Restricted stock
granted to employees in 2004 has two or three-year cliff vesting. A new
Performance Share program was rolled out in 2004. Performance Share grants have
a three-year performance-based vesting.
Data for the stock option plans is summarized as follows:
Year Ended December 31, 2004 Year Ended December 31, 2003
---------------------------- ----------------------------
Weighted Weighted
Average Price Average Price
Options Per Option Options Per Option
----------- ------------- ---------- --------------
Outstanding at beginning of period................ 18,766,824 $30.48 15,335,255 $33.13
January Grant..................................... 1,895,632 $39.22 4,240,644 $21.05
July Grant........................................ 1,802,050 $37.60 648,485 $27.74
Granted - Other................................... 673,624 $35.12 485,625 $27.27
Exercised......................................... (2,970,754) $23.52 (870,357) $23.02
Forfeited......................................... (303,469) $36.67 (1,072,828) $34.25
---------- ------ ---------- ------
Outstanding at end of period...................... 19,863,907 $33.07 18,766,824 $30.48
========== ====== ========== ======
Options exercisable at end of period.............. 8,201,726 $39.34 6,730,863 $43.18
========== ====== ========== ======
In 2004, 3,697,682 options were granted to employees as part of the
long-term incentive process. In addition, 673,624 CIT options were granted to
new hires as well as for retention purposes. In 2003, 4,889,129 options were
granted to employees as part of the long-term incentive process. In addition,
485,625 CIT options were granted to new hires and employees returning from
leaves of absence.
The weighted average fair value of new options granted was $7.51 and $5.30
for the years ended December 31, 2004 and 2003. The fair value of new options
granted was determined at the date of grant using the Black-Scholes
option-pricing model, based on the following assumptions. Due to limited Company
history as a public company, no forfeiture rate was used.
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2004
January, 2004....................... 3-5 Years 1.22% 21.5% - 23.4% 2.20% - 3.02%
February, 2004...................... 3-5 Years 1.33% 21.5% - 23.4% 2.16% - 2.98%
February, 2004 -- Director Grant.... 10 Years 1.33% 22.4% 4.02%
April, 2004......................... 5 Years 1.48% 23.3% 3.52%
May, 2004........................... 5 Years 1.51% 23.3% 3.96%
May, 2004 -- Director Grant......... 10 Years 1.51% 22.4% 4.83%
July, 2004.......................... 3-5 Years 1.38% 20.5% - 23.0% 3.10% - 3.72%
September, 2004..................... 3-5 Years 1.41% 20.5% - 23.0% 2.83% - 3.38%
October, 2004....................... 3-5 Years 1.42% 18.4% - 22.6% 2.78% - 3.26%
84
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected Average Expected Risk Free
Option Issuance Option Life Range Dividend Yield Volatility Range Interest Rate Range
- --------------- ----------------- -------------- ---------------- -------------------
2003
January, 2003....................... 3-5 years 2.28% 31.6% - 33.4% 2.11% - 3.00%
January, 2003 -- Director Grant...... 10 Years 2.28% 28.2% 4.01%
March 2003 -- Other.................. 3-5 Years 2.65% 29.5% - 33.2% 2.12% - 2.97%
May, 2003 -- Director Grant.......... 10 Years 2.11% 28.2% 3.44%
July, 2003.......................... 3-5 years 1.70% 29.3% - 31.0% 2.06% - 3.10%
July, 2003 -- Director Grant......... 10 Years 1.70% 28.1% 4.20%
September, 2003 -- Other............. 3-5 Years 1.70% 29.3% - 31.0% 2.62% - 3.61%
The following table summarizes information about stock options outstanding
and options exercisable at December 31, 2004 and 2003.
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
2004
$18.14 - $27.21 10,503,846 7.7 $ 22.35 4,076,055 $ 22.62
$27.22 - $40.83 6,608,016 8.7 $ 36.20 1,373,626 $ 34.66
$40.84 - $61.26 858,846 4.9 $ 51.24 858,846 $ 51.24
$61.27 - $91.91 1,758,648 3.3 $ 68.89 1,758,648 $ 68.89
$91.92 - $137.87 132,961 3.1 $131.01 132,961 $131.01
$137.88 - $206.82 1,590 3.4 $160.99 1,590 $160.99
---------- ---------
19,863,907 8,201,726
========== =========
2003
$18.14 - $27.21 13,343,619 8.7 $ 22.38 2,850,463 $ 22.98
$27.22 - $40.83 2,598,485 8.3 $ 32.93 1,055,680 $ 35.38
$40.84 - $61.26 899,290 5.9 $ 51.27 899,290 $ 51.27
$61.27 - $91.91 1,779,982 4.4 $ 68.90 1,779,982 $ 68.90
$91.92 - $137.87 143,858 4.1 $130.82 143,858 $130.82
$137.88 - $206.82 1,590 4.4 $160.99 1,590 $160.99
---------- ---------
18,766,824 6,730,863
========== =========
Employee Stock Purchase Plan
In October 2002, CIT adopted an Employee Stock Purchase Plan (the "ESPP")
for all employees customarily employed at least 20 hours per week. The ESPP is
available to employees in the United States and to certain international
employees. Under the ESPP, CIT is authorized to issue up to 1,000,000 shares of
common stock to eligible employees. Employees can choose to have between 1% and
10% of their base salary withheld to purchase shares quarterly, at a purchase
price equal to 85% of the fair market value of CIT common stock on either the
first business day or the last business day of the quarterly offering period,
whichever is lower. The amount of common stock that may be purchased by a
participant through the plan is generally limited to $25,000 per year. A total
of 87,551 shares were purchased under the plan in 2004 and 88,323 shares were
purchased under the plan in 2003.
Restricted Stock
A new Performance Shares program was launched in February 2004 under the
Long-Term Compensation Plan, and 693,328 performance shares were awarded. These
shares have a three-year performance-based vesting period. The performance
targets are based upon a combination of consolidated return on tangible equity
measurements and compounded annual EPS growth rates.
During 2004, 59,163 restricted shares were awarded to employees under the
Long-Term Equity Compensation Plan. These shares were awarded at the fair market
value on the date of the grant and have a two or three-year cliff-vest period.
In addition, 10,481 shares were granted to independent members of the Board of
Directors, who elected
85
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to receive shares in lieu of cash compensation for their retainer. In
2003, CIT issued 1,229,450 restricted shares to employees and 6,488 shares were
granted to independent members of the Board of Directors. The restricted shares
issued to directors in lieu of cash compensation vest on the first anniversary
of the grant.
For the year ended December 31, 2004 and 2003, three months ended December
31, 2002 and year ended September 30, 2002, $23.5 million, $8.8 million, $1.2
million and $5.2 million, respectively, of expenses are included in salaries and
general operating expenses related to restricted stock.
Note 17 -- Commitments and Contingencies
The accompanying table summarizes the contractual amounts of
credit-related commitments and purchase and funding commitments. ($ in
millions).
December 31, 2004
-------------------------------------
Due to Expire December 31,
---------------------- 2003
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
Credit Related Commitments
Financing and leasing assets.............................. $1,467.5 $6,960.8 $8,428.3 $5,934.3
Letters of credit and acceptances:
Standby letters of credit................................. 611.0 7.3 618.3 508.7
Other letters of credit................................... 588.3 -- 588.3 694.0
Acceptances............................................... 16.4 -- 16.4 9.3
Guarantees................................................ 120.9 12.2 133.1 133.2
Purchase and Funding Commitments
Aerospace purchase commitments............................ 906.0 1,262.0 2,168.0 2,934.0
Other manufacturer purchase commitments................... 397.0 -- 397.0 197.2
Sale-leaseback payments................................... 31.0 464.4 495.4 486.4
Venture capital fund commitments.......................... 0.5 79.3 79.8 124.2
In the normal course of meeting the financing needs of its customers, CIT
enters into various credit-related commitments, including commitments to provide
financing and leasing capital, letters of credit and guarantees. Standby letters
of credit obligate CIT to pay the beneficiary of the letter of credit in the
event that a CIT client to which the letter of credit was issued does not meet
its related obligation to the beneficiary. These financial instruments generate
fees and involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated balance sheets. To minimize potential
credit risk, CIT generally requires collateral and other credit-related terms
and conditions from the customer. At the time credit-related commitments are
granted, the fair value of the underlying collateral and guarantees typically
approximates or exceeds the contractual amount of the commitment. In the event a
customer defaults on the underlying transaction, the maximum potential loss will
generally be limited to the contractual amount outstanding less the value of all
underlying collateral and guarantees.
Guarantees are issued primarily in conjunction with CIT's factoring
product, whereby CIT provides the client with credit protection for its trade
receivables without actually purchasing the receivables. The trade terms are
generally sixty days or less. In the event that the customer is unable to pay
according to the contractual terms, then the receivables would be purchased. As
of December 31, 2004, there were no outstanding liabilities relating to these
credit-related commitments or guarantees, as amounts are generally billed and
collected on a monthly basis.
CIT has entered into aerospace commitments to purchase commercial aircraft
from both Airbus Industrie and The Boeing Company. The commitment amounts
detailed in the table are based on appraised values, actual amounts will vary
based upon market factors at the time of delivery. The remaining units to be
purchased are 43, with 18 to be completed in 2005. Lease commitments are in
place for fourteen of the eighteen units to be delivered in 2005. The order
amount excludes CIT's options to purchase additional aircraft.
86
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Outstanding commitments to purchase equipment to be leased to customers,
other than the aircraft detailed above, relates primarily to rail equipment.
Additionally, CIT is party to railcar sale-leaseback transactions under which it
is obligated to pay a remaining total of $495.4 million, approximately $31
million per year through 2010 and declining thereafter through 2024, which is
more than offset by CIT's re-lease of the assets, contingent on its ability to
maintain railcar usage. In conjunction with this sale-leaseback transaction, CIT
has guaranteed all obligations of the related consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
25 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies.
Note 18 -- Lease Commitments
The following table presents future minimum rentals under noncancellable
long-term lease agreements for premises and equipment at December 31, 2004 ($ in
millions).
Years Ended December 31, Amount
- ------------------------ ------
2005........................................................... $ 46.7
2006........................................................... 38.5
2007........................................................... 30.5
2008........................................................... 25.5
2009........................................................... 5.0
Thereafter..................................................... 3.6
------
Total.......................................................... $149.8
======
In addition to fixed lease rentals, leases generally require payment of
maintenance expenses and real estate taxes, both of which are subject to rent
escalation provisions. Minimum payments have not been reduced by minimum
sublease rentals of $32.1 million due in the future under noncancellable
subleases.
Rental expense, net of sublease income on premises and equipment, was as
follows ($ in millions).
Three
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
2004 2003 2002 2002
------------ ------------ ------------ -------------
Premises............... $31.8 $34.0 $ 9.2 $38.4
Equipment.............. 8.4 9.3 2.1 8.4
Less sublease income... (9.1) (9.4) (1.8) (9.0)
----- ----- ----- -----
Total.................. $31.1 $33.9 $ 9.5 $37.8
===== ===== ===== =====
Note 19 -- Fair Values of Financial Instruments
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the estimated fair value of CIT's financial instruments,
excluding leasing transactions accounted for under SFAS 13. The fair value
estimates are made at a discrete point in time based on relevant market
information and information about the financial instrument, assuming adequate
market liquidity. Because no established trading market exists for a significant
portion of CIT's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involving uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions or estimation methods may significantly affect
the estimated fair values. Because of these limitations, management provides no
assurance that the estimated fair values presented would necessarily be realized
upon disposition or sale.
87
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Actual fair values in the marketplace are affected by other significant
factors, such as supply and demand, investment trends and the motivations of
buyers and sellers, which are not considered in the methodology used to
determine the estimated fair values presented. In addition, fair value estimates
are based on existing financial instruments without attempting to estimate the
value of future business transactions and the value of assets and liabilities
that are part of CIT's overall value but are not considered financial
instruments. Significant assets and liabilities that are not considered
financial instruments include customer base, operating lease equipment, premises
and equipment, assets received in satisfaction of loans, and deferred tax
balances. In addition, tax effects relating to the unrealized gains and losses
(differences in estimated fair values and carrying values) have not been
considered in these estimates and can have a significant effect on fair value
estimates. The carrying amounts for cash and cash equivalents approximate fair
value because they have short maturities and do not present significant credit
risks. Credit-related commitments, as disclosed in Note 17 -- "Commitments and
Contingencies", are primarily short-term floating-rate contracts whose terms and
conditions are individually negotiated, taking into account the creditworthiness
of the customer and the nature, accessibility and quality of the collateral and
guarantees. Therefore, the fair value of credit-related commitments, if
exercised, would approximate their contractual amounts.
Estimated fair values, recorded carrying values and various assumptions
used in valuing CIT's financial instruments are set forth below ($ in millions).
December 31, 2004 December 31, 2003
Asset/(Liability) Asset/(Liability)
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
Finance receivables-loans(1).............................. $27,080.8 $27,186.5 $24,620.1 $24,711.3
Finance receivables-held for sale......................... 1,640.8 1,640.8 918.3 918.3
Retained interest in securitizations and
other investments(2)................................... 1,228.2 1,228.2 1,380.8 1,380.8
Other assets(3)........................................... 1,133.5 1,133.5 1,287.8 1,287.8
Commercial paper(4)....................................... (4,210.9) (4,210.9) (4,173.9) (4,173.9)
Variable-rate senior notes (including accrued
interest payable)(5)................................... (11,576.2) (11,635.3) (9,428.9) (9,440.5)
Fixed-rate senior notes (including accrued
interest payable)(5)................................... (22,037.2) (22,659.1) (20,123.7) (21,060.9)
Preferred capital securities (including accrued
interest payable)(6)................................... (261.3) (280.3) (263.0) (286.4)
Credit balances of factoring clients and other
liabilities(7) 6,025.1 6,025.1 (6,318.7) (6,318.7)
Derivative financial instruments(8):
Interest rate swaps, net............................... (17.2) (17.2) (36.1) (36.1)
Cross-currency swaps, net.............................. 369.9 369.9 254.3 254.3
Foreign exchange forwards, net......................... (161.8) (161.8) (216.0) (216.0)
Credit default swaps, net.............................. 5.4 5.4 -- --
Treasury locks......................................... 0.2 0.2 -- --
- --------------------------------------------------------------------------------
(1) The fair value of performing fixed-rate loans was estimated based upon a
present value discounted cash flow analysis, using interest rates that
were being offered at the end of the year for loans with similar terms to
borrowers of similar credit quality. Discount rates used in the present
value calculation range from 3.90% to 8.65% for December 31, 2004 and
4.63% to 7.36% for December 31, 2003. The maturities used represent the
average contractual maturities adjusted for prepayments. For floating-rate
loans that reprice frequently and have no significant change in credit
quality, fair value approximates carrying value. The net carrying value of
lease finance receivables not subject to fair value disclosure totaled
$7.4 billion at December 31, 2004 and $6.0 billion at December 31, 2003.
(2) Fair values of retained interests in securitizations are calculated
utilizing current and anticipated credit losses, prepayment speeds and
discount rates. Other investment securities actively traded in a secondary
market were valued using quoted available market prices.
(3) Other assets subject to fair value disclosure include accrued interest
receivable, certain investment securities and miscellaneous other assets.
The carrying amount of accrued interest receivable approximates fair
value. The carrying value of other assets not subject to fair value
disclosure totaled $1.6 billion at December 31, 2004 and $2.0 billion at
December 31, 2003.
(4) The estimated fair value of commercial paper approximates carrying value
due to the relatively short maturities.
(5) The difference between the carrying value of fixed-rate senior notes,
variable rate senior notes and preferred capital securities and the
corresponding balances reflected in the consolidated balance sheets is
accrued interest payable. These amounts are excluded from the other
liabilities balances in this table. Fixed-rate notes were valued using a
present value discounted cash flow analysis with a discount rate
approximating current market rates for issuances by CIT of similar term
debt at the end of the year. Discount rates used in the present value
calculation ranged from 2.74% to 6.03% at December 31, 2004 and 1.54% to
6.32% at December 31, 2003.
(6) Preferred capital securities were valued using a present value discounted
cash flow analysis with a discount rate approximating current market rates
of similar issuances at the end of the year.
(7) The estimated fair value of credit balances of factoring clients
approximates carrying value due to their short settlement terms. Other
liabilities include accrued liabilities and deferred federal income taxes.
Accrued liabilities and payables with no stated maturities have an
estimated fair value that approximates carrying value. The carrying value
of other liabilities not subject to fair value disclosure totaled $0.9
billion and $0.6 billion December 31, 2004 and 2003, respectively.
(8) CIT enters into derivative financial instruments for hedging economic
exposures only. The estimated fair values are calculated internally using
market data and represent the net amount receivable or payable to
terminate the agreement, taking into account current market rates. See
Note 9 -- "Derivative Financial Instruments" for notional principal
amounts associated with the instruments.
88
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20 -- Certain Relationships and Related Transactions
CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P.
("DFS"), a joint venture that offers financing to Dell's customers. The joint
venture provides Dell with financing and leasing capabilities that are
complementary to its product offerings and provides CIT with a steady source of
new financings. In 2004, CIT and Dell agreed to extend the current agreement
beyond October 2005 and to modify certain contractual terms of the relationship.
The new agreements provide Dell with the option to purchase CIT's 30% interest
in DFS in February 2008 based on a formula tied to DFS profitability, within a
range of $100 million to $345 million. CIT has the right to purchase a minimum
percentage of DFS's finance receivables on a declining scale through January
2010.
CIT regularly purchases finance receivables from DFS at a premium,
portions of which are typically securitized within 90 days of purchase from DFS.
CIT has limited recourse to DFS on defaulted contracts. In accordance with the
joint venture agreement, net income and losses generated by DFS as determined
under GAAP are allocated 70% to Dell and 30% to CIT. The DFS board of directors
voting representation is equally weighted between designees of CIT and Dell,
with one independent director. DFS is not consolidated in CIT's financial
statements and is accounted for under the equity method. At December 31, 2004
and 2003, financing and leasing assets related to the DFS program (included in
the CIT Consolidated Balance Sheet) were $2.0 billion and $1.4 billion, and
securitized assets included in managed assets were $2.5 billion at both periods.
In addition to the owned and securitized assets acquired from DFS, CIT's
investment in and loans to the joint venture were approximately $267 million and
$205 million at December 31, 2004 and 2003.
CIT also has a joint venture arrangement with Snap-on Incorporated
("Snap-on") that has a similar business purpose and model to the DFS arrangement
described above, including credit recourse on defaulted receivables. The
agreement with Snap-on extends until January 2006. CIT and Snap-on have 50%
ownership interests, 50% board of directors' representation, and share income
and losses equally. The Snap-on joint venture is accounted for under the equity
method and is not consolidated in CIT's financial statements. At both December
31, 2004 and 2003, the related financing and leasing assets and securitized
assets were $1.1 billion and $0.1 billion, respectively. In addition to the
owned and securitized assets purchased from the Snap-on joint venture, CIT's
investment in and loans to the joint venture were approximately $16 million and
$17 million at both December 31, 2004 and 2003. Both the Snap-on and the Dell
joint venture arrangements were acquired in a 1999 acquisition.
Since December 2000, CIT has been a joint venture partner with Canadian
Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based
lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint
venture, and share income and losses equally. This entity is not consolidated in
CIT's financial statements and is accounted for under the equity method. As of
December 31, 2004 and 2003, CIT's investment in and loans to the joint venture
were $191 million and $119 million.
CIT invests in various trusts, partnerships, and limited liability
corporations established in conjunction with structured financing transactions
of equipment, power and infrastructure projects. CIT's interests in certain of
these entities were acquired by CIT in November 1999, and others were
subsequently entered into in the normal course of business. At December 31, 2004
and 2003, other assets included $19 million and $21 million of investments in
non-consolidated entities relating to such transactions that are accounted for
under the equity or cost methods.
Certain shareholders of CIT provide investment management services in the
normal course of business in conjunction with CIT's employee benefit plans.
Note 21 -- Business Segment Information
Management's Policy in Identifying Reportable Segments
CIT's reportable segments are comprised of strategic business units
aggregated into segments based upon the core competencies relating to product
origination, distribution methods, operations and servicing, and the nature of
their regulatory environment. This segment reporting is consistent with the
presentation to management.
89
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment reporting was modified in two ways in 2004. First, in order to
better align with the market place and improve efficiency, the former Structured
Finance segment was merged with Capital Finance, and at the same time the
telecommunications and media portfolio was moved to the Business Credit unit of
Commercial Finance. Secondly, the Specialty Finance -- consumer unit, consisting
primarily of home lending and other loans to consumers, was broken out as a
separate segment. All prior periods have been conformed to these changes and
this updated presentation is consistent with the reporting to management during
2004.
Segment reporting was modified, beginning in the quarter ended March 31,
2003, to reflect Equipment Finance and Capital Finance as separate segments.
Prior periods have been restated to conform to this current presentation.
Previously, these two strategic business units were combined as the Equipment
Financing and Leasing segment. This new presentation is consistent with
reporting to management.
Types of Products and Services
CIT has five reportable segments: Specialty Finance -- commercial,
Specialty Finance -- consumer, Commercial Finance, Equipment Finance and Capital
Finance. These segments, other than Commercial Finance, offer secured lending
and leasing products to midsize and larger companies across a variety of
industries, including aerospace, construction, rail, machine tool, business
aircraft, technology, manufacturing and transportation. The Commercial Finance
segment offers secured lending and receivables collection as well as other
financial products to small and midsize companies. These include secured
revolving lines of credit and term loans, credit protection, accounts receivable
collection, import and export financing and factoring, debtor-in-possession and
turnaround financing. The Specialty Finance -- consumer segment offers home
lending products to consumers primarily through a network of brokers and
correspondents.
Segment Profit and Assets
Because CIT generates a majority of its revenue from interest, fees and
asset sales, management relies primarily on operating revenues to assess the
performance of a segment. CIT also evaluates segment performance based on profit
after income taxes, as well as asset growth, credit risk management and other
factors.
Total segment returns were improved in 2004 in comparison to 2003 and
included rebounds in Capital Finance and Equipment Finance from disappointing
2003 results. Corporate and Other for 2004 included the reduction to the
specific telecommunications reserve for credit losses and the first quarter gain
on the call of debt.
The business segments' operating margins and net income for the year ended
December 31, 2003 include the allocation (from Corporate and Other) of
additional borrowing costs stemming from the 2002 disruption to the Company's
funding base and increased liquidity levels. These additional borrowing and
liquidity costs had a greater impact in 2003 than in 2002 and were included in
Corporate and Other in 2002. Also, for the year ended December 31, 2003,
Corporate and Other included an after-tax charge of $38.4 million related to the
write-down of equity investments, an after-tax benefit of $30.8 million from a
gain on a call of debt as well as unallocated expenses. During 2003, in order to
better align competencies, we transferred certain small business loans and
leases, including the small business lending unit, totaling $1,078.6 million
from Equipment Finance to Specialty Finance. Prior periods have not been
restated to conform to this current presentation.
The Corporate and Other segment included the following items in the year
ended September 30, 2002: (1) goodwill impairment of $6,511.7 million, (2)
provision for telecommunications of $200.0 million ($124.0 million after tax),
(3) Argentine provision of $135.0 million ($83.7 million after tax), (4) funding
costs of $85.9 million ($53.2 million after tax), and (5) unallocated corporate
operating items totaling $7.2 million pre-tax (income) or $3.9 million after
tax. For all periods shown, Corporate and Other includes the results of the
venture capital business.
90
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents reportable segment information and the
reconciliation of segment balances to the consolidated financial statement
totals and the consolidated managed assets. The selected financial information
by business segment presented below is based upon a fixed leverage ratio across
business units and the allocation of most corporate expenses. ($ in millions)
Specialty Specialty Corporate
Finance Finance Commercial Equipment Capital Total and
Commercial Consumer Finance Finance Finance Segments Other Consolidated
---------- -------- ------- ------- ------- -------- ----- ------------
At or for the year ended
December 31, 2004
Operating margin....... $ 792.4 $ 147.6 $ 673.8 $ 219.4 $ 287.6 $ 2,120.8 $ 121.7 $ 2,242.5
Income taxes........... 158.9 31.8 183.4 49.5 57.9 481.5 1.7 483.2
Net income (loss)...... 268.3 48.9 295.5 77.7 105.0 795.4 (41.8) 753.6
Total financing and
leasing assets....... 11,172.8 5,374.5 11,780.4 6,924.4 9,908.8 45,160.9 -- 45,160.9
Total managed assets... 15,338.3 6,603.2 11,780.4 9,839.9 9,908.8 53,470.6 -- 53,470.6
At or for the year ended
December 31, 2003
Operating margin....... $ 721.9 $ 120.6 $ 578.8 $ 148.0 $ 214.4 $ 1,783.7 $ 16.1 $ 1,799.8
Income taxes........... 146.8 20.0 156.8 24.6 46.4 394.6 (29.6) 365.0
Net income (loss)...... 225.3 35.6 245.0 38.5 72.6 617.0 (50.1) 566.9
Total financing and
leasing assets....... 9,504.1 2,814.3 11,572.9 6,957.7 9,234.9 40,083.9 -- 40,083.9
Total managed assets... 14,062.0 4,681.9 11,572.9 10,183.9 9,234.9 49,735.6 -- 49,735.6
At or for the three months
ended December 31, 2002
Operating margin....... $ 189.3 $ 27.5 $ 163.0 $ 64.7 $ 67.0 $ 511.5 $ (42.9) $ 468.6
Income taxes........... 41.5 5.6 45.4 8.7 18.5 119.7 (27.7) 92.0
Net income (loss)...... 64.9 8.8 71.0 13.4 29.1 187.2 (45.9) 141.3
Total financing and
leasing assets....... 9,024.1 1,292.7 9,305.2 8,145.2 8,107.5 35,874.7 -- 35,874.7
Total managed assets... 13,356.7 3,506.3 9,305.2 12,081.4 8,107.5 46,357.1 -- 46,357.1
At or for the year ended
September 30, 2002
Operating margin....... $ 754.0 $ 178.1 $ 532.4 $ 378.7 $ 260.2 $ 2,103.4 $ (322.3) $ 1,781.1
Income taxes........... 166.4 48.0 140.1 74.3 71.4 500.2 (126.2) 374.0
Net income (loss)...... 271.6 78.2 228.5 121.1 116.5 815.9 (7,514.6) (6,698.7)
Total financing and
leasing assets....... 8,805.2 1,314.2 10,079.9 8,398.8 7,789.5 36,387.6 -- 36,387.6
Total managed assets... 13,539.9 3,430.1 10,079.9 12,782.9 7,789.5 47,622.3 -- 47,622.3
Finance income and other revenues derived from United States based
financing and leasing assets were $3,864.4 million, $3,695.2 million, $977.1
million, and $4,284.8 million for the years ended December 31, 2004 and 2003,
the three months ended December 31, 2002, and the year ended September 30, 2002,
respectively. Finance income and other revenues derived from foreign based
financing and leasing assets, were $850.2 million, $944.0 million, $251.7
million, and $990.3 million for the years ended December 31, 2004 and 2003, the
three months ended December 31, 2002, and the year ended September 30, 2002,
respectively.
Note 22 -- Legal Proceedings
Putative Securities Class Action
On April 10, 2003, a putative class action lawsuit, asserting claims under
the Securities Act of 1933, was filed in the United States District Court for
the Southern District of New York against CIT, its former Chief Executive
Officer and its Chief Financial Officer. The lawsuit contained allegations that
the registration statement and prospectus prepared and filed in connection with
CIT's 2002 initial public offering ("IPO") were materially false and misleading,
principally with respect to the adequacy of CIT's telecommunications-related
loan loss reserves at the time. The lawsuit purported to have been brought on
behalf of all those who purchased CIT common stock in or traceable to the IPO,
and sought, among other relief, unspecified damages or rescission for those
alleged class members who still hold CIT stock and unspecified damages for other
alleged class members.
91
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 25, 2003, by order of the United States District Court, the
lawsuit was consolidated with five other substantially similar suits, all of
which had been filed after April 10, 2003 and one of which named as defendants
some of the underwriters in the IPO and certain former directors of CIT.
Glickenhaus & Co., a privately held investment firm, was named lead plaintiff in
the consolidated action. On September 16, 2003, an amended and consolidated
complaint was filed. That complaint contained substantially the same allegations
as the original complaints. In addition to the foregoing, two similar suits (the
"Derivative Suits") were brought by certain shareholders on behalf of CIT
against CIT and some of its present and former directors under Delaware
corporate law.
On December 28, 2004, the United States District Court entered an order
granting CIT's motion to dismiss the consolidated case. The plaintiff's time to
appeal that order expired on January 28, 2005 with no notice of appeal having
been filed. The cases against all parties, including the Derivative Suits, have
been dismissed.
NorVergence Related Litigation
On September 9, 2004, Exquisite Caterers v. Popular Leasing et al.
("Exquisite Caterers"), a putative national class action, was filed against 13
financial institutions, including CIT, who had acquired equipment leases
("NorVergence Leases") from NorVergence, Inc., a reseller of telecommunications
and Internet services to businesses. The Exquisite Caterers lawsuit is now
pending in the Superior Court of New Jersey, Monmouth County. Exquisite Caterers
based its complaint on allegations that NorVergence misrepresented the
capabilities of the equipment leased to its customers and overcharged for the
equipment. The complaint asserts that the NorVergence Leases are unenforceable
and seeks rescission, punitive damages, treble damages and attorneys' fees. In
addition, putative class action suits in Florida, Illinois, New York, and Texas
and several individual suits, all based upon the same core allegations and
seeking the same relief, have been filed by NorVergence customers against CIT
and other financial institutions.
On July 14, 2004, the U.S. Bankruptcy Court ordered the liquidation for
NorVergence under Chapter 7 of the Bankruptcy Code. Thereafter, the Attorneys
General of Florida, New Jersey, New York, Illinois, Massachusetts and Texas
commenced investigations of NorVergence and the financial institutions,
including CIT, which purchased NorVergence Leases. CIT entered into settlement
negotiations with those Attorney Generals and with Attorneys General from
several other states, including Pennsylvania and Massachusetts. In December
2004, CIT reached separate settlements with the New York and the New Jersey
Attorneys General. Under those settlements, lessees in those states will have an
opportunity to resolve all claims by and against CIT by paying a percentage of
the remaining balance on their lease. Negotiations with other Attorneys General
are continuing. CIT has also been asked by the Federal Trade Commission to
produce documents for transactions related to NorVergence. In addition, on
February 15, 2005, CIT was served with a subpoena seeking the production of
documents in a grand jury proceeding being conducted by the U.S. Attorney for
the Southern District of New York in connection with an investigation of
transactions related to NorVergence. CIT is in the process of complying with
these information requests.
Other Litigation
In addition, there are various legal proceedings against CIT, which have
arisen in the ordinary course of business. While the outcomes of the above
mentioned and ordinary course legal proceedings and the related activities are
not certain, based on present assessments, management does not believe that they
will have a material adverse effect on the financial condition of CIT.
Note 23 -- Goodwill and Intangible Assets
Goodwill and intangible assets totaled $596.5 million and $487.7 million
at December 31, 2004 and 2003, respectively. The Company periodically reviews
and evaluates its goodwill and other intangible assets for potential impairment.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets"
92
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
("SFAS 142"), under which goodwill is no longer amortized but instead is
assessed for impairment at least annually. As part of the adoption, the Company
allocated its existing goodwill to each of its reporting units as of October 1,
2001. Under the transition provisions of SFAS 142, there was no goodwill
impairment as of October 1, 2001.
During the quarter ended March 31, 2002, CIT's former parent, Tyco,
experienced disruptions to its business surrounding its announced break-up plan,
downgrades in its credit ratings, and a significant decline in its market
capitalization, which caused a disruption in the Company's ability to access
capital markets. As a result, management performed impairment analyses during
the quarters ended March 31, 2002 and June 30, 2002. These analyses resulted in
goodwill impairment charges of $4.513 billion and $1.999 billion for the
quarters ended March 31, 2002 and June 30, 2002, respectively. Management
performed a goodwill impairment analysis as of October 1, 2004, which indicated
that the fair value of goodwill was in excess of the carrying value. Therefore,
additional impairment charges were not necessary.
The following table summarizes goodwill balances by segment ($ in
millions):
Specialty
Finance -- Commercial
commercial Finance Total
---------- ------- -----
Balance at December 31, 2002............ $14.0 $370.4 $384.4
Severance reduction..................... (1.3) -- (1.3)
----- ------ ------
Balance at December 31, 2003............ 12.7 370.4 383.1
Acquisitions ........................... 49.6 -- 49.6
----- ------ ------
Balance at December 31, 2004............ $62.3 $370.4 $432.7
===== ====== ======
The increase in Specialty Finance goodwill during 2004 was largely due to
the Western European vendor finance and leasing business acquisition. The
downward revision to severance liabilities during 2003 was related to Specialty
Finance restructuring activities and was recorded as a reduction to goodwill, as
the severance liability was established in conjunction with Tyco acquisition
purchase accounting adjustments.
Other intangible assets, net are comprised primarily of acquired customer
relationships, proprietary computer software and related transaction processes,
and are included in Goodwill and Intangible Assets on the Consolidated Balance
Sheets. The following table summarizes intangible assets balances, net by
segment ($ in millions):
Specialty
Finance -- Commercial
commercial Finance Total
---------- ------- -----
Balance at December 31, 2002........... $ -- $ 16.5 $ 16.5
Additions.............................. -- 93.0 93.0
Amortization........................... -- (4.9) (4.9)
----- ------ ------
Balance at December 31, 2003........... -- 104.6 104.6
Additions.............................. 72.1 0.4 72.5
Amortization........................... (4.1) (9.2) (13.3)
----- ------ ------
Balance at December 31, 2004........... $68.0 $ 95.8 $163.8
===== ====== ======
The increase in other intangible assets during the 2004 was due primarily
to customer relationships acquired in the Western European vendor finance and
leasing business acquisition and in a purchase of a technology leasing business.
The increase during 2003 was due to customer relationships acquired in the
purchase of two factoring businesses.
Other intangible assets are being amortized over their corresponding
respective lives ranging from five to twenty years in relation to revenue
streams where applicable. Accumulated amortization totaled $23.7 million and
$10.4 million at December 31, 2004 and 2003, respectively. The projected
amortization for the years ended December 31, 2005 through December 31, 2009 is:
$20.8 million for 2005; $19.7 million for 2006; and $16.4 million for 2007, and
$16.3 million each for 2008 and 2009.
93
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 24 -- Severance and Facility Restructuring Reserves
The following table summarizes previously established purchase accounting
liabilities (pre-tax) related to severance of employees and closing facilities,
as well as 2004 restructuring activities ($ in millions):
Severance Facilities
---------------------- ----------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance December 31, 2003................... 43 $ 2.3 12 $ 7.2 $ 9.5
2004 additions.............................. 175 15.2 6 4.5 19.7
2004 utilization............................ (89) (5.3) (3) (6.0) (11.3)
--- ----- -- ----- ------
Balance December 31, 2004................... 129 $12.2 15 $ 5.7 $ 17.9
=== ===== == ===== ======
The reserves as of December 31, 2003 relate largely to the restructuring
of the European operations and include amounts payable within the next year to
individuals who chose to receive payments on a periodic basis and shortfalls in
sublease transactions, which will be utilized over the remaining lease terms,
generally 5 years.
The additions to restructuring reserves in 2004 relate to two initiatives:
(1) the second quarter combination of the former Structured Finance with Capital
Finance and a back office restructuring in Commercial Finance ($4.1 million) and
(2) the third quarter acquisition of a Western European vendor finance and
leasing business ($15.6 million). Costs related to the Capital Finance
combination were included in current period earnings, while restructuring
liabilities related to the vendor finance and leasing business acquisition were
established under purchase accounting in conjunction with fair value adjustments
to purchased assets and liabilities.
94
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 25 -- Summarized Financial Information of Subsidiaries (Unaudited)
The following presents condensed consolidating financial information for
CIT Holdings LLC and its wholly-owned subsidiary, Capita Corporation (formerly
AT&T Capital Corporation). CIT has guaranteed on a full and unconditional basis
the existing registered debt securities and certain other indebtedness of these
subsidiaries. Therefore, CIT has not presented financial statements or other
information for these subsidiaries on a stand-alone basis. ($ in millions).
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------- ----------- -------- ------------ ------------ -----
December 31, 2004
ASSETS
Net finance receivables ............ $ 1,121.1 $ 3,129.8 $ 1,682.7 $ 28,497.4 $ -- $ 34,431.0
Operating lease equipment, net ..... -- 517.9 130.8 7,642.2 -- 8,290.9
Finance receivables held for sale .. -- 122.4 72.0 1,446.4 -- 1,640.8
Cash and cash equivalents .......... 1,311.4 670.8 127.5 100.5 -- 2,210.2
Other assets ....................... 9.536.8 (278.9) 316.2 1,019.4 (6,055.1) 4,538.4
----------- ---------- ---------- ----------- ---------- -----------
Total Assets ..................... $ 11,969.3 $ 4,162.0 $ 2,329.2 $ 38,705.9 $ (6,055.1) $ 51,111.3
=========== ========== ========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 34,699.1 $ 487.8 $ 1,383.8 $ 1,154.1 $ -- $ 37,724.8
Credit balances of factoring clients -- -- -- 3,847.3 -- 3,847.3
Accrued liabilities and payables ... (28,784.9) 3,184.5 (591.3) 29,635.4 -- 3,443.7
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities ............... 5,914.2 3,672.3 792.5 34,636.8 -- 45,015.8
Minority interest .................. -- -- -- 40.4 -- 40.4
Total Stockholders' Equity ......... 6,055.1 489.7 1,536.7 4,028.7 (6,055.1) 6,055.1
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities and
Stockholders' Equity ............. $ 11,969.3 $ 4,162.0 $ 2,329.2 $ 38,705.9 $ (6,055.1) $ 51,111.3
=========== ========== ========== =========== ========== ===========
December 31, 2003
ASSETS
Net finance receivables ............ $ 1,581.3 $ 3,755.4 $ 1,208.8 $ 24,111.0 $ -- $ 30,656.5
Operating lease equipment, net ..... -- 580.3 146.4 6,888.8 -- 7,615.5
Finance receivables held for sale .. -- 80.0 163.8 674.5 -- 918.3
Cash and cash equivalents .......... 1,479.9 410.6 227.5 (144.3) -- 1,973.7
Other assets ....................... 8,973.6 198.0 174.1 1,227.3 (5,394.2) 5,178.8
----------- ---------- ---------- ----------- ---------- -----------
Total Assets ..................... $ 12,034.8 $ 5,024.3 $ 1,920.6 $ 32,757.3 $ (5,394.2) $ 46,342.8
=========== ========== ========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ............................... $ 30,551.8 $ 1,003.5 $ 1,206.1 $ 907.2 $ -- $ 33,668.6
Credit balances of factoring clients -- -- -- 3,894.6 -- 3,894.6
Accrued liabilities and payables ... (23,911.2) 3,429.8 (631.8) 24,459.6 -- 3,346.4
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities ................ 6,640.6 4,433.3 574.3 29,261.4 -- 40,909.6
Minority interest .................. -- -- -- 39.0 -- 39.0
Total Stockholders' Equity ......... 5,394.2 591.0 1,346.3 3,456.9 (5,394.2) 5,394.2
----------- ---------- ---------- ----------- ---------- -----------
Total Liabilities and
Stockholders' Equity ............. $ 12,034.8 $ 5,024.3 $ 1,920.6 $ 32,757.3 $ (5,394.2) $ 46,342.8
=========== ========== ========== =========== ========== ===========
95
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- -------- ------------ ------------ -----
Year Ended December 31, 2004
Finance income ..................... $ 38.3 $ 703.0 $ 187.5 $2,856.9 $ -- $3,785.7
Interest expense ................... (150.3) 582.2 10.9 817.3 -- 1,260.1
-------- -------- ------- -------- ------- --------
Net finance income ................. 188.6 120.8 176.6 2,039.6 -- 2,525.6
Depreciation on operating
lease equipment .................. -- 305.7 43.8 606.5 -- 956.0
-------- -------- ------- -------- ------- --------
Net finance margin ................. 188.6 (184.9) 132.8 1,433.1 -- 1,569.6
Provision for credit losses ........ 27.5 46.5 12.0 128.2 -- 214.2
-------- -------- ------- -------- ------- --------
Net finance margin, after provision
for credit losses ................ 161.1 (231.4) 120.8 1,304.9 -- 1,355.4
Equity in net income of subsidiaries 691.7 -- -- -- (691.7) --
Other revenue ...................... 107.4 68.2 86.9 628.1 -- 890.6
Loss on venture capital investments -- -- -- (3.5) -- (3.5)
-------- -------- ------- -------- ------- --------
Operating margin ................... 960.2 (163.2) 207.7 1,929.5 (691.7) 2,242.5
Operating expenses ................. 167.1 71.7 67.7 739.9 -- 1,046.4
Gain on redemption of debt ......... -- -- 41.8 -- 41.8
-------- -------- ------- -------- ------- --------
Income (loss) before provision for
income taxes ..................... 793.1 (234.9) 140.0 1,231.4 (691.7) 1,237.9
Provision for income taxes ......... (39.5) 91.1 (54.6) (480.2) -- (483.2)
Minority interest, after tax ....... -- -- -- (1.1) -- (1.1)
-------- -------- ------- -------- ------- --------
Net income (loss)................... $ 753.6 $ (143.8) $ 85.4 $ 750.1 $(691.7) $ 753.6
======== ======== ======= ======== ======= ========
Year Ended December 31, 2003
Finance income ..................... $ 89.0 $ 785.3 $ 195.0 $2,660.2 $ -- $3,729.5
Interest expense ................... (23.3) 303.8 6.6 1,061.6 -- 1,348.7
-------- -------- ------- -------- ------- --------
Net finance income ................. 112.3 481.5 188.4 1,598.6 -- 2,380.8
Depreciation on operating
lease equipment .................. -- 371.6 68.5 612.9 -- 1,053.0
-------- -------- ------- -------- ------- --------
Net finance margin ................. 112.3 109.9 119.9 985.7 -- 1,327.8
Provision for credit losses ........ 36.7 53.1 14.6 282.9 -- 387.3
-------- -------- ------- -------- ------- --------
Net finance margin, after provision
for credit losses ................ 75.6 56.8 105.3 702.8 -- 940.5
Equity in net income of subsidiaries 481.3 -- -- -- (481.3) --
Other revenue ...................... 60.4 124.8 95.7 666.7 -- 947.6
Loss on venture capital investments -- -- -- (88.3) -- (88.3)
-------- -------- ------- -------- ------- --------
Operating margin ................... 617.3 181.6 201.0 1,281.2 (481.3) 1,799.8
Operating expenses ................. 28.0 168.9 90.3 625.7 -- 912.9
Gain on redemption of debt ......... -- -- -- 50.4 -- 50.4
-------- -------- ------- -------- ------- --------
Income before provision for
income taxes ..................... 589.3 12.7 110.7 705.9 (481.3) 937.3
Provision for income taxes ......... (22.4) (5.0) (43.2) (294.4) -- (365.0)
Dividends on preferred capital
securities, after tax ............ -- -- -- (5.4) -- (5.4)
-------- -------- ------- -------- ------- --------
Net income ......................... $ 566.9 $ 7.7 $ 67.5 $ 406.1 $(481.3) $ 566.9
======== ======== ======= ======== ======= ========
96
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Finance income ..................... $ 32.9 $ 224.5 $ 50.6 $ 663.7 $ -- $ 971.7
Interest expense ................... 33.4 73.9 (1.1) 243.3 -- 349.5
--------- -------- ------ --------- -------- ---------
Net finance income ................. (0.5) 150.6 51.7 420.4 -- 622.2
Depreciation on operating
lease equipment .................. -- 105.0 21.6 150.7 -- 277.3
--------- -------- ------ --------- -------- ---------
Net finance margin ................. (0.5) 45.6 30.1 269.7 -- 344.9
Provision for credit losses ........ 18.8 8.9 2.4 103.3 -- 133.4
--------- -------- ------ --------- -------- ---------
Net finance margin, after provision
for credit losses ................ (19.3) 36.7 27.7 166.4 -- 211.5
Equity in net income of subsidiaries 144.1 -- -- -- (144.1) --
Other revenue ...................... 4.1 46.1 23.5 189.8 -- 263.5
Loss on venture capital investments -- -- -- (6.4) -- (6.4)
--------- -------- ------ --------- -------- ---------
Operating margin ................... 128.9 82.8 51.2 349.8 (144.1) 468.6
Operating expenses ................. 6.9 35.1 24.7 165.9 -- 232.6
--------- -------- ------ --------- -------- ---------
Income before provision for
income taxes ..................... 122.0 47.7 26.5 183.9 (144.1) 236.0
Provision for income taxes ......... 19.3 (18.6) (14.2) (78.5) -- (92.0)
Dividends on preferred capital
securities, after tax ............ -- -- -- (2.7) -- (2.7)
--------- -------- ------ --------- -------- ---------
Net income ......................... $ 141.3 $ 29.1 $ 12.3 $ 102.7 $ (144.1) $ 141.3
========= ======== ====== ========= ======== =========
Year Ended September 30, 2002
Finance income ..................... $ 200.4 $1,050.1 $233.2 $ 2,859.1 $ -- $ 4,342.8
Interest expense ................... (54.9) 401.3 4.8 1,113.5 -- 1,464.7
--------- -------- ------ --------- -------- ---------
Net finance income ................. 255.3 648.8 228.4 1,745.6 -- 2,878.1
Depreciation on operating
lease equipment .................. -- 503.0 105.5 632.5 -- 1,241.0
--------- -------- ------ --------- -------- ---------
Net finance margin ................. 255.3 145.8 122.9 1,113.1 -- 1,637.1
Provision for credit losses ........ 308.3 197.9 24.9 257.2 -- 788.3
--------- -------- ------ --------- -------- ---------
Net finance margin, after provision
for credit losses ................ (53.0) (52.1) 98.0 855.9 -- 848.8
Equity in net income of subsidiaries 130.9 -- -- -- (130.9) --
Other revenue ...................... 20.7 124.0 93.0 734.9 -- 972.6
Loss on venture capital investments -- -- -- (40.3) -- (40.3)
--------- -------- ------ --------- -------- ---------
Operating margin ................... 98.6 71.9 191.0 1,550.5 (130.9) 1,781.1
Operating expenses ................. 6,562.6 188.7 65.9 1,278.1 -- 8,095.3
--------- -------- ------ --------- -------- ---------
Gain on redemption of debt .........
Income (loss) before provision for
income taxes ..................... (6,464.0) (116.8) 125.1 272.4 (130.9) (6,314.2)
Provision for income taxes ......... (234.7) 45.6 (48.8) (136.1) -- (374.0)
Dividends on preferred capital
securities, after tax ............ -- -- -- (10.5) -- (10.5)
--------- -------- ------ --------- -------- ---------
Net income (loss) .................. $(6,698.7) $ (71.2) $ 76.3 $ 125.8 $ (130.9) $(6,698.7)
========= ======== ====== ========= ======== =========
97
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- --- ------------ ------------ -----
Year Ended December 31, 2004
Cash Flows From Operating Activities:
Net cash flows provided
by (used for) operations ............. $ (1,110.9) $ 1,012.5 $ 116.1 $ 1,600.0 $ -- $ 1,617.7
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease (increase) in financing and
leasing assets ....................... 433.0 366.0 (389.4) (5,505.9) -- (5,096.3)
Decrease in inter-company loans
and investments ...................... (3,527.0) -- -- -- 3,527.0 --
Other .................................. 41.6 -- 41.6
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................. (3,094.0) 366.0 (389.4) (5,464.3) 3,527.0 (5,054.7)
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ........ 4,147.3 (515.7) 177.7 42.0 -- 3,851.3
Inter-company financing ................ -- (602.6) (4.4) 4,134.0 (3,527.0) --
Cash dividends paid .................... (110.9) -- -- (110.9)
Other .................................. (66.9) -- (66.9)
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows provided by
(used for) financing activities ...... 4,036.4 (1,118.3) 173.3 4,109.1 (3,527.0) 3,673.5
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents ..................... (168.5) 260.2 (100.0) 244.8 -- 236.5
Cash and cash equivalents,
beginning of period .................. 1,479.9 410.6 227.5 (144.3) -- 1,973.7
---------- ---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,311.4 $ 670.8 $ 127.5 $ 100.5 $ -- $ 2,210.2
========== ========== ========== ========== ========== ==========
Year Ended December 31, 2003
Cash Flows From Operating Activities:
Net cash flows provided
by operations ........................ $ 224.4 $ 629.7 $ 386.6 $ 1,241.5 $ -- $ 2,482.2
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net increase in financing and
leasing assets ....................... (982.4) (338.2) (416.4) (2,560.4) -- (4,297.4)
Decrease in inter-company loans
and investments ...................... (1,534.9) -- -- -- 1,534.9 --
Other .................................. -- -- -- 14.8 -- 14.8
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows (used for)
investing activities ................. (2,517.3) (338.2) (416.4) (2,545.6) 1,534.9 (4,282.6)
---------- ---------- ---------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ........ 2,461.9 (812.2) (709.1) 902.3 -- 1,842.9
Inter-company financing ................ -- 700.2 672.7 162.0 (1,534.9) --
Cash dividends paid .................... -- -- -- (101.8) -- (101.8)
Other .................................. -- -- -- (3.6) -- (3.6)
---------- ---------- ---------- ---------- ---------- ----------
Net cash flows provided by
(used for) financing activities ...... 2,461.9 (112.0) (36.4) 958.9 (1,534.9) 1,737.5
---------- ---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ..................... 169.0 179.5 (66.2) (345.2) -- (62.9)
Cash and cash equivalents,
beginning of period .................. 1,310.9 231.1 293.7 200.9 -- 2,036.6
---------- ---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,479.9 $ 410.6 $ 227.5 $ (144.3) $ -- $ 1,973.7
========== ========== ========== ========== ========== ==========
98
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
----------------------- ---------- ----------- -------- ------------ ------------ -----
Three Months Ended December 31, 2002
Cash Flows From Operating Activities:
Net cash flows provided
by operations ........................ $ (2,191.1) $ 115.1 $ 51.5 $ 2,443.0 $ -- $ 418.5
---------- ---------- --------- ---------- ---------- ----------
Cash Flows From Investing Activities:
Net decrease (increase) in financing and
leasing assets ....................... 212.8 (1,062.8) (43.6) 1,076.7 -- 183.1
Decrease in inter-company loans
and investments ...................... 2,217.4 -- -- -- (2,217.4) --
Other .................................. -- -- -- (4.3) -- (4.3)
---------- ---------- --------- ---------- ---------- ----------
Net cash flows (used for) provided by
investing activities ................. 2,430.2 (1,062.8) (43.6) 1,072.4 (2,217.4) 178.8
---------- ---------- --------- ---------- ---------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ (666.0) (42.3) (30.8) (70.6) -- (809.7)
Inter-company financing ................ -- 995.3 (13.7) (3,199.0) 2,217.4 --
Cash dividends paid .................... -- -- -- (25.4) -- (25.4)
---------- ---------- --------- ---------- ---------- ----------
Net cash flows (used for)
provided by financing activities ..... (666.0) 953.0 (44.5) (3,295.0) 2,217.4 (835.1)
---------- ---------- --------- ---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents ..................... (426.9) 5.3 (36.6) 220.4 -- (237.8)
Cash and cash equivalents,
beginning of period .................. 1,737.8 225.8 330.3 (19.5) -- 2,274.4
---------- ---------- --------- ---------- ---------- ----------
Cash and cash equivalents,
end of period ........................ $ 1,310.9 $ 231.1 $ 293.7 $ 200.9 $ -- $ 2,036.6
========== ========== ========= ========== ========== ==========
Year Ended September 30, 2002
Cash Flows From Operating Activities:
Net cash flows provided by
(used for) operations ................ $ 334.7 $ (298.1) $ (688.2) $ 1,785.9 $ -- $ 1,134.3
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Investing Activities:
Net decrease in financing
and leasing assets ................... 662.0 211.9 721.3 1,040.6 -- 2,635.8
Decrease in intercompany loans and
investments .......................... 1,008.3 -- -- -- (1,008.3) --
Other .................................. -- -- -- (52.5) -- (52.5)
---------- ---------- -------- ---------- -------- ----------
Net cash flows provided by
investing activities ................. 1,670.3 211.9 721.3 988.1 (1,008.3) 2,583.3
---------- ---------- -------- ---------- -------- ----------
Cash Flows From Financing Activities:
Net (decrease) increase in debt ........ (1,885.3) (1,021.2) 175.3 (698.1) -- (3,429.3)
Intercompany financing ................. -- 1,226.2 117.7 (2,352.2) 1,008.3 --
Capital contributions from former parent 923.5 -- -- -- -- 923.5
Proceeds from issuance of common stock . 254.6 -- -- -- -- 254.6
Net cash flows (used for) provided by ---------- ---------- -------- ---------- -------- ----------
financing activities ................. (707.2) 205.0 293.0 (3,050.3) 1,008.3 (2,251.2)
---------- ---------- -------- ---------- -------- ----------
Net increase (decrease) in cash and
cash equivalents ....................... 1,297.8 118.8 326.1 (276.3) -- 1,466.4
Cash and cash equivalents,
beginning of period .................. 440.0 107.0 4.2 256.8 -- 808.0
---------- ---------- -------- ---------- -------- ----------
Cash and cash equivalents, $ 1,737.8 $ 225.8 $ 330.3 $ (19.5) $ -- $ 2,274.4
end of period ........................ ========== ========== ========= ========== ========== ==========
99
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 26 -- Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are presented below ($ in millions,
except per share data).
Year Ended December 31, 2004
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net finance margin............................................. $370.4 $378.9 $402.0 $418.3
Provision for credit losses.................................... 85.6 65.7 60.2 2.7
Other revenue.................................................. 230.4 233.5 212.5 214.2
Net gain (loss) on venture capital investments................. 0.7 3.0 4.2 (11.4)
Salaries and general operating expenses........................ 247.3 260.3 256.7 282.1
Net gain on debt call.......................................... 41.8 -- -- --
Provision for income taxes..................................... (121.1) (112.8) (117.7) (131.6)
Minority interest after tax.................................... -- -- (0.2) (0.9)
Net income..................................................... $189.3 $176.6 $183.9 $203.8
Net income per diluted share................................... $ 0.88 $ 0.82 $ 0.86 $ 0.95
Year Ended December 31, 2003
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net finance margin............................................. $305.7 $332.5 $335.1 $354.5
Provision for credit losses.................................... 103.0 100.6 82.9 100.8
Other revenue.................................................. 239.9 229.7 232.0 246.0
Net loss on venture capital investments........................ (4.4) (12.1) (11.3) (60.5)
Salaries and general operating expenses........................ 225.6 220.5 230.3 236.5
Net gain on debt call.......................................... -- -- -- 50.4
Provision for income taxes..................................... (82.9) (89.3) (94.6) (98.2)
Dividends on preferred capital
securities, after tax....................................... (2.7) (2.7) -- --
Minority interest after tax.................................... -- (0.1) (0.2) 0.3
Net income..................................................... $127.0 $136.9 $147.8 $155.2
Net income per diluted share................................... $ 0.60 $ 0.65 $ 0.69 $ 0.72
Year Ended September 30, 2002
-------------------------------------------
Three Months
Ended
December 31, First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
------------ ------- ------- ------- -------
Net finance margin................................... $344.9 $483.9 $ 442.5 $ 348.1 $362.6
Provision for credit losses.......................... 133.4 112.9 195.0 357.7 122.7
Other revenue........................................ 263.5 242.5 237.4 247.5 245.2
Net (loss) gain on venture capital investment........ (6.4) 2.6 (5.3) (1.4) (36.2)
Salaries and general operating expenses.............. 232.6 235.1 228.5 230.0 227.4
Interest expense -- TCH.............................. -- 76.3 305.0 281.3 --
Goodwill impairment.................................. -- -- 4,512.7 1,999.0 --
Provision for income taxes........................... (92.0) (118.2) (50.4) (121.3) (84.1)
Dividends on preferred capital
securities, after tax............................. (2.7) (2.4) (2.7) (2.7) (2.7)
Net income (loss).................................... $141.3 $184.1 $(4,619.7) $(2,397.8) $134.7
Net income (loss) per diluted share.................. $ 0.67 $ 0.87 $ (21.84) $ (11.33) $ 0.64
100
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 27 -- Subsequent Event
On February 14, 2005, CIT announced the successful completion of its cash
tender offer for all outstanding shares of common stock of the Education Lending
Group, Inc. (Nasdaq: EDLG). Approximately 98% percent of the outstanding shares
of EDLG were tendered to CIT's offer of $19.05 cash per share. Under applicable
law, the merger is not subject to the approval of the remaining stockholders of
EDLG. All necessary regulatory approvals for the transaction were obtained. On
February 17, 2005, EDLG merged with a wholly owned subsidiary of CIT, and the
remaining EDLG shareholders received the right to payment of $19.05 per share.
Effective upon this merger, EDLG became a wholly owned subsidiary of CIT Group
Inc.
101
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act). Based on this evaluation, our principal
executive officer and our principal financial officer concluded that our
disclosure controls and procedures were not effective as of the end of the
period covered by this annual report because of the material weakness discussed
below.
Management's Report on Internal Control Over Financial Reporting
Management of CIT is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is identified in
Exchange Act Rules 13a-15(f). Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Management of CIT, including our principal executive officer and principal
financial officer, conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control -- Integrated Framework. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, the Company did not maintain effective
controls over the reconciliations of the differences between the tax basis and
book basis of each component of the Company's balance sheet with the deferred
tax asset and liability accounts. The control deficiency did not result in any
adjustments to the 2004 annual or interim consolidated financial statements.
However, this control deficiency results in more than a remote likelihood that a
material misstatement to the deferred tax asset and liability accounts and
income tax provision will not be prevented or detected in the annual or interim
consolidated financial statements. Accordingly, management has determined that
this condition constitutes a material weakness based on our evaluation under the
criteria in Internal Control -- Integrated Framework and concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2004, due to the aforementioned tax basis balance sheet
reconciliation issues.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report (which expressed an unqualified opinion on management's
assessment and an adverse opinion on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004) which appears on pages
52 through 53.
102
Income Tax Financial Reporting and Internal Control Changes
As discussed above, management has determined that the lack of a control
to reconcile the difference between the tax basis and book basis of each
component of the Company's balance sheet with the deferred tax asset and
liability accounts constitutes a material weakness. Management has performed
alternative analyses and reconciliations of the income tax balance sheet and
income statement accounts and based thereon believes that the 2004 income tax
provision is appropriate and that the remediation will not result in a material
adjustment to the Company's reported balance sheet or net income as of or for
the year ended December 31, 2004.
In connection with the June 2001 acquisition by Tyco, our income tax
compliance, reporting and planning function was transferred to Tyco. This caused
a lapse in maintaining, developing and implementing changes to various income
tax financial reporting processes that are currently required. 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. As previously reported, we have made substantial progress with
respect to the reportable condition by hiring and training personnel, rebuilding
tax reporting systems, preparing amendments to prior U.S. Federal income tax
returns, and implementing processes and controls with respect to income tax
reporting and compliance. Throughout 2004, we continued to develop the processes
and controls to complete an analysis of our income tax asset and liability
accounts, including the refinement of and reconciliation to transactional level
detail of book to tax differences.
As of the end of the period covered by this report, we have not fully
remediated the material weakness in the Company's internal control over income
tax deferred assets and liabilities. In this regard, we have conducted the
following remedial actions:
o Established a 2005 remediation plan to compute the book to tax basis
differences at an asset and liability transactional level, including
documentation, testing and periodic updates to senior management and
the Audit Committee;
o Further enhanced, and will continue to enhance, data processing
capabilities to automate and better control the calculation of book
to tax assets and liabilities at the transactional level; and
o Continued to develop procedures and processes to prove the changes
in the book to tax basis of our assets and liabilities that occur in
interim and annual financial reporting periods.
Other than the changes discussed above, there have been no changes to the
Company's internal control over financial reporting that occurred since the
beginning of the Company's fourth quarter of 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
Item 9B. Other Information.
None
103
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by Item 10 is incorporated by reference from
the information under the caption "Election of Directors" and "Election of
Directors -- Executive Officers" in our Proxy Statement for our 2005 annual
meeting of stockholders.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference from
the information under the caption "Compensation of Directors and Executive
Officers" in our Proxy Statement for our 2005 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference from
the information under the caption "Principal Shareholders" in our Proxy
Statement for our 2005 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement for our 2005 annual meeting of
stockholders.
Item 14. Principal Accountant Fees and Services.
The information called for by Item 14 is incorporated by reference from
the information under the caption "Appointment of Independent Accountants" in
our Proxy Statement for our 2005 annual meeting of stockholders.
104
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed with the Securities and Exchange
Commission as part of this report (see Item 8):
1. The following financial statements of CIT and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2004 and December
31, 2003.
Consolidated Statements of Income for the years ended December
31, 2004 and 2003, for the three months ended December 31,
2002 and for the fiscal year ended September 30, 2002.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004 and 2003, for the three months ended
December 31, 2002 and for the fiscal year ended September 30,
2002.
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003, for the three months ended
December 31, 2002 and for the fiscal year ended September 30,
2002.
Notes to Consolidated Financial Statements
2. All schedules are omitted because they are not applicable or
because the required information appears in the Consolidated
Financial Statements or the notes thereto.
(b) 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 Form of Certificate of Common Stock of CIT (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 26, 2002).
4.2 Indenture dated as of August 26, 2002 by and among CIT Group
Inc., J.P. Morgan Trust Company, National Association (as
successor to 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).
4.3 Form of Indenture dated as of October 29, 2004 between CIT
Group Inc. and J.P. Morgan Trust Company, National Association
for the issuance of senior debt securities (Incorporated by
reference to Exhibit 4.4 to Form S-3/A filed by CIT on October
28, 2004).
4.4 Form of Indenture dated as of October 29, 2004 between CIT
Group Inc. and J.P. Morgan Trust Company, National Association
for the issuance of subordinated debt securities (Incorporated
by reference to Exhibit 4.5 to Form S-3/A filed by CIT on
October 28, 2004).
4.5 Certain instruments defining the rights of holders of CIT's
long-term debt, none of which authorize a total amount of
indebtedness in excess of 10% of the total amounts outstanding
of CIT and its subsidiaries on a consolidated basis have not
been filed as exhibits. CIT agrees to furnish a copy of these
agreements to the Commission upon request.
4.6 5-Year Credit Agreement, dated as of October 10, 2003 among
J.P. Morgan Securities Inc., a joint lead arranger and
bookrunner, Citigroup Global Markets Inc., as joint lead
arranger and bookrunner, JP Morgan Chase Bank as
administrative agent, Bank of America, N.A. as syndication
agent, and Barclays Bank PLC, as documentation agent
(Incorporated by reference to Exhibit 4.2 to Form 10-Q filed
by CIT on November 7, 2003).
105
4.7 364-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, JP Morgan Chase Bank, as administrative agent,
and Bank of America, N.A. and Citibank N.A., as syndication
agents and Barclays Bank PLC, as documentation agent
(Incorporated by reference to Exhibit 4.2 to Form 10-Q filed
by CIT on May 7, 2004).
4.8 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, JP Morgan Chase Bank, as administrative agent,
Bank of America, N.A., as syndication agents and Barclays
Bank PLC, as documentation agent (Incorporated by reference
to Exhibit 4.3 to Form 10-Q filed by CIT on May 7, 2004).
10.1 Agreement dated as of June 1, 2001 between CIT Holdings (NV)
Inc., a wholly-owned subsidiary of Tyco International Ltd.,
and CIT (formerly known as Tyco Capital Corporation and Tyco
Acquisition Corp. XX (NV) and successor to The CIT Group,
Inc.), a Nevada corporation, regarding transactions between
CIT Holdings and CIT (incorporated by reference to Exhibit
10.1 to Amendment No. 3 to the Registration Statement on
Form S-3 filed June 7, 2002).
10.2 Form of Separation Agreement by and between Tyco
International Ltd. and CIT (incorporated by reference to
Exhibit 10.2 to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
10.3 Form of Financial Services Cooperation Agreement by and
between Tyco International Ltd. and CIT (incorporated by
reference to Exhibit [10.3] to Amendment No. 3 to the
Registration Statement on Form S-3 filed June 12, 2002).
10.4* Employment Agreement for Joseph M. Leone dated as of August
1, 2004 (incorporated by reference to Exhibit 10.3 to Form
10-Q filed by CIT on November 9, 2004).
10.5* Employment Agreement for Thomas B. Hallman dated as of
August 1, 2004 (incorporated by reference to Exhibit 10.2 to
Form 10-Q filed by CIT on November 9, 2004).
10.6* Employment Agreement for Lawrence A. Marsiello dated as of
August 1, 2004 (incorporated by reference to Exhibit 10.4 to
Form 10-Q filed by CIT on November 9, 2004).
10.7* Employment Agreement for Jeffrey M. Peek dated as of July
22, 2003 (incorporated by reference to Form 10-Q filed by
CIT on November 7, 2003).
10.8* Amendment to Employment Agreement by and among CIT Group
Inc. and Jeffrey M. Peek dated as of July 22, 2004
(Incorporated by reference to Exhibit 10.1 to Form 10-Q
filed by CIT on November 9, 2004).
10.9* Employment Agreement by and among CIT Group Inc. and
Frederick E. Wolfert dated as of August 1, 2004
(Incorporated by reference to Exhibit 10.5 to Form 10-Q
filed by CIT on November 9, 2004).
10.10* 2004 Extension and Funding Agreement dated September 8,
2004, by and among Dell Financial Services L.P., Dell Credit
Company L.L.C., DFS-SPV L.P., DFS-GP, Inc., Dell Inc., Dell
Gen. P. Corp., Dell DFS Corporation, CIT Group Inc.,
CIT Financial USA, Inc., CIT DCC Inc., CIT DFS Inc., CIT
Communications Finance Corporation, and CIT Credit Group USA
Inc. (Incorporated by reference to Form 8-K filed by CIT on
September 9, 2004).
10.11* Executive Severance Plan (incorporated by reference to
Exhibit 10.24 to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
10.12* Long-Term Equity Compensation Plan (incorporated by
reference to Form DEF-14A filed April 23, 2003).
106
10.13 Form of Indemnification Agreement (incorporated by reference
to Exhibit 10.26 to Amendment No. 3 to the Registration
Statement on Form S-3 filed June 26, 2002).
10.14 Form of Tax Agreement by and between Tyco International Ltd.
and CIT (incorporated by reference to Exhibit 10.27 to
Amendment No. 3 to the Registration Statement on Form S-3
filed June 26, 2002).
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
21.1 Subsidiaries of CIT.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney.
31.1 Certification of Jeffrey M. Peek pursuant to Rules 13a-15(e)
and 15d-15(f) of the Securities Exchange Commission, as
promulgated pursuant to Section 13(a) of the Securities
Exchange Act and Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Joseph M. Leone pursuant to Rules 13a-15(e)
and 15d-15(f) of the Securities Exchange Commission, as
promulgated pursuant to Section 13(a) of the Securities
Exchange Act and Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Jeffrey M. Peek 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.
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or arrangement.
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ ROBERT J. INGATO
.........................................
March 7, 2005 Robert J. Ingato
Executive Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 7, 2005 in the
capacities indicated below.
Name Date
---- ----
/S/ JEFFREY M. PEEK
.....................................................
Jeffrey M. Peek
Chairman and Chief Executive Officer
and Director
GARY C. BUTLER*
.....................................................
Gary C. Butler
Director
WILLIAM A. FARLINGER*
.....................................................
William A. Farlinger
Director
WILLIAM FREEMAN
.....................................................
William Freeman
Director
THOMAS H. KEAN*
.....................................................
Thomas H. Kean
Director
EDWARD J. KELLY, III*
.....................................................
Edward J. Kelly, III
Director
MARIANNE MILLER PARRS*
.....................................................
Marianne Miller Parrs
Director
TIMOTHY M. RING
.....................................................
Timothy M. Ring
Director
JOHN RYAN*
.....................................................
John Ryan
Director
PETER J. TOBIN*
.....................................................
Peter J. Tobin
Director
LOIS M. VAN DEUSEN*
.....................................................
Lois M. Van Deusen
Director
/S/ JOSEPH M. LEONE
.....................................................
Joseph M. Leone
Vice Chairman and
Chief Financial Officer
/s/ WILLIAM J. TAYLOR
.....................................................
William J. Taylor
Executive Vice President, Controller and
Principal Accounting Officer
*By: /S/ ROBERT J. INGATO
.....................................................
Robert J. Ingato
Executive Vice President, General Counsel
and Secretary
* Original powers of attorney authorizing Robert Ingato, and James P.
Shanahan and each of them to sign on behalf of the above-mentioned directors are
held by the Corporation and available for examination by the Securities and
Exchange Commission pursuant to Item 302(b) of Regulation S-T.
108
Where You Can Find More Information
A copy of the Annual Report on Form 10-K, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington D.C. 20549. Information on the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested parties can electronically access the Annual Report on Form 10-K,
including the exhibits and schedules thereto.
The Annual Report on Form 10-K, including the exhibits and schedules
thereto, and other SEC filings, are available free of charge on the Company's
Internet site at http://www.cit.com as soon as reasonably practicable after such
material is electronically filed with the SEC. Copies of our Corporate
Governance Guidelines, the Charters of the Audit Committee, the Compensation
Committee, and the Nominating and Governance Committee, and our Code of Business
Conduct are available, free of charge, on our internet site at
http://www.cit.com, and printed copies are available by contacting Investor
Relations, 1 CIT Drive, Livingston, NJ 07039 or by telephone at (973) 740-5000.
109