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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q/A
Amendment No. 1 to Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-31369
CIT Group Inc.
(Exact name of Registrant as specified in its charter)
Delaware 65-1051192
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1211 Avenue of the Americas, New York, New York 10036
(Address of Registrant's principal executive offices) (Zip Code)
(212) 536-1211
(Registrant's telephone number)
----------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |X| No [ ]
As of July 29, 2005, there were 201,708,815 shares of the Registrant's
common stock outstanding.
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Overview
We are filing this amendment to our Form 10-Q for the quarterly period
ended June 30, 2005 to restate financial statements and corresponding financial
information for certain derivative transactions that do not qualify for hedge
accounting. We are also including other previously identified, immaterial,
in-period financial statement changes in conjunction with this amendment.
The primary impacts of this restatement of non-cash items on our financial
statements and certain key financial ratios are as follows ($ in millions, per
share amounts in dollars):
Quarter Year to Date
At or for the Quarter and Six ------------------------------------- ----------------------------------
Previously Previously
Months Ended June 30, 2005 Reported Restated Change Reported Restated Change
--------- -------- ------ ---------- -------- ------
Income Statement
Finance income $ 1,106.7 $ 1,100.7 $ (6.0) $ 2,128.7 $ 2,128.7 $ --
Interest expense 466.7 467.8 1.1 860.9 859.3 (1.6)
Other revenue 278.9 331.3 52.4 518.3 597.0 78.7
Salaries and general operating
expenses 271.8 268.8 (3.0) 532.8 532.8 --
Provision for income taxes 113.0 132.9 19.9 235.8 270.5 34.7
Net income 220.7 249.1 28.4 431.1 476.7 45.6
Basic earnings per share 1.05 1.18 0.13 2.05 2.26 0.21
Diluted earnings per share 1.03 1.16 0.13 2.01 2.22 0.21
Balance Sheet
Finance receivables and education
lending receivables 40,509.3 40,507.9 (1.4)
Total debt 43,458.5 43,376.8 (81.7)
Accrued liabilities and payables 3,748.5 3,783.2 34.7
Total stockholders' equity 6,401.2 6,446.8 45.6
Financial Ratios
Net finance margin as a percentage
of average earning assets 3.36% 3.30% 3.44% 3.45%
Return on average earning assets 1.86% 2.10% 1.88% 2.08%
Return on average common equity 13.9% 15.7% 13.8% 15.2%
Return on average tangible
common equity 16.3% 18.3% 15.7% 17.4%
Tangible stockholders' equity
and preferred capital securities
to managed assets 9.92% 10.00%
Efficiency ratio 43.7% 40.6% 42.3% 39.9%
During the fourth quarter of 2005, we learned of an interpretation with
respect to applying the "matched terms" approach in hedge accounting under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133"). We reviewed our
accounting for certain cross-currency interest rate swaps ("compound swaps" or
"compound derivatives") under SFAS 133.
We determined that seven compound cross-currency and interest rate swaps
with a notional principal of approximately $1.4 billion at June 30, 2005 were
not appropriately accounted for, even though these compound swaps were highly
effective economic hedges of the interest rate and currency exchange risks
associated with the corresponding foreign denominated debt. We documented these
swaps originally as "matched terms" hedges which assumes no hedge
ineffectiveness. The swaps would have qualified for "long-haul" hedge accounting
with ineffectiveness reflected in current earnings. However, the swaps did not
qualify for hedge accounting treatment from their inception, as SFAS 133 does
not allow for subsequent documentation modifications.
i
The elimination of hedge accounting from inception of the compound swaps
resulted in an increase to other revenue and earnings for the six months ended
June 30, 2005 to reflect the elimination of adjustments to the basis of the
corresponding debt under SFAS 133 fair value hedge accounting for changes in
interest rates during each period. This increase to revenues in the current
period will reduce future earnings by an equal amount through 2015.
As a result of the review of our accounting, we have terminated these
compound cross-currency swaps and replaced each with a pair of individual swaps
(a cross-currency basis swap and an interest rate swap, both with zero fair
value at inception) with the same counterparties and with the same terms as both
the hedged debt and the original compound derivatives. The replacement
derivative contracts achieve the same economics as the original compound
derivatives and will be accounted for as hedges under SFAS 133. Accessing
non-U.S. capital markets is a key element of our funding strategy, and we remain
committed to our risk management strategy to hedge, or significantly mitigate,
our interest and currency risk and to transact derivatives only for risk
management purposes. We plan to utilize stand alone swaps for similar hedge
transactions in the future.
After reviewing the above with the Audit Committee of the Board of
Directors on December 9, 2005, the Audit Committee agreed with management's
recommendation to adjust our financial statements. In light of this decision and
resulting restatement, the previously reported financial statements and other
information included in the CIT Group Inc. Form 10-Q for the quarterly period
ended June 30, 2005 should no longer be relied upon.
ii
CIT GROUP INC. AND SUBSIDIARIES
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
----
Part I--Financial Information:
Item 1. Consolidated Financial Statements ........................... 1
Consolidated Balance Sheets (Unaudited) ..................... 1
Consolidated Statements of Income (Unaudited) ............... 2
Consolidated Statement of Stockholders' Equity (Unaudited) .. 3
Consolidated Statements of Cash Flows (Unaudited) ........... 4
Notes to Consolidated Financial Statements (Unaudited) ...... 5-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
and
Item 3. Quantitative and Qualitative Disclosure about Market Risk ... 22-46
Item 4. Controls and Procedures ..................................... 47
Part II--Other Information:
Item 1. Legal Proceedings ........................................... 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . 49
Item 3. Default Upon Senior Securities .............................. 50
Item 4. Submission of Matters to a Vote of Security Holders ......... 50
Item 5. Other Information ........................................... 51
Item 6. Exhibits .................................................... 51
Signatures ............................................................. 52
iii
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
($ in millions -- except share data)
June 30, December 31,
2005 2004
-------- -----------
ASSETS (Restated)
Financing and leasing assets:
Finance receivables ............................................. $36,337.0 $35,048.2
Education lending receivables pledged ........................... 4,170.9 --
Reserve for credit losses ....................................... (622.3) (617.2)
--------- ---------
Net finance receivables ......................................... 39,885.6 34,431.0
Operating lease equipment, net .................................. 8,642.9 8,290.9
Finance receivables held for sale ............................... 1,435.9 1,640.8
Cash and cash equivalents, including $309.3 and $0.0 restricted .... 2,231.7 2,210.2
Retained interest in securitizations and other investments ......... 1,122.0 1,228.2
Goodwill and intangible assets, net ................................ 903.1 596.5
Other assets ....................................................... 3,084.1 2,713.7
--------- ---------
Total Assets ....................................................... $57,305.3 $51,111.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt:
Commercial paper ................................................ $ 3,253.4 $ 4,210.9
Variable-rate senior unsecured notes ............................ 13,556.0 11,545.0
Fixed-rate senior unsecured notes ............................... 22,375.7 21,715.1
Non-recourse, secured borrowings -- education lending ........... 3,938.8 --
Preferred capital securities .................................... 252.9 253.8
--------- ---------
Total debt ......................................................... 43,376.8 37,724.8
Credit balances of factoring clients ............................... 3,649.2 3,847.3
Accrued liabilities and payables ................................... 3,783.2 3,443.7
--------- ---------
Total Liabilities ............................................... 50,809.2 45,015.8
Commitments and Contingencies (Note 10)
Minority interest .................................................. 49.3 40.4
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: 212,256,253 and 212,112,203 ........................... 2.1 2.1
Outstanding: 210,047,448 and 210,440,170
Paid-in capital, net of deferred compensation of $55.2
and $39.3 ..................................................... 10,648.1 10,674.3
Accumulated deficit ............................................. (4,084.3) (4,499.1)
Accumulated other comprehensive loss ............................ (29.6) (58.4)
Less: treasury stock, 2,208,805 and 1,672,033 shares, at cost ...... (89.5) (63.8)
--------- ---------
Total Stockholders' Equity ...................................... 6,446.8 6,055.1
--------- ---------
Total Liabilities and Stockholders' Equity ......................... $57,305.3 $51,111.3
========= =========
See Notes to Consolidated Financial Statements.
1
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
($ in millions -- except per share data)
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
(Restated) (Restated)
Finance income .......................................... $1,100.7 $ 908.9 $2,128.7 $1,805.8
Interest expense ........................................ 467.8 300.0 859.3 598.0
-------- -------- -------- --------
Net finance income ...................................... 632.9 608.9 1,269.4 1,207.8
Depreciation on operating lease equipment ............... 241.2 237.9 478.8 473.7
-------- -------- -------- --------
Net finance margin ...................................... 391.7 371.0 790.6 734.1
Provision for credit losses ............................. 47.2 65.7 92.5 151.3
-------- -------- -------- --------
Net finance margin after provision for credit losses .... 344.5 305.3 698.1 582.8
Other revenue ........................................... 331.3 233.5 597.0 463.9
Net gain on venture capital investments ................. 1.3 3.0 12.1 3.7
-------- -------- -------- --------
Operating margin ........................................ 677.1 541.8 1,307.2 1,050.4
Salaries and general operating expenses ................. 268.8 252.4 532.8 492.4
Provision for restructuring ............................. 25.2 -- 25.2 --
Gain on redemption of debt .............................. -- -- -- 41.8
-------- -------- -------- --------
Income before provision for income taxes ................ 383.1 289.4 749.2 599.8
Provision for income taxes .............................. (132.9) (112.8) (270.5) (233.9)
Minority interest, after tax ............................ (1.1) -- (2.0) --
-------- -------- -------- --------
Net income .............................................. $ 249.1 $ 176.6 $ 476.7 $ 365.9
======== ======== ======== ========
Earnings per share
Basic earnings per share ................................ $ 1.18 $ 0.83 $ 2.26 $ 1.73
Diluted earnings per share .............................. $ 1.16 $ 0.82 $ 2.22 $ 1.70
Number of shares -- basic (thousands) ................... 210,506 211,532 210,581 211,685
Number of shares -- diluted (thousands) ................. 214,699 215,359 214,894 215,584
Dividends per common share .............................. $ 0.16 $ 0.13 $ 0.29 $ 0.26
See Notes to Consolidated Financial Statements.
2
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
($ in millions)
Accumulated
Accumulated Other Total
Common Paid-in (Deficit)/ Comprehensive Treasury Stockholders'
Stock Capital Earnings (Loss)/Income Stock Equity
------ --------- ----------- ------------- -------- -------------
(Restated) (Restated)
December 31, 2004 ................... $2.1 $10,674.3 $(4,499.1) $(58.4) $ (63.8) $6,055.1
Net income .......................... 476.7 476.7
Foreign currency translation
adjustments ...................... 21.5 21.5
Change in fair values of
derivatives qualifying as cash
flow hedges ...................... (2.4) (2.4)
Unrealized gain on equity and
securitization investments, net .. 9.3 9.3
Minimum pension liability
adjustment ....................... 0.4 0.4
--------
Total comprehensive income .......... 505.5
--------
Cash dividends ...................... (61.9) (61.9)
Restricted common stock grants
amortization ..................... 23.1 23.1
Treasury stock purchased, at cost ... (141.9) (141.9)
Exercise of stock option awards ..... (48.9) 114.0 65.1
Employee stock purchase plan
participation .................... (0.4) 2.2 1.8
---- --------- --------- ------ ------- --------
June 30, 2005 ....................... $2.1 $10,648.1 $(4,084.3) $(29.6) $ (89.5) $6,446.8
==== ========= ========= ====== ======= ========
See Notes to Consolidated Financial Statements.
3
CIT GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
Six Months Ended
June 30,
------------------------
2005 2004
---------- ----------
(Restated)
Cash Flows From Operations
Net income (loss) ............................................... $ 476.7 $ 365.9
Adjustments to reconcile net income (loss) to net cash flows
from operations:
Depreciation and amortization ................................ 499.9 490.7
Provision for deferred federal income taxes .................. 216.8 151.3
Provision for credit losses .................................. 92.5 175.2
Gains on equipment, receivable and investment sales .......... (164.3) (115.7)
Gain on debt redemption ...................................... -- (41.8)
Decrease (increase) in finance receivables held for sale ..... 278.8 (523.9)
(Increase) decrease in other assets .......................... (41.6) 228.3
Increase (decrease) in accrued liabilities and payables ...... 194.8 (223.4)
Other ........................................................ (78.3) (57.8)
---------- ----------
Net cash flows provided by operations ........................... 1,475.3 448.8
---------- ----------
Cash Flows From Investing Activities
Loans extended .................................................. (26,792.6) (24,551.1)
Collections on loans ............................................ 24,869.2 22,739.1
Proceeds from asset and receivable sales ........................ 3,056.5 2,072.0
Purchase of finance receivable portfolios ....................... (2,095.0) (1,373.5)
Purchases of assets to be leased ................................ (985.1) (548.7)
Net decrease in short-term factoring receivables ................ (165.9) (88.9)
Acquisitions, net of cash acquired .............................. (152.6) --
Goodwill and intangibles assets acquired ........................ (60.0) --
Other ........................................................... 167.2 51.1
---------- ----------
Net cash flows (used for) investing activities .................. (2,158.3) (1,700.0)
---------- ----------
Cash Flows From Financing Activities
Proceeds from the issuance of variable and fixed-rate notes ..... 7,656.4 6,628.1
Repayments of variable and fixed-rate notes ..................... (5,626.4) (5,374.3)
Net decrease in commercial paper ................................ (957.6) (3.5)
Net loans extended -- pledged in conjunction with
secured borrowings ........................................... (270.3) --
Cash dividends paid ............................................. (61.9) (55.9)
Net repayments of non-recourse leveraged lease debt ............. 16.2 (103.3)
Other ........................................................... (51.9) (35.9)
---------- ----------
Net cash flows provided by financing activities ................. 704.5 1,055.2
---------- ----------
Net increase (decrease) in cash and cash equivalents ............ 21.5 (196.0)
Cash and cash equivalents, beginning of period .................. 2,210.2 1,973.7
---------- ----------
Cash and cash equivalents, end of period ........................ $ 2,231.7 $ 1,777.7
========== ==========
Supplementary Cash Flow Disclosure
Interest paid ................................................... $ 759.4 $ 642.3
Federal, foreign, state and local income taxes paid, net ........ $ 48.3 $ 45.1
See Notes to Consolidated Financial Statements.
4
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)
Note 1 -- Summary of Significant Accounting Policies
CIT Group Inc., a Delaware corporation ("we," "CIT" or the "Company"), is
a global commercial and consumer finance company that was founded in 1908. CIT
provides financing and leasing capital for consumers and companies in a wide
variety of industries, offering vendor, equipment, commercial, factoring, home
lending, educational lending and structured financing products as well as
rendering management advisory services. CIT operates primarily in North America,
with locations in Europe, Latin America, Australia and the Asia-Pacific region.
These financial statements, which have been prepared in accordance with
the instructions to Form 10-Q, do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States ("GAAP") and should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. Financial statements
in this Form 10-Q have not been audited by the independent registered public
accounting firm in accordance with the standards of the Public Company
Accounting Oversight Board (U.S.), but in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of CIT's financial position and results of operations. Certain
prior period amounts have been reclassified to conform to the current
presentation.
Education Lending Acquisition
In February 2005, CIT acquired Education Lending Group, Inc. ("EDLG"), a
specialty finance company principally engaged in providing education loans
(primarily U.S. government guaranteed), products and services to students,
parents, schools and alumni associations. The shareholders of EDLG received
$19.05 per share or approximately $383 million in cash. The acquisition was
accounted for under the purchase method, with the acquired assets and
liabilities recorded at their estimated fair values as of the February 17, 2005
acquisition date. The assets acquired included approximately $4.4 billion of
finance receivables and $287 million of goodwill and intangible assets. This
business is largely funded with "Education Loan Backed Notes," which are
accounted for under SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The assets related to
these borrowings are owned by a special purpose entity that is consolidated in
the CIT financial statements, and the creditors of that special purpose entity
have received ownership and / or security interests in the assets. As EDLG
retains certain call features with respect to these borrowings, the transactions
do not meet the SFAS 140 requirements for sales treatment and are therefore
recorded as secured borrowings and are reflected in the Consolidated Balance
Sheet as "Education lending receivables pledged" and "Non-recourse, secured
borrowings -- education lending." Certain cash balances, included in cash and
cash equivalents, are restricted in conjunction with these borrowings.
Stock-Based Compensation
CIT has elected to apply Accounting Principles Board Opinion 25 ("APB 25")
rather than the optional provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure" in accounting for its stock-based compensation plans. Under APB
25, CIT does not recognize compensation expense on the issuance of its stock
options because the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date. The following table
presents the proforma information required by SFAS 123 as if CIT had accounted
for stock options granted under the fair value method of SFAS 123, as amended ($
in millions, except per share data):
5
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Quarters Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
(Restated) (Restated)
Net income as reported .............................................. $249.1 $176.6 $476.7 $365.9
Stock-based compensation expense -- fair value
method, after tax ................................................... (4.8) (5.4) (9.9) (10.5)
------ ------ ------ ------
Proforma net income ................................................. $244.3 $171.2 $466.8 $355.4
====== ====== ====== ======
Basic earnings per share as reported ................................ $1.18 $0.83 $2.26 $1.73
Basic earnings per share proforma ................................... $1.16 $0.81 $2.22 $1.68
Diluted earnings per share as reported .............................. $1.16 $0.82 $2.22 $1.70
Diluted earnings per share proforma ................................. $1.14 $0.79 $2.17 $1.65
For the quarters ended June 30, 2005 and 2004, net income includes $6.3
million and $3.4 million of after-tax compensation cost related to restricted
stock awards, while the year to date costs were $14.1 million and $7.4 million,
respectively.
Recent Accounting Pronouncements
On January 1, 2005, the Company adopted Statement of Position No. 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer" ("SOP
03-3"). SOP 03-3 requires acquired loans to be carried at fair value and
prohibits the establishment of credit loss valuation reserves at acquisition for
loans that have evidence of credit deterioration since origination. The
implementation of SOP 03-3 did not have a material financial statement impact.
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 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. The financial statement impact
of adopting FAS 123R is not expected to differ materially from proforma amounts
previously disclosed.
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. The implementation of FSP 109-2 is not expected to have a
material financial statement impact on the Company, as there are no present
plans to repatriate foreign earnings.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." 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.
Restatement Relating to Derivative Hedge Accounting (see Note 16 -- Restatement
Relating to Derivative Hedge Accounting for additional information).
6
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Note 2 -- Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. The diluted
EPS computation includes the potential impact of dilutive securities, including
stock options and restricted stock grants. The dilutive effect of stock options
is computed using the treasury stock method, which assumes the repurchase of
common shares by CIT at the average market price for the period. Options that do
not have a dilutive effect (because the exercise price is above the market
price) are not included in the denominator and averaged approximately 16.1
million shares and 16.7 million shares for the quarters ended June 30, 2005 and
2004, and 16.5 million shares and 16.4 million shares for the six months ended
June 30, 2005 and 2004, respectively.
The reconciliation of the numerator and denominator of basic EPS with that
of diluted EPS is presented ($ in millions, except per share amounts, which are
in whole dollars; weighted-average share balances are in thousands):
Quarter Ended June 30, 2005 Quarter Ended June 30, 2004
------------------------------------ -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ------------ ------------- ---------
(Restated) (Restated)
Basic EPS:
Income available to common stockholders ....... $249.1 210,506 $1.18 $176.6 211,532 $0.83
Effect of Dilutive Securities:
Restricted shares ............................. 890 758
Performance shares ............................ 644 --
Stock options ................................. 2,659 3,069
------ ------- ------ -------
Diluted EPS ..................................... $249.1 214,699 $1.16 $176.6 215,359 $0.82
====== ======= ====== =======
Six Months Ended June 30, 2005 Six Months Ended June 30, 2004
------------------------------------ -------------------------------------
(Restated) (Restated)
Basic EPS:
Income available to common stockholders ....... $476.7 210,581 $2.26 $365.9 211,685 $1.73
Effect of Dilutive Securities:
Restricted shares ............................. 883 649
Performance shares ............................ 537 --
Stock options ................................. 2,893 3,250
------ ------- ------ -------
Diluted EPS ..................................... $476.7 214,894 $2.22 $365.9 215,584 $1.70
====== ======= ====== =======
Note 3 -- Business Segment Information
The selected financial information by business segment presented below is
based upon the allocation of most corporate expenses. For the 2005 periods,
capital is allocated to the segments by applying different leverage ratios to
each business unit using market capitalization and risk criteria. The capital
allocations reflect the relative risk of individual asset classes within
segments and range from approximately 2% of managed assets for U.S. government
guaranteed loans to approximately 15% of managed assets for longer-term assets
such as aerospace and rail.
During the second quarter of 2005, segment reporting was modified in
conjunction with certain business restructuring initiatives. First, the former
Commercial Finance segment has been divided into two segments, Commercial
Services (factoring) and Corporate Finance. Corporate Finance includes the
former Business Credit (asset based lending), Power, Energy and Infrastructure,
which was transferred from Capital Finance, and Healthcare, which was
transferred from Equipment Finance. Prior period balances have been adjusted to
conform to current period presentation, except for the transfer of Healthcare
assets and related income data ($ in millions):
7
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Specialty Specialty Corporate
Finance- Finance- Commercial Corporate Equipment Capital Total and
commercial consumer Services Finance Finance Finance Segments Other Consolidated
---------- -------- -------- ------- ------- ------- -------- ----- ------------
Quarter Ended
June 30, 2005
(Restated)
Operating margin ............ $ 216.2 $ 61.6 $ 97.3 $ 100.6 $ 72.6 $ 59.4 $ 607.7 $ 69.4 $ 677.1
Income taxes ................ 48.8 10.5 26.2 26.4 20.6 3.6 136.1 (3.2) 132.9
Net income (loss) .......... 75.5 16.7 42.6 43.4 34.2 38.9 251.3 (2.2) 249.1
Quarter Ended
June 30, 2004
Operating margin ............ $ 187.5 $ 39.8 $ 92.6 $ 110.0 $ 53.6 $ 33.2 $ 516.7 $ 25.1 $ 541.8
Income taxes ................ 33.8 8.4 25.9 31.8 11.7 3.8 115.4 (2.6) 112.8
Net income (loss) .......... 65.6 14.2 40.0 48.3 19.3 13.2 200.6 (24.0) 176.6
At or for the Six
Months Ended
June 30, 2005
(Restated)
Operating margin ............ $ 427.5 $ 111.8 $ 185.9 $ 196.1 $ 128.2 $ 114.6 $ 1,164.1 $143.1 $ 1,307.2
Income taxes ................ 89.8 20.5 48.4 51.3 34.1 14.3 258.4 12.1 270.5
Net income (loss) .......... 153.4 32.4 79.9 85.1 55.5 65.5 471.8 4.9 476.7
Total financing and
leasing assets ............ 10,726.5 10,899.0 6,417.2 8,104.2 4,636.2 9,835.2 50,618.3 -- 50,618.3
Total managed
assets .................... 14,523.7 11,926.6 6,417.2 8,158.2 7,217.3 9,835.2 58,078.2 -- 58,078.2
At or for the Six
Months Ended
June 30, 2004
Operating margin ............ $ 382.7 $ 70.3 $ 179.2 $ 182.9 $ 102.0 $ 82.6 $ 999.7 $ 50.7 $ 1,050.4
Income taxes ................ 72.0 14.1 49.2 51.1 21.5 15.3 223.2 10.7 233.9
Net income (loss) .......... 134.5 21.7 76.3 78.2 35.4 35.7 381.8 (15.9) 365.9
Total financing and
leasing assets ............ 10,322.2 3,756.5 5,808.6 6,335.2 6,847.5 8,383.5 41,453.5 -- 41,453.5
Total managed
assets .................... 14,330.4 5,244.4 5,808.6 6,335.2 9,752.4 8,383.5 49,854.5 -- 49,854.5
8
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Note 4 -- Concentrations
The following table summarizes the geographic and industry compositions
(by obligor) of financing and leasing portfolio assets ($ in millions):
June 30, 2005 December 31, 2004
------------- -----------------
(Restated)
Geographic
North America:
West........................................................... $10,023.3 19.8% $ 8,595.3 19.0%
Northeast...................................................... 9,372.3 18.5% 8,463.4 18.7%
Midwest........................................................ 8,297.7 16.4% 6,907.0 15.3%
Southeast...................................................... 7,270.3 14.4% 6,283.3 14.0%
Southwest...................................................... 5,114.9 10.1% 4,848.3 10.7%
Canada......................................................... 2,583.9 5.1% 2,483.4 5.5%
--------- ----- --------- -----
Total North America......................................... 42,662.4 84.3% 37,580.7 83.2%
Other foreign.................................................. 7,955.9 15.7% 7,580.2 16.8%
--------- ----- --------- -----
Total.......................................................... $50,618.3 100.0% $45,160.9 100.0%
========= ===== ========= =====
Industry
Manufacturing(1)............................................... $ 7,156.5 14.1% $ 6,932.0 15.4%
Consumer based lending -- home lending.......................... 6,285.0 12.4% 5,069.8 11.2%
Commercial airlines (including regional airlines).............. 6,063.9 12.0% 5,512.4 12.2%
Retail(2)...................................................... 5,993.6 11.8% 5,859.4 13.0%
Consumer based lending -- education lending..................... 4,291.5 8.5% -- --
Service industries............................................. 2,863.6 5.7% 2,854.5 6.3%
Transportation(3).............................................. 2,430.9 4.8% 2,969.6 6.6%
Consumer based lending -- non-real estate(4).................... 2,325.7 4.6% 2,480.1 5.5%
Wholesaling.................................................... 1,901.1 3.8% 1,727.5 3.8%
Construction equipment......................................... 1,603.5 3.2% 1,603.1 3.5%
Communications(5).............................................. 1,255.7 2.5% 1,292.1 2.9%
Healthcare services............................................ 1,134.5 2.2% 992.5 2.2%
Other (no industry greater than 3.0%)(6)....................... 7,312.8 14.4% 7,867.9 17.4%
--------- ----- --------- -----
Total.......................................................... $50,618.3 100.0% $45,160.9 100.0%
========= ===== ========= =====
--------------------------------------------------------------------------------
(1) Includes manufacturers of apparel (2.9%), 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 (4.8%) and general merchandise (3.8%).
(3) Includes rail, bus, over-the-road trucking industries and business
aircraft.
(4) Includes receivables from consumers in the Specialty Finance -- commercial
segment for products in various industries such as computers and related
equipment and the remaining manufactured housing portfolio.
(5) Includes $278.9 million and $335.2 million of equipment financed for the
telecommunications industry at June 30, 2005 and December 31, 2004,
respectively, but excludes telecommunications equipment financed for other
industries.
(6) Includes financing and leasing assets in the energy, power and utilities
sectors, which totaled $1.1 billion, or 2.1% of total financing and
leasing assets at June 30, 2005. This amount includes approximately $740.8
million in project financing and $262.5 million in rail cars on lease.
9
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Note 5 -- Retained Interests in Securitizations and Other Investments
The following table details the components of retained interests in
securitizations and other investments ($ in millions):
June 30, December 31,
2005 2004
-------- --------
Commercial:
Retained subordinated securities............................................ $ 413.1 $ 446.2
Interest-only strips........................................................ 324.2 292.4
Cash reserve accounts....................................................... 271.3 323.4
-------- --------
Total retained interests in commercial loans................................ 1,008.6 1,062.0
-------- --------
Consumer:(1)
Retained subordinated securities............................................ 68.6 76.6
Interest-only strips........................................................ 8.8 17.0
Cash reserve accounts....................................................... -- --
-------- --------
Total retained interests in consumer loans.................................. 77.4 93.6
-------- --------
Total retained interests in securitizations.................................... 1,086.0 1,155.6
Aerospace equipment trust certificates and other(2)............................ 36.0 72.6
-------- --------
Total....................................................................... $1,122.0 $1,228.2
======== ========
--------------------------------------------------------------------------------
(1) Comprised of amounts related to home lending receivables securitized.
(2) At December 31, 2004 other includes a $4.7 million investment in common
stock received as part of a loan work-out of an aerospace account.
Note 6 -- Accumulated Other Comprehensive (Loss) / Income
The following table details the components of accumulated other
comprehensive (loss) / income, net of tax ($ in millions):
June 30, December 31,
2005 2004
------- ------------
Changes in fair values of derivatives qualifying as cash flow hedges........... $(29.5) $(27.1)
Foreign currency translation adjustments....................................... (15.7) (37.2)
Minimum pension liability adjustments.......................................... (2.3) (2.7)
Unrealized gain on equity and securitization investments....................... 17.9 8.6
------ ------
Total accumulated other comprehensive loss..................................... $(29.6) $(58.4)
====== ======
The changes in fair values of derivatives qualifying as cash flow hedges
related to variations in market interest rates during the quarter, as these
derivatives effectively convert an equivalent amount of variable-rate debt,
including commercial paper, to fixed rates of interest. See Note 7 for
additional information.
Total comprehensive income for the quarters ended June 30, 2005 and 2004
was $188.3 million and $254.9 million and for the six months ended June 30, 2005
and 2004 was $505.5 million and $389.4 million.
Note 7 -- Derivative Financial Instruments
As part of managing exposure to interest rate, foreign currency, and, in
limited instances, credit risk, CIT, as an end-user, enters into various
derivative transactions, all of which are transacted in over-the-counter markets
with other financial institutions. Derivatives are utilized to hedge exposures,
and not for speculative purposes. To ensure both appropriate use as a hedge and
to achieve hedge accounting treatment, whenever possible, substantially all
derivatives entered into are designated according to a hedge objective against a
specific or forecasted liability or, in limited instances, assets. The notional
amounts, rates, indices, and maturities of derivatives closely match the related
terms of the underlying hedged items.
10
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
CIT utilizes interest rate swaps to convert variable-rate interest
underlying forecasted issuances of commercial paper, specific variable-rate debt
instruments, and, in limited instances, variable-rate assets to fixed-rate
amounts. These interest rate swaps are designated as cash flow hedges and
changes in fair value of these swaps, to the extent they are effective as a
hedge, are recorded in other comprehensive income. Amounts related to hedges to
the extent ineffective are recorded in interest expense.
The components of the adjustment to Accumulated Other Comprehensive Loss
for derivatives qualifying as hedges of future cash flows are presented in the
following table ($ in millions):
Fair Value Total
Adjustments Income Tax Unrealized
of Derivatives Effects Loss
-------------- ---------- ----------
Balance at December 31, 2004 -- unrealized loss.................... $(41.3) $14.2 $(27.1)
Changes in values of derivatives qualifying as cash flow hedges... (3.9) 1.5 (2.4)
------ ----- ------
Balance at June 30, 2005 -- unrealized loss........................ $(45.2) $15.7 $(29.5)
====== ===== ======
The unrealized loss for the six months ended and as of June 30, 2005
primarily reflects our use of interest rate swaps to effectively convert
variable-rate debt to fixed-rate debt followed by increased market interest
rates. The Accumulated Other Comprehensive Loss (along with the corresponding
swap asset or liability) will be adjusted as market interest rates change over
the remaining life of the swaps. Assuming no change in interest rates,
approximately $7.2 million, net of tax, of the Accumulated Other Comprehensive
Loss as of June 30, 2005 is expected to be reclassified to earnings over the
next twelve months as contractual cash payments are made.
The ineffective amounts, due to changes in the fair value of cash flow
hedges, are recorded as either an increase or decrease to interest expense as
presented in the following table ($ in millions):
Increase/Decrease to
Ineffectiveness Interest Expense
--------------- --------------------
Quarter ended June 30, 2005 (Restated).................................... $1.7 Increase
Quarter ended June 30, 2004............................................... $0.4 Decrease
Six months ended June 30, 2005 (Restated)................................. $0.6 Decrease
Six months ended June 30, 2004............................................ $0.7 Decrease
CIT also utilizes interest rate swaps to convert fixed-rate interest on
specific debt instruments to variable-rate amounts. These interest rate swaps
are designated as fair value hedges and changes in fair value of these swaps are
effectively recorded as an adjustment to the carrying value of the hedged item,
as the offsetting changes in fair value of the swaps and the hedged items are
recorded in earnings.
The following table presents the notional principal amounts of interest
rate swaps by class and the corresponding hedged item ($ in millions):
June 30, December 31,
2005 2004
--------- -----------
Effectively converts the interest rate on
Floating to fixed-rate swaps........................ $ 4,399.1 $ 3,533.6 an equivalent amount of commercial
paper, variable-rate notes and selected
assets to a fixed rate.
Fixed to floating-rate swaps........................ 7,781.4 7,642.6 Effectively converts the interest rate on
--------- --------- an equivalent amount of fixed-rate notes
Total interest rate swaps........................... $12,180.5 $11,176.2 and selected assets to a variable rate.
========= =========
11
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
In addition to the swaps in the table above, in conjunction with
securitizations, at June 30, 2005, CIT has $2.4 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 $2.4 billion in notional amount at June 30, 2005 to
insulate the related interest rate risk.
CIT also 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 accumulated other
comprehensive loss along with the translation 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 foreign currency
fair value hedges and changes in fair value of these contracts are recorded in
accumulated other comprehensive loss (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.
During 2005 and 2004, CIT entered into credit default swaps, with a
combined notional value of $118.0 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 fair value adjustment for the quarter and
six months ended June 30, 2005 amounted to a $1.3 million and $5.5 million
pretax gain. CIT also has certain cross-currency swaps (with a combined notional
principal of $1,635 million (Restated)) and an interest rate swap (basis swap
denominated in U.S. dollars with notional principal of $935 million) that was
acquired in the education lending acquisition. These instruments economically
hedge exposures, but do not qualify for hedge accounting. These derivatives are
recorded at fair value, with both realized and unrealized gains or losses
recorded in other revenue in the consolidated statement of income.
Note 8 -- Certain Relationships and Related Transactions
CIT is a partner with Dell Inc. ("Dell") in Dell Financial Services L.P.
("DFS"), a joint venture that offers financing to Dell's customers. The joint
venture provides Dell with financing and leasing capabilities that are
complementary to its product offerings and provides CIT with a source of new
financings. The joint venture agreement provides 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 June 30, 2005 and
December 31, 2004, financing and leasing assets related to the DFS program
included in the CIT Consolidated Balance Sheet (but excluding certain related
International receivables originated directly by CIT) were approximately $2.2
billion and $2.0 billion, and securitized assets included in managed assets were
approximately $2.3 billion and $2.5 billion, respectively. CIT's investment in
the form of equity and loans to the joint venture was approximately $233 million
and $267 million at June 30, 2005 and December 31, 2004.
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 limited credit recourse on defaulted receivables. The
agreement with Snap-on was recently extended until January 2009. 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
June 30, 2005 and December 31, 2004, financing and leasing assets were
approximately $1.1 billion and
12
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
securitized assets included in managed assets were $0.1 billion. 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 $12 million and
$16 million at June 30, 2005 and December 31, 2004.
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. At June
30, 2005 and December 31, 2004, CIT's investment in and loans to the joint
venture were approximately $257 million and $191 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 a 1999 acquisition, and others were
subsequently entered into in the normal course of business. At June 30, 2005 and
December 31, 2004, other assets included approximately $17 million and $19
million of investments in non-consolidated entities relating to such
transactions that are accounted for under the equity or cost methods.
Certain shareholders of CIT provide investment management, banking and
investment banking services in the normal course of business.
Note 9 -- Postretirement and Other Benefit Plans
The following table discloses various components of pension expense ($ in
millions):
Quarters Six Months
Ended June 30, Ended June 30,
-------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Retirement Plans
Service cost ......................................................... $ 4.9 $ 4.4 $ 9.9 $ 8.9
Interest cost ........................................................ 4.3 3.9 8.6 7.8
Expected return on plan assets ....................................... (4.8) (4.0) (9.6) (8.1)
Amortization of net loss ............................................. 0.7 0.7 1.4 1.4
----- ----- ----- -----
Net periodic benefit cost ............................................ 5.1 5.0 10.3 10.0
Loss due to settlements and curtailments ............................. 0.5 -- 0.5 --
Cost for special termination benefits ................................ 2.3 -- 2.3 --
----- ----- ----- -----
Net amount recognized ................................................ $ 7.9 $ 5.0 $13.1 $10.0
===== ===== ===== =====
Postretirement Plans
Service cost ......................................................... $ 0.5 $ 0.4 $ 1.1 $ 0.9
Interest cost ........................................................ 0.8 0.9 1.6 1.7
Amortization of net loss ............................................. 0.3 0.2 0.5 0.5
----- ----- ----- -----
Net periodic benefit cost ............................................ $ 1.6 $ 1.5 $ 3.2 $ 3.1
===== ===== ===== =====
CIT contributed $6.5 million to its pension plans for the six months ended
June 30, 2005, and currently expects to fund approximately an additional $15
million during the second half of 2005.
13
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Note 10 -- Commitments and Contingencies
Financing and leasing asset commitments, referred to as loan commitments
or lines of credit, are agreements to lend to customers subject to the
customers' compliance with contractual obligations. The accompanying table
summarizes these and other credit-related commitments as well as purchase and
funding commitments ($ in millions):
June 30, 2005
-------------------------------------
Due to Expire December 31
--------------------- 2004
Within After Total Total
One Year One Year Outstanding Outstanding
-------- -------- ----------- -----------
Financing Commitments
Financing and leasing commitments....................... $1,725.2 $7,611.9 $9,337.1 $8,428.3
Letters of credit and acceptances:
Standby letters of credit............................. 499.0 43.3 542.3 618.3
Other letters of credit............................... 657.9 0.4 658.3 588.3
Acceptances........................................... 27.3 -- 27.3 16.4
Guarantees.............................................. 144.2 12.1 156.3 133.1
Purchase and Funding Commitments
Aerospace purchase commitments.......................... 794.0 766.0 1,560.0 2,168.0
Other equipment purchase commitments.................... 593.1 -- 593.1 397.0
Sale-leaseback payments................................. 10.0 462.4 472.4 495.4
Venture capital fund investment commitments............. -- -- -- 79.8
In addition to the amounts shown in the table above, unused, cancelable
lines of credit to consumers in connection with a third-party vendor program,
which may be used to finance additional technology product purchases, amounted
to approximately $13.1 billion and $9.8 billion at June 30, 2005 and December
31, 2004. These uncommitted vendor-related lines of credit can be reduced or
canceled by CIT at any time without notice. Our experience does not indicate
that customers will exercise their entire available line of credit at any point
in time.
In the normal course of meeting the needs of its customers, CIT also
enters into commitments to provide financing, 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
forms of credit support from the customer.
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 from
the client. As of June 30, 2005, 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 Industries and The Boeing Company. The commitment amounts
detailed in the preceding table are based on estimated values, as actual amounts
will vary based upon market factors at the time of delivery. Pursuant to
existing contractual commitments, 34 aircraft remain to be purchased (18 within
the next twelve months). Lease commitments are in place for ten of the remaining
aircraft to be delivered over the next twelve months. The order amount excludes
CIT's options to purchase additional aircraft.
Outstanding commitments to purchase equipment to be leased to customers,
other than aircraft, 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 $472.4 million, approximately $31 million per year through
2010 and
14
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
declining thereafter through 2024, which is more than offset by CIT's re-lease
of the assets, contingent on its ability to maintain railcar usage. In
conjunction with this sale-leaseback transaction, CIT has guaranteed all
obligations of the related consolidated lessee entity.
CIT has guaranteed the public and private debt securities of a number of
its wholly-owned, consolidated subsidiaries, including those disclosed in Note
14 -- Summarized Financial Information of Subsidiaries. In the normal course of
business, various consolidated CIT subsidiaries have entered into other credit
agreements and certain derivative transactions with financial institutions that
are guaranteed by CIT. These transactions are generally used by CIT's
subsidiaries outside of the U.S. to allow the local subsidiary to borrow funds
in local currencies.
Note 11 -- Legal Proceedings
On September 9, 2004, Exquisite Caterers Inc., et al. v. Popular Leasing
Inc., et al. ("Exquisite Caterers"), a putative national class action, was filed
against 13 financial institutions, including CIT, which 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 has alleged 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, were filed by NorVergence customers against CIT and other financial
institutions. On June 16, 2005, the Court in Exquisite Caterers denied the
plaintiffs' motion for class certification. Plaintiffs filed a motion for
reconsideration of the Court's denial. Thereafter, the putative class action
suits in Florida and New York and one of the putative class action suits in
Illinois were dismissed as to CIT, leaving pending putative class action suits
in Illinois and Texas.
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 several states commenced investigations of NorVergence and the
financial institutions, including CIT, that purchased NorVergence Leases. CIT
has entered into settlement agreements with all of those Attorneys General
except for California and Texas. Under those settlements, lessees will have an
opportunity to resolve all claims by and against CIT by paying a percentage of
the remaining balance on their lease. CIT has also produced documents related to
NorVergence at the request of the Federal Trade Commission ("FTC"). No further
action by the FTC against CIT is expected. 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 has produced documents in response to that subpoena.
In addition, there are various proceedings that have been brought against
CIT in the ordinary course of business. While the outcomes of the NorVergence
related litigation and the 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 12 -- Severance and Facility Restructuring Reserves
The following table summarizes previously established purchase accounting
liabilities (pre-tax) related to severance of employees and closing of
facilities, as well as restructuring activities during 2005 ($ in millions):
Severance Facilities
--------------------- --------------------
Number of Number of Total
Employees Reserve Facilities Reserve Reserves
--------- ------- ---------- ------- --------
Balance at December 31, 2004................ 129 $12.2 15 $ 5.7 $17.9
2005 additions.............................. 172 20.9 -- 2.5 23.4
2005 utilization............................ (140) (8.4) (5) (1.0) (9.4)
---- ----- -- ----- -----
Balance at June 30, 2005.................... 161 $24.7 10 $ 7.2 $31.9
==== ===== == ===== =====
15
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
The beginning severance reserves relate primarily to the 2004 acquisition
of a Western European vendor finance and leasing business, and include amounts
payable within the year after the acquisition to individuals who chose to
receive payments on a periodic basis. Severance and facilities restructuring
liabilities were established under purchase accounting in conjunction with fair
value adjustments to acquired assets and liabilities. The additions during 2005
are largely employee termination benefits related to the realignment of the
Commercial Finance Group business segments and other business streamlining
activities ($20.3 million, which was recorded as a component of the $25.2
million restructuring charge within Corporate and Other). The 2005 addition also
included facility exit plan refinements relating to the acquired Western
European vendor finance and leasing business, which were recorded as fair value
adjustments to purchased liabilities / adjustments to goodwill. The employee
termination benefits accrued during the second quarter will largely be paid
during the quarter ending September 30, 2005. The facility reserves relate
primarily to shortfalls in sublease transactions and will be utilized over the
remaining lease terms, generally 6 years.
Note 13 -- Goodwill and Intangible Assets, Net
Goodwill and intangible assets totaled $903.1 million and $596.5 million
at June 30, 2005 and December 31, 2004. The Company periodically reviews and
evaluates its goodwill and other intangible assets for potential impairment.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), under which goodwill is no longer amortized but
instead is assessed periodically for impairment.
The most recent goodwill and intangible asset impairment analyses
indicated that the fair values of goodwill and intangible assets were in excess
of the carrying values.
The following table summarizes the goodwill balance by segment ($ in
millions):
Specialty Specialty
Finance - Finance - Commercial Corporate
commercial consumer Services Finance Total
---------- -------- -------- ------- -----
Balance at December 31, 2004......................... $62.3 $ -- $261.6 $108.8 $432.7
Additions, foreign currency translation, other....... 1.9 257.2 (0.1) -- 259.0
----- ------ ------ ------ ------
Balance at June 30, 2005............................. $64.2 $257.2 $261.5 $108.8 $691.7
===== ====== ====== ====== ======
The increase in goodwill during the period was primarily due to the
education lending acquisition in Specialty Finance -- consumer.
Other intangible assets, net, are comprised primarily of acquired customer
relationships (Specialty Finance and Commercial Service balances), as well as
proprietary computer software and related transaction processes (Commercial
Services). The following table summarizes the net intangible asset balances by
segment ($ in millions):
Specialty Specialty
Finance - Finance - Commercial
commercial consumer Services Total
---------- -------- -------- -----
Balance at December 31, 2004............................... $68.0 $ -- $ 95.8 $163.8
Additions, foreign currency translation, other............. (1.9) 29.4 30.3 57.8
Amortization............................................... (5.0) (0.2) (5.0) (10.2)
----- ----- ------ ------
Balance at June 30, 2005................................... $61.1 $29.2 $121.1 $211.4
===== ===== ====== ======
The increase was primarily related to the education lending acquisition in
Specialty Finance -- consumer and a factoring acquisition in Commercial Services
during the first quarter of 2005. Other intangible assets are being amortized
over their corresponding lives ranging from five to twenty years in relation to
the related cash flows, where applicable. Amortization expense totaled $5.5
million and $10.2 million for the quarter and six months ended June 30, 2005
versus $2.3 million and $4.5 million for the respective prior year periods.
16
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
Accumulated amortization totaled $33.9 million and $23.7 million at June 30,
2005 and December 31, 2004. The projected amortization for the years ended
December 31, 2005 through December 31, 2009 is: $21.1 million for 2005; $20.8
million for 2006; $17.5 million for 2007; $17.6 million for 2008 and $17.8
million for 2009.
During the quarter ended June 30, 2005, segment reporting was modified in
conjunction with various business realignments. The December 31, 2004 balances
have been conformed to the current presentation. See Note 3 -- Business Segment
Information for additional information.
Note 14 -- Summarized Financial Information of Subsidiaries
The following presents condensed consolidating financial information for
CIT Holdings LLC and Capita Corporation (formerly AT&T Capital Corporation). CIT
has guaranteed on a full and unconditional basis the existing debt securities
that were registered under the Securities Act of 1933 and certain other
indebtedness of these subsidiaries. CIT has not presented related financial
statements or other information for these subsidiaries on a stand-alone basis ($
in millions):
CIT
CONSOLIDATING CIT Capita Holdings Other
BALANCE SHEETS Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------- ---------- ----------- --------- ----------- ------------ ----------
June 30, 2005 (Restated)
ASSETS
Net finance receivables .................... $ 1,051.2 $3,592.4 $1,891.7 $33,350.3 $ -- $39,885.6
Operating lease equipment, net ............. -- 526.1 134.8 7,982.0 -- 8,642.9
Finance receivables held for sale .......... -- 124.3 54.9 1,256.7 -- 1,435.9
Cash and cash equivalents .................. 876.7 676.0 267.2 411.8 -- 2,231.7
Other assets ............................... 9,595.9 60.6 16.4 1,883.1 (6,446.8) 5,109.2
---------- -------- -------- --------- --------- ---------
Total Assets ............................. $ 11,523.8 $4,979.4 $2,365.0 $44,883.9 $(6,446.8) $57,305.3
========== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt ....................................... $ 33,398.8 $ 150.1 $3,873.4 $ 5,954.5 $ -- $43,376.8
Credit balances of factoring clients ....... -- -- -- 3,649.2 -- 3,649.2
Accrued liabilities and payables ........... (28,321.8) 4,243.5 (3,341.7) 31,203.2 -- 3,783.2
---------- -------- -------- --------- --------- ---------
Total Liabilities ........................ 5,077.0 4,393.6 531.7 40,806.9 -- 50,809.2
Minority interest .......................... -- -- 49.3 -- 49.3
Total Stockholders' Equity ................. 6,446.8 585.8 1,833.3 4,027.7 (6,446.8) 6,446.8
---------- -------- -------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ..................... $ 11,523.8 $4,979.4 $2,365.0 $44,883.9 $(6,446.8) $57,305.3
========== ======== ======== ========= ========= =========
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
========== ======== ======== ========= ========= =========
17
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENTS OF INCOME Group Inc. Corporation LLC Subsidiaries Eliminations Total
-------------------- ---------- ----------- --------- ----------- ------------ ----------
Six Months Ended June 30, 2005 (Restated)
Finance income ............................. $ 23.2 $ 330.9 $112.7 $1,661.9 $ -- $2,128.7
Interest expense ........................... (32.8) 82.1 40.4 769.6 -- 859.3
------- ------- ------ -------- ------- --------
Net finance income ......................... 56.0 248.8 72.3 892.3 -- 1,269.4
Depreciation on operating
lease equipment .......................... -- 133.6 22.0 323.2 -- 478.8
------- ------- ------ -------- ------- --------
Net finance margin ......................... 56.0 115.2 50.3 569.1 -- 790.6
Provision for credit losses ................ (4.8) 22.6 5.8 68.9 -- 92.5
------- ------- ------ -------- ------- --------
Net finance margin, after provision
for credit losses ........................ 60.8 92.6 44.5 500.2 -- 698.1
Equity in net income of subsidiaries ....... 453.2 -- -- -- (453.2) --
Other revenue .............................. 70.6 68.4 82.9 375.1 -- 597.0
Net gain on venture capital investments .... -- -- -- 12.1 -- 12.1
------- ------- ------ -------- ------- --------
Operating margin ........................... 584.6 161.0 127.4 887.4 (453.2) 1,307.2
Operating expenses ......................... 84.9 104.7 51.6 291.6 -- 532.8
Provision for restructuring ................ -- -- -- 25.2 -- 25.2
------- ------- ------ -------- ------- --------
Income (loss) before provision for
income taxes ............................. 499.7 56.3 75.8 570.6 (453.2) 749.2
Benefit (provision) for income taxes ....... (23.0) (20.7) (27.9) (198.9) -- (270.5)
Minority interest, after tax ............... -- -- -- (2.0) -- (2.0)
------- ------- ------ -------- ------- --------
Net income ................................. $ 476.7 $ 35.6 $ 47.9 $ 369.7 $(453.2) $ 476.7
======= ======= ====== ======== ======= ========
Six Months Ended June 30, 2004
Finance income ............................. $ 15.5 $ 359.6 $ 93.7 $1,337.0 $ -- $1,805.8
Interest expense ........................... (43.5) 105.6 7.5 528.4 -- 598.0
------- ------- ------ -------- ------- --------
Net finance income ......................... 59.0 254.0 86.2 808.6 -- 1,207.8
Depreciation on operating
lease equipment .......................... -- 161.4 21.4 290.9 -- 473.7
------- ------- ------ -------- ------- --------
Net finance margin ......................... 59.0 92.6 64.8 517.7 -- 734.1
Provision for credit losses ................ 7.7 25.5 5.2 112.9 -- 151.3
------- ------- ------ -------- ------- --------
Net finance margin, after provision
for credit losses ........................ 51.3 67.1 59.6 404.8 -- 582.8
Equity in net income of subsidiaries ....... 341.2 -- -- -- (341.2) --
Other revenue .............................. (2.2) 77.0 50.6 338.5 -- 463.9
Net gain on venture capital investments .... -- -- -- 3.7 -- 3.7
------- ------- ------ -------- ------- --------
Operating margin ........................... 390.3 144.1 110.2 747.0 (341.2) 1,050.4
Operating expenses ......................... 56.7 71.7 50.9 313.1 -- 492.4
Gain on redemption of debt ................. 41.8 -- -- -- -- 41.8
------- ------- ------ -------- ------- --------
Income (loss) before provision for
income taxes ............................. 375.4 72.4 59.3 433.9 (341.2) 599.8
Provision for income taxes ................. (9.5) (28.2) (23.1) (173.1) -- (233.9)
------- ------- ------ -------- ------- --------
Net income ................................. $ 365.9 $ 44.2 $ 36.2 $ 260.8 $(341.2) $ 365.9
======= ======= ====== ======== ======= ========
18
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Continued)
CIT
CONSOLIDATING CIT Capita Holdings Other
STATEMENT OF CASH FLOWS Group Inc. Corporation LLC Subsidiaries Eliminations Total
--------------------=-- ---------- ----------- --------- ------------ ------------ ----------
Six Months Ended June 30, 2005 (Restated)
Cash Flows From Operating Activities:
Net cash flows provided
by (used for) operations ................. $ 6,180.5 $(267.5) $ 633.9 $(5,071.6) $ -- $ 1,475.3
--------- ------- -------- --------- --------- ---------
Cash Flows From Investing Activities:
Net increase (decrease) in financing and
leasing assets ............................. 74.7 (594.9) (205.7) (1,599.6) -- (2,325.5)
Inter-company loans and investments ........ (5,327.7) -- -- -- 5,327.7 --
Other ...................................... -- -- -- 167.2 -- 167.2
--------- ------- -------- --------- --------- ---------
Net cash flows (used for) provided by
investing activities ..................... (5,253.0) (594.9) (205.7) (1,432.4) 5,327.7 (2,158.3)
--------- ------- -------- --------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ............ (1,300.3) (337.7) 2,489.6 237.0 -- 1,088.6
Net loans extended -- pledged .............. -- -- -- (270.3) -- (270.3)
Inter-company financing .................... -- 1,205.3 (2,778.1) 6,900.5 (5,327.7) --
Cash dividends paid ........................ (61.9) -- -- -- -- (61.9)
Other ...................................... -- -- -- (51.9) -- (51.9)
--------- ------- -------- --------- --------- ---------
Net cash flows provided by (used for)
financing activities ..................... (1,362.2) 867.6 (288.5) 6,815.3 (5,327.7) 704.5
--------- ------- -------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ......................... (434.7) 5.2 139.7 311.3 -- 21.5
Cash and cash equivalents,
beginning of period ...................... 1,311.4 670.8 127.5 100.5 -- 2,210.2
--------- ------- -------- --------- --------- ---------
Cash and cash equivalents, end of period ... $ 876.7 $ 676.0 $ 267.2 $ 411.8 $ -- $ 2,231.7
========= ======= ======== ========= ========= =========
Six Months Ended June 30, 2004
Cash Flows From Operating Activities:
Net cash flows provided
by operations ............................ $ 128.8 $ 514.0 $ 166.4 $ (360.4) $ -- $ 448.8
--------- ------- -------- --------- --------- ---------
Cash Flows From Investing Activities:
Net (decrease) increase in financing and
leasing assets ........................... 457.5 322.3 (122.7) (2,408.2) -- (1,751.1)
Inter-company loans and investments ........ (2,453.7) -- -- -- 2,453.7 --
Other ...................................... -- -- -- 51.1 -- 51.1
--------- ------- -------- --------- --------- ---------
Net cash flows (used for) provided by
investing activities ..................... (1,996.2) 322.3 (122.7) (2,357.1) 2,453.7 (1,700.0)
--------- ------- -------- --------- --------- ---------
Cash Flows From Financing Activities:
Net increase (decrease) in debt ............ 1,475.1 (566.1) 6.8 231.2 -- 1,147.0
Inter-company financing .................... -- (134.5) 47.4 2,540.8 (2,453.7) --
Cash dividends paid ........................ (55.9) -- -- -- -- (55.9)
Other ...................................... -- -- -- (35.9) -- (35.9)
--------- ------- -------- --------- --------- ---------
Net cash flows provided by
(used for) financing activities .......... 1,419.2 (700.6) 54.2 2,736.1 (2,453.7) 1,055.2
--------- ------- -------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents ......................... (448.2) 135.7 97.9 18.6 -- (196.0)
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 ... $ 1,031.7 $ 546.3 $ 325.4 $ (125.7) $ -- $ 1,777.7
========= ======= ======== ========= ========= =========
19
CIT GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited) (Concluded)
Note 15 -- Subsequent Events
In connection with a share repurchase program authorized by the Company's
Board of Directors, on July 19, 2005, the Company entered into an agreement with
Goldman, Sachs & Co. ("Goldman Sachs") to purchase shares of the Company's
common stock for an aggregate purchase price of $500 million under an
accelerated stock buyback program. The buyback agreement provides for the
upfront delivery of $500 million to Goldman Sachs and the initial delivery of
shares to CIT, followed by the potential delivery of additional shares depending
upon the price of CIT common stock during the term of the program. Additional
shares may be delivered to CIT at two subsequent dates, during the third quarter
when minimum and maximum number of shares will be set and in the fourth quarter
at the end of the program. Repurchased shares delivered to CIT will be held in
treasury.
The number of additional shares the Company may receive over the remaining
term of the agreement, which expires during December 2005, will generally be
based upon the volume-weighted average price of the Company's common stock
during the term of the program. However, as part of the agreement, minimum and
maximum share prices will be set, which will serve to determine the number of
shares to be received. The minimum and maximum share prices will be established
based upon the volume-weighted average price, during a period that began on July
25, 2005, and will be completed during the third quarter of 2005. The Company
expects that the program will be completed in December 2005, although in certain
circumstances the completion date may be accelerated or extended.
In connection with the program, the Company expects that Goldman Sachs
will purchase shares of the Company's common stock in the open market over time.
Also in conjunction with the program, Goldman Sachs may sell CIT shares in the
open market over time. These activities undertaken by Goldman Sachs are expected
to increase the amount of short interest in the Company's stock, but will be
reversed over the course of the agreement term.
On July 28, 2005, the Company delivered $500 million to Goldman Sachs and
received the initial delivery of approximately 8.2 million shares, while
retaining the right to receive additional shares as explained above. The 8.2
million shares represents 80% of the minimum expected share delivery based upon
preliminary pricing. In no event, will CIT receive less than the 8.2 million
shares.
On July 26, 2005, the Company issued $500 million aggregate amount of
Series A and Series B preferred equity securities. The offering was comprised of
$350 million 6.35% non-cumulative fixed rate Series A preferred stock and $150
million 5.189% non-cumulative adjustable rate Series B preferred stock. Holders
of the Series A preferred shares will be entitled to receive dividends as
declared, at an annual rate of 6.35%. Holders of the Series B preferred shares
will be entitled to receive dividends as declared, at an annual rate of 5.189%
through and including September 15, 2010, and thereafter at an annual floating
rate spread over a pre-specified benchmark rate. Both the Series A and Series B
preferred stock are callable at par at any time after September 15, 2010. The
intended use of proceeds from this offering was to fund the repurchase of our
common stock in conjunction with the previously announced accelerated stock
buyback program.
On July 19, 2005, the Company announced the definitive agreement to
acquire Healthcare Business Credit Corporation ("HBCC"), a full service
healthcare financing company that specializes in asset-based and cash flow
financing to U.S. healthcare providers. HBCC, which is located in New Jersey,
has approximately $500 million in assets and $1 billion in lending commitments.
The transaction is expected to close in the third quarter of 2005.
20
Note 16 -- Restatement Relating to Derivative Hedge Accounting
During the fourth quarter of 2005, we learned of an interpretation with
respect to applying the "matched terms" approach in hedge accounting under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133"). We reviewed our
accounting for certain cross-currency interest rate swaps ("compound swaps" or
"compound derivatives") under SFAS 133.
We determined that certain compound swaps were not appropriately accounted
for, even though these compound swaps were highly effective economic hedges of
the interest rate and currency exchange risks associated with foreign
denominated debt. We documented these swaps originally as "matched terms"
hedges, which assumes no hedge ineffectiveness. The swaps would have qualified
for "long-haul" hedge accounting with ineffectiveness reflected in current
earnings. However, the swaps did not qualify for hedge accounting treatment from
their inception, as SFAS 133 does not allow for subsequent documentation
modifications.
The elimination of hedge accounting from inception of the compound swaps
resulted in an increase in pre-tax income of $52.4 million and $80.1 million for
the three and six months ended June 30, 2005, to reflect the elimination of
adjustments to the basis of the corresponding debt under SFAS 133 fair value
hedge accounting for changes in interest rates during the period. This amount
includes a year to date increase in other revenue for 2004 and prior derivative
hedge accounting adjustments that management determined to be immaterial to the
2004 annual and interim financial statements. This increase to revenues in the
six-month period will reduce future earnings by an equal amount through 2015. We
are also including other previously identified, immaterial, in-period financial
statement changes for various revenue and expense accruals in conjunction with
this restatement with respect to year to date results.
The primary impacts of this restatement of non-cash items on our financial
statements are as follows ($ in millions, per share amounts in dollars):
Quarter Year to Date
At or for the Quarter and Six ------------------------------------- ----------------------------------
Previously Previously
Months Ended June 30, 2005 Reported Restated Change Reported Restated Change
--------- -------- ------ ---------- -------- ------
Income Statement
Finance income $ 1,106.7 $ 1,100.7 $ (6.0) $ 2,128.7 $ 2,128.7 $ --
Interest expense 466.7 467.8 1.1 860.9 859.3 (1.6)
Other revenue 278.9 331.3 52.4 518.3 597.0 78.7
Salaries and general operating
expenses 271.8 268.8 (3.0) 532.8 532.8 --
Provision for income taxes 113.0 132.9 19.9 235.8 270.5 34.7
Net income 220.7 249.1 28.4 431.1 476.7 45.6
Basic earnings per share 1.05 1.18 0.13 2.05 2.26 0.21
Diluted earnings per share 1.03 1.16 0.13 2.01 2.22 0.21
Balance Sheet
Finance receivables and education
lending receivables 40,509.3 40,507.9 (1.4)
Total debt 43,458.5 43,376.8 (81.7)
Accrued liabilities and payables 3,748.5 3,783.2 34.7
Total stockholders' equity 6,401.2 6,446.8 45.6
The effect of the restatement on our statement of financial position at
the end of the reported periods is immaterial and the restatement has no effect
on our cash flows.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
and
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Certain data within this section has been "Restated" as detailed in Note
16 -- Restatement Relating to Derivative Hedge Accounting to the financial
statements.
CIT Group Inc., a Delaware corporation, is a global commercial and
consumer finance company that was founded in 1908. CIT provides financing and
leasing capital for consumers and companies in a wide variety of industries,
offering vendor, equipment, commercial, factoring, home lending, educational
lending and structured financing products as well as rendering management
advisory services.
Refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 for a glossary of key terms used in our business and an
overview of profitability drivers and related metrics.
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.
Profitability
Profitability measurements for the respective periods are presented in the
table below:
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
(Restated) (Restated)
Net income............................................. $249.1 $176.6 $476.7 $365.9
Net income per diluted share........................... $ 1.16 $ 0.82 $ 2.22 $ 1.70
Net income as a percentage of AEA...................... 2.10% 1.86% 2.08% 1.95%
Return on average tangible common equity............... 18.3% 13.7% 17.4% 14.4%
Return on average common equity........................ 15.7% 12.5% 15.2% 13.1%
--------------------------------------------------------------------------------
For the six months ended June 30, 2004, net income, net income per diluted
share, net income as a percentage of average earning assets ("AEA"), return on
average tangible equity and return on average equity excluding gain on
redemption of debt, were $340.4 million, $1.58, 1.82%, 13.4% and 12.2%,
respectively.
Current quarter net income includes: a pre-tax $25.2 million restructuring
charge corresponding to the termination benefits of approximately 200 employees
in conjunction with the realignment of Commercial Finance and other business
streamlining activities (detailed further in Note 12 -- Severance and Facility
Restructuring Reserves) and a pre-tax $22.0 million gain on the sale of a
significant portion of the business aircraft portfolio. Current quarter and year
to date 2005 also include pre-tax mark-to-market gains of $52.4 million and
$80.1 million relating to derivatives that do not qualify for hedge accounting
treatment. Prior year first half net income included a pre-tax $41.8 million
gain on early debt redemption. Excluding these transactions, the improved
results reflected lower charge-offs, strong non-spread revenues and a lower
effective tax rate.
Results by Business Segment
The tables that follow summarize selected financial information by
business segment. See Note 3 -- Business Segments Information for details on
2005 realignment initiatives and measuring segment performance using
risk-adjusted capital. The 2004 results have been conformed to the current
presentation reflecting the revised 2005 capital allocation methodology and
certain asset transfers, as described in Note 3. ($ in millions)
Quarters Ended June 30,
----------------------------------------------------------------------
2005 2004
--------------------------------- ---------------------------------
(Restated)
Return on Return on
Net Return Risk-Adjusted Net Return Risk-Adjusted
Income on AEA Capital Income on AEA Capital
------ ------ ------------- ------ ------ -------------
Specialty Finance -- commercial...... $ 75.5 2.71% 22.8% $ 65.6 2.66% 20.3%
Specialty Finance -- consumer........ 16.7 0.63% 9.5% 14.2 1.60% 18.7%
------ ------
Total Specialty Finance.......... 92.2 1.70% 17.8% 79.8 2.37% 20.0%
------ ------
Commercial Services................. 42.6 6.43% 25.5% 40.0 5.87% 26.2%
Corporate Finance................... 43.4 2.21% 20.6% 48.3 2.97% 28.5%
Equipment Finance................... 34.2 2.19% 15.6% 19.3 1.12% 7.5%
Capital Finance..................... 38.9 1.72% 12.4% 13.2 0.65% 6.3%
------ ------
Total Commercial Finance......... 159.1 2.47% 17.5% 120.8 1.99% 15.6%
------ ------
Corporate, including certain charges (2.2) (0.02)% -- (24.0) (0.27)% --
------ ------
Total............................ $249.1 2.10% 18.3% $176.6 1.86% 13.7%
====== ======
22
Six Months Ended June 30,
----------------------------------------------------------------------
2005 2004
--------------------------------- ---------------------------------
(Restated)
Return on Return on
Net Return Risk-Adjusted Net Return Risk-Adjusted
Income on AEA Capital Income on AEA Capital
------ ------ ------------- ------ ------ -------------
Specialty Finance -- commercial...... $153.4 2.75% 23.4% $134.5 2.74% 21.0%
Specialty Finance -- consumer........ 32.4 0.71% 10.2% 21.7 1.33% 15.2%
------ ------
Total Specialty Finance.......... 185.8 1.83% 18.8% 156.2 2.39% 19.9%
------ ------
Commercial Services................. 79.9 6.23% 25.0% 76.3 5.76% 25.0%
Corporate Finance................... 85.1 2.19% 20.4% 78.2 2.40% 23.1%
Equipment Finance................... 55.5 1.78% 12.6% 35.4 1.03% 6.9%
Capital Finance..................... 65.5 1.48% 10.7% 35.7 0.88% 8.7%
------ ------
Total Commercial Finance......... 286.0 2.25% 16.0% 225.6 1.87% 14.6%
------ ------
Corporate, including certain charges 4.9 0.02% -- (15.9) (0.10)% --
------ ------
Total............................ $476.7 2.08% 17.4% $365.9 1.95% 14.4%
====== ======
Capital is allocated to the segments by applying different leverage ratios
to each business using market and risk criteria. The capital allocations reflect
the relative risk of individual asset classes within the segments and range from
approximately 2% of managed assets for U.S. government guaranteed education
loans to approximately 15% of managed assets for longer-term assets such as
aerospace. The targeted risk-adjusted capital allocations by segment (as a
percentage of average managed assets) are as follows: Specialty Finance --
commercial 9%, Specialty Finance -- consumer 5%, Commercial Services, Corporate
Finance and Equipment Finance 10% and Capital Finance 14%.
Results by segment were as follows:
o Specialty Finance -- commercial reflected stronger second quarter
earnings in the major vendor unit, while earnings in the
international, small / mid-ticket leasing and small business lending
units were strong.
o Specialty Finance -- consumer reported strong home lending results
due to a higher earning assets base and lower charge-offs. Education
lending earnings turned positive in the second quarter and included
gains on approximately $300 million in loan sales. Returns in this
segment were below last year given the 2005 addition of the
education lending business, however our home lending portfolio
generated returns on a risk-adjusted basis that met the corporate
hurdle rate for the six months ended June 30, 2005 and 2004.
o Commercial Services earnings benefited from continued strong
factoring commissions (in amount). However, commission rates
declined modestly from the prior year.
o Corporate Finance earnings improvement from the prior year was
particularly strong in the Capital Markets and Communications &
Media units, reflecting higher risk-adjusted margins and non-spread
revenue. The earnings decline from the prior year quarter was due to
a large syndication gain on a project finance asset completed in
2004.
o Equipment Finance returns for the quarter reflected the $22.0
million pretax gain from the sale of a majority of the business
aircraft portfolio, while year to date also reflected improvement in
the level of charge-offs.
o Capital Finance earnings improved from the prior year due to
stronger operating lease margins in both aerospace and rail and the
lower effective tax rate resulting from aircraft transfers to
Ireland. See "Income Taxes" for additional information.
Corporate included amounts as shown in the table below (after tax):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
(Restated) (Restated)
Unallocated expenses................................... $(16.6) $(23.9) $(30.8) $(39.3)
Restructuring charges.................................. (15.4) -- (15.4) --
Gain on derivatives.................................... 29.7 -- 45.4 --
Gain on debt redemption................................ -- -- -- 25.5
Venture capital operating income/(losses)(1)........... 0.1 (0.1) 5.7 (2.1)
------ ------ ------ ------
Total............................................... $ (2.2) $(24.0) $ 4.9 $(15.9)
====== ====== ====== ======
--------------------------------------------------------------------------------
(1) Venture capital operating income / (losses) include realized and
unrealized gains and losses related to venture capital investments as well
as interest costs and other operating expenses associated with these
portfolios.
23
Net Finance Margin
A table summarizing the components of net finance margin is set forth
below ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(Restated) (Restated)
Finance income -- loans and capital leases.............. $ 730.2 $ 577.0 $ 1,400.2 $ 1,133.6
Rental income on operating leases...................... 370.5 331.9 728.5 672.2
Interest expense....................................... 467.8 300.0 859.3 598.0
--------- --------- --------- ---------
Net finance income.................................. 632.9 608.9 1,269.4 1,207.8
Depreciation on operating lease equipment.............. 241.2 237.9 478.8 473.7
--------- --------- --------- ---------
Net finance margin.................................. $ 391.7 $ 371.0 $ 790.6 $ 734.1
========= ========= ========= =========
As a % of AEA:
Finance income -- loans and capital leases.............. 6.15% 6.08% 6.10% 6.05%
Rental income on operating leases...................... 3.12% 3.49% 3.18% 3.59%
Interest expense....................................... 3.94% 3.16% 3.74% 3.19%
--------- --------- --------- ---------
Net finance income.................................. 5.33% 6.41% 5.54% 6.45%
Depreciation on operating lease equipment.............. 2.03% 2.50% 2.09% 2.53%
--------- --------- --------- ---------
Net finance margin.................................. 3.30% 3.91% 3.45% 3.92%
========= ========= ========= =========
As a % of AOL:
Rental income on operating leases...................... 17.42% 17.40% 17.32% 17.65%
Depreciation on operating lease equipment.............. 11.34% 12.47% 11.38% 12.44%
--------- --------- --------- ---------
Net operating lease margin.......................... 6.08% 4.93% 5.94% 5.21%
========= ========= ========= =========
Average Earning Assets................................. $47,482.4 $37,992.8 $45,869.5 $37,499.1
========= ========= ========= =========
Average Operating Leases Equipment ("AOL")............. $ 8,508.7 $ 7,628.5 $ 8,413.7 $ 7,613.6
========= ========= ========= =========
Analysis of net finance margin is as follows:
o Finance income for 2005 benefited from assets repricing at higher
market interest rates, and higher 2005 asset levels.
o Interest expense increased from 2004, reflecting debt assumed in the
education lending acquisition, higher 2005 market interest rates and
the effect of extending the maturity of the debt portfolio, which
exceeded the savings from refinancing higher-cost debt at tighter
2005 spreads.
o The decline in net finance margin as a percentage of AEA reflects
the blending of the lower-margin education lending receivables into
the portfolio, lower yield-related fees (as prepayments declined
this quarter), as well as pricing pressure, reflecting liquidity in
many of our lending businesses, particularly in Corporate Finance
and Equipment Finance. Lease margin trends were favorable as
discussed below.
o Rental income increased over the prior year periods as rates
strengthened in aerospace and rail. Depreciation expense declined as
a percentage of AOL from 2004, reflecting the continued asset mix
change from shorter-term small to mid-ticket leasing assets in
Specialty Finance and Equipment Finance to longer-lived assets in
Capital Finance. The 2004 depreciation expense includes a $14.8
million impairment charge. See "Concentrations -- Operating Leases"
for additional information regarding our operating lease assets.
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.
24
At the date that interest rate sensitivity is modeled, "baseline" net
interest income is derived using 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
July 1, 2005 would reduce net income by an estimated $15 million after-tax over
the next twelve months. A corresponding decrease in the yield curve would cause
an increase in net income of a like amount. A 100 basis point increase in the
yield curve on July 1, 2004 would have reduced net income by an estimated $15
million after tax, while a corresponding decrease in the yield curve would have
increased net income by a like amount. Although management believes that this
static analysis provides an estimate of our interest rate sensitivity, it does
not account for potential changes in the credit quality, size, composition and
prepayment characteristics of the balance sheet and other business developments
that could affect net income. Accordingly, no assurance can be given that actual
results would not differ materially from the estimated outcomes of our
simulations. Further, such simulations do not represent management's current
view of future market interest rate movements.
A comparative analysis of the weighted average principal outstanding and
interest rates on our debt before and after the effect of interest rate swaps is
shown in the following table ($ in millions):
Before Swaps After Swaps
-------------------- --------------------
Quarter Ended June 30, 2005 (Restated)
Commercial paper, variable-rate senior
notes and bank credit facilities......................... $16,678.0 3.28% $20,225.5 3.69%
Fixed-rate senior and subordinated notes.................... 26,632.0 5.10% 23,084.5 4.88%
--------- ---------
Composite................................................... $43,310.0 4.40% $43,310.0 4.33%
========= =========
Quarter Ended June 30, 2004
Commercial paper, variable-rate senior
notes and bank credit facilities......................... $14,875.7 1.55% $18,250.0 2.33%
Fixed-rate senior and subordinated notes.................... 19,312.4 5.71% 15,938.1 5.19%
--------- ---------
Composite................................................... $34,188.1 3.90% $34,188.1 3.67%
========= =========
Six Months Ended June 30, 2005 (Restated)
Commercial paper, variable-rate senior
notes and bank credit facilities......................... $16,003.1 3.05% $19,917.4 3.47%
Fixed-rate senior and subordinated notes.................... 25,460.1 5.01% 21,545.8 4.77%
--------- ---------
Composite................................................... $41,463.2 4.25% $41,463.2 4.14%
========= =========
Six Months Ended June 30, 2004
Commercial paper, variable-rate senior
notes and bank credit facilities......................... $14,289.9 1.56% $18,036.9 2.30%
Fixed-rate senior and subordinated notes.................... 19,130.3 5.70% 15,383.3 5.26%
--------- ---------
Composite................................................... $33,420.2 3.93% $33,420.2 3.66%
========= =========
The weighted average interest rates before swaps do not necessarily
reflect the interest expense that would have been incurred over the life of the
borrowings had the interest rate risk been managed without the use of such
swaps.
25
Net Finance Margin after Provision for Credit Losses (Risk-Adjusted Margin)
The following table summarizes risk-adjusted margin, both in amount and as
a percentage of AEA ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
(Restated) (Restated)
Net finance margin..................................... $391.7 $371.0 $790.6 $734.1
Provision for credit losses............................ 47.2 65.7 92.5 151.3
------ ------ ------ ------
Net finance margin after provision for credit
losses (risk adjusted margin)....................... $344.5 $305.3 $698.1 $582.8
====== ====== ====== ======
As a % of AEA:
Net finance margin..................................... 3.30% 3.91% 3.45% 3.92%
Provision for credit losses............................ 0.40% 0.70% 0.40% 0.81%
------ ------ ------ ------
Net finance margin after provision for credit
losses (risk adjusted margin)....................... 2.90% 3.21% 3.05% 3.11%
====== ====== ====== ======
For both the quarter and the six months, credit quality, including lower
charge-offs, mitigated the previously discussed decline in net finance margin in
relation to 2004. Charge-off trends are discussed further in "Credit Metrics".
Other Revenue
The components of other revenue are set forth in the following table ($ in
millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
(Restated) (Restated)
Fees and other income.................................. $168.6 $141.0 $317.4 $267.7
Factoring commissions.................................. 56.3 53.5 111.1 108.5
Gains on derivatives .................................. 52.4 -- 80.1 --
Gains on sales of leasing equipment.................... 20.9 27.1 43.5 54.4
Gain on sale of business aircraft portfolio............ 22.0 -- 22.0 --
Gains on securitizations............................... 11.1 11.9 22.9 33.3
------ ------ ------ ------
Total other revenue................................. $331.3 $233.5 $597.0 $463.9
====== ====== ====== ======
Other revenue as a percentage of AEA................... 2.79% 2.46% 2.60% 2.47%
====== ====== ====== ======
o Fees and other income include securitization-related servicing fees
and accretion, syndication fees, miscellaneous fees and gains from
asset sales. The improvement from 2004 reflected gains from
receivable sales in Specialty Finance -- consumer, including the
sale of approximately $300 million in education lending assets
during the second quarter, as well as strong fees in Corporate
Finance.
o Factoring commissions, though up modestly in amount, reflected
slightly lower factoring rates (as a percentage of factoring
volume).
o Gains on sales of equipment declined from 2004, reflecting lower
gains in Capital Finance.
o During the second quarter we sold the majority of the Equipment
Finance business aircraft portfolio (approximately $900 million),
resulting in a $22.0 million gain. The remaining portfolio
(approximately $600 million) was transferred to Capital Finance. See
"Financing and Leasing Assets" section for further detail.
26
The following table presents information regarding gains on
securitizations ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
Total volume securitized............................... $1,052.7 $847.2 $1,981.7 $2,083.6
Gains.................................................. $ 11.1 $ 11.9 $ 22.9 $ 33.3
Gains as a percentage of volume securitized............ 1.05% 1.40% 1.16% 1.60%
Gains as a percentage of pre-tax income (Restated)..... 2.90% 4.11% 3.06% 5.55%
Securitized assets..................................... $7,459.9 $8,401.0
Retained interest in securitized assets................ $1,086.0 $1,178.5
Reserve for Credit Losses
The changes to the reserve for credit losses, including related
provisions, are presented in the following table ($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
------ ------ ------ ------
Balance beginning of period............................ $620.4 $636.7 $617.2 $643.7
------ ------ ------ ------
Provision for credit losses -- finance receivables...... 47.2 65.7 92.5 151.3
Reserves relating to acquisitions, other............... 8.6 2.2 15.6 8.9
------ ------ ------ ------
Additions to reserve for credit losses, net......... 55.8 67.9 108.1 160.2
------ ------ ------ ------
Net credit losses
Specialty Finance -- commercial...................... 26.1 23.5 45.5 52.0
Specialty Finance -- consumer........................ 13.5 9.9 24.5 20.1
Commercial Services................................. 5.5 5.0 12.1 10.0
Corporate Finance................................... 1.9 23.2 7.2 51.4
Equipment Finance................................... 6.9 15.5 13.3 41.8
Capital Finance..................................... -- 6.5 0.4 7.6
------ ------ ------ ------
Total net credit losses................................ 53.9 83.6 103.0 182.9
------ ------ ------ ------
Balance end of period.................................. $622.3 $621.0 $622.3 $621.0
====== ====== ====== ======
Reserve for credit losses as a percentage of
finance receivables................................. 1.54% 1.95%
====== ======
Reserve for credit losses as a percentage of
past due receivables (60 days or more)(1)(2)........ 91.0% 108.9%
====== ======
Reserve for credit losses as a percentage of
non-performing assets(2)............................ 131.6% 110.5%
====== ======
--------------------------------------------------------------------------------
(1) The reserve for credit losses as a percentage of past due receivables and
non-performing accounts, excluding telecommunications reserves and account
balances, were 96.3% and 105.9% at June 30, 2005 and 2004, respectively.
(2) At June 30, 2005, the reserve to non-performing asset percentage exceeded
the reserve to delinquency percentage primarily due to the fact that the
education lending portfolio has no non-performing assets, as education
lending past due receivables are not classified as non-performing assets
because such loans are subject to the U.S. government guarantee.
The reserve for credit losses was $622.3 million (1.54% of finance
receivables) at June 30, 2005, compared to $617.2 million (1.76%) at December
31, 2004. The increase in reserve amount from December 31, 2004 was due to
portfolio growth and increased risk related to U.S. commercial airline hub
carriers, reflecting the continuation of high fuel costs and losses, as well as
the potential for additional bankruptcies in this sector. The decline as a
percentage of receivables represents credit quality improvements across
portfolios and asset mix changes, including an additional $4.2 billion of U.S.
Government-guaranteed education lending loans.
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.
27
The reserve included specific reserves, excluding telecommunication
accounts, relating to impaired loans of $32.8 million, $42.4 million, and $35.9
million at June 30, 2005, December 31, 2004 and June 30, 2004. The portion of
the reserve related to inherent estimated loss and estimation risk reflects our
evaluation of trends in our key credit metrics, as well as our assessment of
risk in certain industry sectors, including commercial aerospace.
The consolidated reserve for credit losses is intended to provide for
losses inherent in the portfolio, which requires the application of estimates
and significant judgment as to the ultimate outcome of collection efforts and
realization of collateral values, among other things. Therefore, changes in
economic conditions or credit metrics, including past due and non-performing
accounts, or other events affecting specific obligors or industries may
necessitate additions or reductions to the consolidated reserve for credit
losses. Management continues to believe that the credit risk characteristics of
the portfolio are well diversified by geography, industry, borrower and
equipment type. Refer to "Concentrations" for more information.
Based on currently available information, management believes that our
total reserve for credit losses is adequate.
See Concentrations for additional information on the commercial aerospace
portfolio.
Credit Metrics
Net Charge-offs
Net charge-offs, both in amount and as a percentage of average finance
receivables, are shown in the following table ($ in millions):
Quarters Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Specialty Finance -- commercial.. $26.1 1.17% $23.5 1.17% $ 45.5 1.02% $ 52.0 1.30%
Specialty Finance -- consumer.... 13.5 0.53% 9.9 1.18% 24.5 0.55% 20.1 1.30%
----- ----- ------ ------
Total Specialty Finance Group. 39.6 0.83% 33.4 1.17% 70.0 0.79% 72.1 1.30%
----- ----- ------ ------
Commercial Services............. 5.5 0.33% 5.0 0.32% 12.1 0.38% 10.0 0.33%
Corporate Finance............... 1.9 0.10% 23.2 1.43% 7.2 0.19% 51.4 1.59%
Equipment Finance............... 6.9 0.48% 15.5 0.99% 13.3 0.47% 41.8 1.33%
Capital Finance................. -- 0.00% 6.5 1.49% 0.4 0.04% 7.6 0.88%
----- ----- ------ ------
Total Commercial Finance Group 14.3 0.26% 50.2 0.97% 33.0 0.31% 110.8 1.08%
----- ----- ------ ------
Total......................... $53.9 0.52% $83.6 1.04% $103.0 0.52% $182.9 1.15%
===== ===== ====== ======
Net charge-offs for the quarter were 0.52% of average finance receivables,
unchanged from last quarter and down from 1.04% last year. Charge-offs for the
quarter ended June 30, 2004, excluding amounts related to liquidating and
specifically-reserved telecommunication accounts, were $55.4 million or 0.72%.
The most notable improvements from the prior year were in Capital Finance,
Equipment Finance and the communication & media and capital markets units within
Corporate Finance. Additional analysis by segment follows:
o Specialty Finance -- commercial charge-offs for the quarter
increased from 2004 primarily due to higher losses in the
small-ticket portfolios.
o Specialty Finance -- consumer home lending charge-offs, while up in
amount, were down as a percentage of average finance receivables
from the prior year, reflecting portfolio growth, improved credit
performance and the addition of the student lending assets.
o Commercial Services charge-offs were modestly above the prior year.
o Corporate Finance charge-off improvement was driven by a decline in
the capital markets unit charge-offs and by recoveries from
previously written-off accounts in the communication and media unit.
o Equipment Finance charge-off improvement continued in the second
quarter of 2005, as current quarter charge-offs, were essentially
flat with last quarter and considerably below the 2004 levels.
o Capital Finance charge-offs were below 2004 due to a project finance
write-off in the prior year.
28
Net charge-offs on a managed basis, including securitized receivables,
both in amount and as a percentage of average managed receivables, are shown in
the following table ($ in millions):
Quarters Ended Six Months Ended
-------------------------------- --------------------------------
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Specialty Finance -- commercial.. $35.6 1.12% $ 34.9 1.15% $ 65.3 1.03% $ 74.9 1.22%
Specialty Finance -- consumer.... 20.1 0.72% 15.0 1.21% 36.6 0.74% 29.7 1.25%
----- ------ ------ ------
Total Specialty Finance Group. 55.7 0.93% 49.9 1.17% 101.9 0.90% 104.6 1.23%
----- ------ ------ ------
Commercial Services............. 5.5 0.33% 5.0 0.32% 12.1 0.38% 10.0 0.33%
Corporate Finance............... 2.1 0.11% 23.2 1.43% 7.7 0.21% 51.4 1.59%
Equipment Finance............... 10.1 0.49% 27.4 1.19% 21.7 0.53% 69.0 1.49%
Capital Finance................. -- 0.00% 6.5 1.49% 0.4 0.04% 7.6 0.88%
----- ------ ------ ------
Total Commercial Finance Group 17.7 0.29% 62.1 1.05% 41.9 0.35% 138.0 1.17%
----- ------ ------ ------
Total......................... $73.4 0.60% $112.0 1.10% $143.8 0.61% $242.6 1.19%
===== ====== ====== ======
The previously discussed trends in owned portfolio charge-offs were the
primary cause of fluctuations in charge-offs on a managed basis.
Past Due Loans and Non-performing Assets
The following table sets forth certain information concerning our past due
(sixty days or more) and non-performing assets and the related percentages of
finance receivables ($ in millions):
June 30, 2005 December 31, 2004
--------------------- ----------------------
Past due accounts:
Specialty Finance -- commercial...................... $281.2 3.27% $283.3 3.22%
Specialty Finance -- consumer........................ 249.6 2.35% 116.4 2.27%
------ ------
Total Specialty Finance Group..................... 530.8 2.76% 399.7 2.87%
------ ------
Commercial Services................................. 39.7 0.62% 88.0 1.42%
Corporate Finance................................... 46.5 0.58% 43.3 0.65%
Equipment Finance................................... 41.1 0.93% 50.1 0.79%
Capital Finance..................................... 25.7 1.04% 26.9 1.47%
------ ------
Total Commercial Finance Group.................... 153.0 0.72% 208.3 0.99%
------ ------
Total............................................. $683.8 1.69% $608.0 1.73%
====== ======
June 30, 2005 December 31, 2004
--------------------- ----------------------
Non-performing accounts:
Specialty Finance -- commercial...................... $163.1 1.90% $165.9 1.88%
Specialty Finance -- consumer........................ 135.2 1.27% 119.3 2.32%
------ ------
Total Specialty Finance Group..................... 298.3 1.55% 285.2 2.05%
------ ------
Commercial Services................................. 10.2 0.16% 56.8 0.92%
Corporate Finance................................... 69.4 0.87% 61.9 0.92%
Equipment Finance................................... 78.5 1.78% 131.2 2.06%
Capital Finance..................................... 16.3 0.66% 4.6 0.25%
------ ------
Total Commercial Finance Group.................... 174.4 0.82% 254.4 1.21%
------ ------
Total............................................. $472.7 1.17% $539.6 1.54%
====== ======
Non-accrual loans $410.9 $458.4
Repossessed assets..................................... 61.8 81.2
------ ------
Total non-performing accounts..................... $472.7 $539.6
====== ======
--------------------------------------------------------------------------------
Corporate Finance and Equipment Finance non-performing assets include accounts
that are less than sixty days past due.
29
Delinquency levels, though down from the prior quarter (largely due to a
reduction in Commercial Services), increased from December 31, 2004 primarily
due to the education lending acquisition, as excluding these assets, delinquency
was $569.5 million (1.57%) at June 30, 2005. Although delinquency is higher in
this portfolio, this metric is not indicative of ultimate loss, given the U.S.
government guarantee of these loans. Additional analysis follows:
o Specialty Finance -- commercial delinquency level was essentially
unchanged from last quarter and the fourth quarter of 2004.
o Specialty Finance -- consumer delinquency increased from December
31, 2004, due to the education lending acquisition. Excluding
education lending receivables, delinquencies were $135.3 million
(2.10%), versus $116.4 million (2.27%) last year-end, reflecting the
continued home lending growth.
o Commercial Services delinquency was down from 2004 due to the work
out of one significant account.
o Corporate Finance, Equipment Finance and Capital Finance
delinquencies remained at the relatively low year end 2004 levels.
Similarly, non-performing assets remained at the low fourth quarter 2004
levels, and the percentage trends were impacted by the education lending
acquisition, which had no non-performing accounts at June 30, 2005.
Managed past due loans in dollar amount and as a percentage of managed
financial assets are shown in the table below ($ in millions):
June 30, 2005 December 31, 2004
--------------------- --------------------
Managed past due accounts:
Specialty Finance -- commercial...................... $362.4 2.70% $402.1 2.82%
Specialty Finance -- consumer........................ 348.0 2.92% 227.8 3.45%
------ ------
Total Specialty Finance Group..................... 710.4 2.80% 629.9 3.02%
------ ------
Commercial Services................................. 39.7 0.62% 88.0 1.42%
Corporate Finance................................... 47.3 0.59% 43.3 0.65%
Equipment Finance................................... 57.7 0.81% 90.3 0.96%
Capital Finance..................................... 25.7 1.04% 26.9 1.47%
------ ------
Total Commercial Finance Group.................... 170.4 0.71% 248.5 1.03%
------ ------
Total............................................. $880.8 1.78% $878.4 1.95%
====== ======
The trends in the table above largely reflect the previously discussed
fluctuations in the owned portfolios.
Salaries and General Operating Expenses
The efficiency ratio and the ratio of salaries and general operating
expenses to average managed assets ("AMA") are summarized in the following table
($ in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(Restated) (Restated)
Salaries and employee benefits......................... $ 161.7 $ 156.8 $ 331.0 $ 302.2
Other general operating expenses....................... 107.1 95.6 201.8 190.2
--------- --------- --------- ---------
Salaries and general operating expenses................ 268.8 252.4 532.8 492.4
Provision for restructuring............................ 25.2 -- 25.2 --
--------- --------- --------- ---------
Total.................................................. $ 294.0 $ 252.4 $ 558.0 $ 492.4
========= ========= ========= =========
Efficiency ratio(1).................................... 40.6% 41.5% 39.9% 41.0%
Salaries and general operating expenses as a
percentage of AMA(2)................................ 2.16% 2.17% 2.09% 2.12%
Average Managed Assets................................. $54,910.8 $46,608.4 $53,426.9 $46,406.5
--------------------------------------------------------------------------------
(1) Efficiency ratio is the ratio of salaries and general operating expenses
to operating margin, excluding the provision for credit losses. Excluding
the provision for restructuring, the gain on sale of business aircraft,
and the gain on derivatives, the efficiency ratio was 41.4% and 41.1% for
the quarter, six months ended June 30, 2005.
(2) "AMA" means average managed assets, which is average earning assets plus
the average of finance receivables previously securitized and still
managed by us. Excluding the provision for restructuring, the ratio of
salaries and general operating expenses to managed assets was 1.98% and
1.99% for the quarter and six months ended June 30, 2005.
30
Salaries and general operating expenses for the quarter ended June 30,
2005 increased from 2004 due to incremental salaries and other operating
expenses related to recent acquisitions, as well as higher incentive-based costs
(driven primarily by higher restricted stock awards and sales incentive plans),
consistent with the improved volume, fees and profitability. Operating expenses
for education lending were $16.7 million and $23.7 million for the quarter and
six months ended June 30, 2005.
Personnel totaled approximately 6,110 at June 30, 2005, versus 6,130 last
quarter and 5,705 last year. The increase from 2004 was largely due to the
education lending acquisition and higher international headcount.
Improvement in the efficiency ratio remains one of management's goals, and
several initiatives are underway to reduce costs, including system
consolidations and process efficiency improvements. Accordingly, a $25.2 million
restructuring charge was accrued during the quarter, reflecting the realignment
of Commercial Finance and back-office streamlining and consolidation activities
in Specialty Finance. The charge consists largely of employee termination costs
related to approximately 200 personnel. We anticipate reinvesting the savings
from these initiatives in sales and growth initiatives, as well as the
continuation of streamlining initiatives. We expect the streamlining initiatives
to reduce costs by approximately $23 million in 2006.
Income Taxes
The effective tax rate differs from the U.S. Federal tax rate of 35%
primarily due to state and local income taxes, the domestic and international
geographic distribution of taxable income and corresponding foreign income
taxes, as well as differences between book and tax treatment of certain items.
The effective tax rate was 34.7% and 39.0% for the quarters ended June 30,
2005 and 2004 and 36.1% and 39.0% for the respective year to date periods. The
reduction in the 2005 effective tax rate, which is based on our revised estimate
of annual effective tax rate of approximately 35%, reflects improved
profitability in certain foreign locations, as well as our plan to relocate and
place certain aerospace assets in Ireland with offshore funding, as provisions
of the American Jobs Creation Act of 2004 provide favorable treatment for
certain aircraft leasing operations conducted offshore. In total, we anticipate
transferring approximately 40 commercial aircraft during the year. The improved
profitability in international operations resulted from our initiative to grow
our international profitability via better platform efficiency coupled with
asset growth.
At June 30, 2005, 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 June 30, 2005, based on
management's assessment as to realizability, the net deferred tax liability
includes a valuation allowance of approximately $9.4 million relating to state
net operating losses.
CIT has open tax years in the U.S., Canada and other jurisdictions that
are currently under examination by the applicable taxing authorities, and
certain tax years that may in the future be subject to examination. Management
periodically evaluates the adequacy of our related tax reserves, taking into
account our open tax return positions, tax assessments received, tax law changes
and third party indemnifications. We believe that our tax reserves are
appropriate. The final determination of tax audits could affect our tax
reserves.
See Item 4. Controls and Procedures for a discussion of internal controls
relating to income taxes.
31
Financing and Leasing Assets
The managed assets of our business segments and the corresponding
strategic business units are presented in the following table ($ in millions):
June 30, December 31, Percentage
2005 2004 Change
--------- --------- ----------
(Restated)
Specialty Finance Group
Specialty Finance -- commercial
Finance receivables............................................ $ 8,588.8 $ 8,805.7 (2.5)%
Operating lease equipment, net................................. 1,105.8 1,078.7 2.5%
Finance receivables held for sale.............................. 1,031.9 1,288.4 (19.9)%
--------- ---------
Owned assets................................................. 10,726.5 11,172.8 (4.0)%
Finance receivables securitized and managed by CIT............. 3,797.2 4,165.5 (8.8)%
--------- ---------
Managed assets................................................. 14,523.7 15,338.3 (5.3)%
--------- ---------
Specialty Finance -- consumer
Finance receivables -- home lending............................ 6,172.9 4,896.8 26.1%
Finance receivables -- education lending....................... 4,170.9 -- N/A
Finance receivables -- other................................... 273.2 236.0 15.8%
Finance receivables held for sale.............................. 282.0 241.7 16.7%
--------- ---------
Owned assets................................................. 10,899.0 5,374.5 102.8%
Home lending finance receivables securitized
and managed by CIT .......................................... 1,027.6 1,228.7 (16.4)%
--------- ---------
Managed assets................................................. 11,926.6 6,603.2 80.6%
--------- ---------
Commercial Finance Group
Commercial Services
Finance receivables............................................ 6,417.2 6,204.1 3.4%
--------- ---------
Corporate Finance
Finance receivables............................................ 7,998.0 6,702.8 19.3%
Operating lease equipment, net................................. 78.3 35.1 123.1%
Finance receivables held for sale.............................. 27.9 -- N/A
--------- ---------
Owned assets................................................. 8,104.2 6,737.9 20.3%
Finance receivables securitized and managed by CIT............. 54.0 -- N/A
--------- ---------
Managed assets................................................. 8,158.2 6,737.9 21.1%
--------- ---------
Equipment Finance
Finance receivables............................................ 4,420.7 6,373.1 (30.6)%
Operating lease equipment, net................................. 121.4 440.6 (72.4)%
Finance receivables held for sale.............................. 94.1 110.7 (15.0)%
--------- ---------
Owned assets................................................. 4,636.2 6,924.4 (33.0)%
Finance receivables securitized and managed by CIT............. 2,581.1 2,915.5 (11.5)%
--------- ---------
Managed assets................................................. 7,217.3 9,839.9 (26.7)%
--------- ---------
Capital Finance
Finance receivables............................................ 2,466.2 1,829.7 34.8%
Operating lease equipment, net................................. 7,337.4 6,736.5 8.9%
--------- ---------
Owned assets................................................. 9,803.6 8,566.2 14.4%
--------- ---------
Other -- Equity Investments...................................... 31.6 181.0 (82.5)%
--------- ---------
Total
Finance receivables............................................ $40,507.9 $35,048.2 15.6%
Operating lease equipment, net................................. 8,642.9 8,290.9 4.2%
Finance receivables held for sale.............................. 1,435.9 1,640.8 (12.5)%
--------- ---------
Financing and leasing assets excl. equity investments.......... 50,586.7 44,979.9 12.5%
Equity investments (included in other assets).................. 31.6 181.0 (82.5)%
--------- ---------
Owned assets................................................. 50,618.3 45,160.9 12.1%
Finance receivables securitized and managed by CIT............. 7,459.9 8,309.7 (10.2)%
--------- ---------
Managed assets............................................... $58,078.2 $53,470.6 8.6%
========= =========
32
The six-month activity reflects strong volumes and the education lending
acquisition, offset by asset sales and syndications, done largely for risk
management and capital allocation purposes, particularly in the second quarter.
Additional trends by segment follow:
o Specialty Finance -- commercial declined despite strong volume, as
runoff / liquidations were similarly high. The trend also reflected
the sale of over $300 million of liquidating manufactured housing
assets in the first quarter of 2005.
o Specialty Finance -- consumer increased, reflecting the acquisition
of the $4.3 billion education lending unit in addition to continued
strength in the home equity lending market, where originations and
purchases were partially offset by sales to balance certain
portfolio demographics and risk characteristics.
o Commercial Services increased, reflecting the purchase of
substantially all of the factoring assets of Receivables Capital
Management, a division of SunTrust, in the first quarter of 2005,
while the decline from last quarter was due to seasonal runoff.
o The increase in Corporate Finance reflects strong volumes and the
transfer of approximately $850 million of sports and gaming
portfolio assets and healthcare assets from Equipment Finance.
o Equipment Finance declined, reflecting the sale of $923 million in
business aircraft assets, the transfer of the remaining $0.6 billion
of this portfolio to Capital Finance, and the transfer of
approximately $450 million in healthcare assets to Corporate
Finance. In addition, the $400 million sports and gaming portfolio
was transferred to Corporate Finance last quarter.
o Capital Finance's increase reflected commercial aerospace deliveries
and the transfer of the remaining business aircraft portfolio from
Equipment Finance during the quarter.
o Equity investments decreased due to the completion of the previously
contracted sale of most of the remaining private equity funds.
Consistent with our capital optimization activities during the current
period, we will consider other opportunities for more rapid liquidation of
non-strategic and under-performing assets to the extent available.
Business Volumes
The following table presents new business origination volume by segment ($
in millions):
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
-------- -------- --------- ---------
Specialty Finance -- commercial......................... $2,685.2 $2,411.0 $ 5,022.7 $ 4,929.0
Specialty Finance -- consumer........................... 2,306.3 867.3 3,668.8 1,925.2
Commercial Services.................................... 76.1 142.4 172.1 253.5
Corporate Finance...................................... 1,324.7 685.0 2,159.1 1,291.4
Equipment Finance...................................... 1,044.6 1,049.2 1,959.7 1,971.3
Capital Finance........................................ 641.7 438.4 892.9 550.9
-------- -------- --------- ---------
Total new business volume........................... $8,078.6 $5,593.3 $13,875.3 $10,921.3
======== ======== ========= =========
o Specialty Finance -- commercial volume increase was broad-based
across units, including strength in the vendor programs.
o Specialty Finance -- consumer volume increase included strong
origination volume, including bulk receivable purchases in home
lending.
o Commercial Services volume was low in relation to the prior year in
the seasonally soft second quarter.
o Corporate Finance's capital markets and communications and media
units posted strong volumes and drove the favorable trends.
o Capital Finance year-over-year volume increases reflected additional
aircraft fundings.
33
Concentrations
Ten Largest Accounts
Our ten largest financing and leasing asset accounts in the aggregate
represented 4.8% of our total financing and leasing assets at June 30, 2005 (the
largest account being less than 1.0%), compared to 5.3% at December 31, 2004.
The decline is due to the addition of the education lending receivables.
Operating Leases
The following table summarizes the total operating lease portfolio by
segment ($ in millions):
June 30, December 31,
2005 2004
-------- -----------
Capital Finance -- Aerospace.......................... $4,920.0 $4,461.0
Capital Finance -- Rail and Other..................... 2,417.4 2,275.5
Specialty Finance..................................... 1,105.8 1,078.7
Equipment Finance..................................... 121.4 440.6
Corporate Finance..................................... 78.3 35.1
-------- --------
Total.............................................. $8,642.9 $8,290.9
======== ========
The increases in the Capital Finance aerospace portfolio reflected
deliveries of eleven new commercial aircraft, partially offset by the
disposition of eight aircraft.
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 $220.4 million
and $118.3 million at June 30, 2005 and December 31, 2004, respectively.
Weakness in the commercial airline industry could adversely impact prospective
rental and utilization rates.
Leveraged Leases
The major components of net investments in leveraged leases include:
commercial aerospace transactions, including tax-optimized leveraged leases,
which generally have increased risk of loss in default for lessors in relation
to conventional lease structures due to additional leverage and the third party
lender priority recourse to the equipment in these transactions, project finance
transactions, primarily in the power and utility sectors, and rail transactions.
The balances are as follows ($ in millions):
June 30, December 31,
2005 2004
-------- -----------
Commercial aerospace -- non-tax optimized............ $ 339.7 $ 336.6
Commercial aerospace -- tax optimized................ 219.3 221.0
Project finance...................................... 349.4 334.9
Rail................................................. 241.3 233.9
Other................................................ 122.3 115.4
-------- --------
Total leveraged lease transactions................ $1,272.0 $1,241.8
======== ========
As a percentage of finance receivables............... 3.1% 3.5%
======== ========
Joint Venture Relationships
Our strategic relationships with industry-leading equipment vendors are a
significant origination channel for our financing and leasing activities. These
vendor alliances include traditional vendor finance programs, joint ventures and
profit sharing structures. Our vendor programs with Dell, Snap-on and Avaya are
among our largest alliances. The agreements with Dell grants Dell the option to
purchase CIT's 30% interest in Dell Financial Services L.P. ("DFS") in February
2008 and extends CIT's right to purchase a percentage of DFS's finance
receivables through January 2010. The joint venture agreement with Snap-on
recently extended until January 2009, pursuant to an automatic renewal provision
in the agreement. The Avaya agreement, which relates to profit sharing on a CIT
direct origination program, extends through September 2006.
34
Our financing and leasing assets include amounts related to the Dell,
Snap-on and Avaya joint venture programs. These amounts include receivables
originated directly by CIT as well as receivables purchased from joint venture
entities. The asset balances for these programs are as follows ($ in millions):
June 30, December 31,
2005 2004
-------- ------------
Owned Financing and Leasing Assets
Dell................................................. $3,546.1 $3,389.4
Snap-on.............................................. 1,073.2 1,114.7
Avaya Inc............................................ 586.8 620.7
Securitized Financing and Leasing Assets
Dell................................................. $2,297.6 $2,489.2
Snap-on.............................................. 54.0 64.8
Avaya Inc............................................ 504.8 599.6
Dell International Financing and
Leasing Assets Included above
Dell -- owned........................................ $1,366.6 $1,403.6
Dell -- securitized.................................. 46.2 5.1
Returns relating to the joint venture relationships (i.e., net income as a
percentage of average managed assets) for 2005 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 8 -- Certain Relationships and Related Transactions.
Home Lending Portfolio
The Specialty Finance -- consumer home lending business is largely
originated through a broker network. As part of originating business through
this core channel, we employ an active portfolio management practice, whereby we
target desired portfolio mix / risk attributes in terms of product type, lien
position, and geographic concentrations, among other factors. We supplement
business with opportunistic purchases in the secondary market when market
conditions are favorable from a credit and price perspective. The interest rate
environment over the last 18 months, combined with substantial volume growth in
the industry, have made these bulk asset purchases attractive.
The home lending portfolio totaled $6.2 billion (owned) and $7.3 billion
(managed) at June 30, 2005, representing 12.3% and 12.5% of owned and managed
assets, respectively. Selected statistics for our managed home lending portfolio
are as follows:
o 93% first mortgages.
o Average loan size of approximately $108.7 thousand.
o Top 5 state concentrations (California, Texas, Florida, Ohio, and
Pennsylvania) represented an aggregate 43% of the managed portfolio.
o 47% fixed-rate.
o Average loan-to-value of 81%.
o Average FICO score of 633.
o Delinquencies (sixty days or more) were 3.17% and 3.59% at June 30,
2005 and December 31, 2004.
o Charge-offs were 1.05% and 0.95% for the quarters ended June 30, and
March 31, 2005.
Education Lending Portfolio (Student Loan Xpress)
The Specialty Finance -- consumer education lending portfolio, which is
marketed as Student Loan Xpress, totaled $4.3 billion at June 30, 2005,
representing 8.5% of owned and 7.4% of managed assets. Loan origination volumes
for the June 2005 quarter were $383.5 million, and $554.2 million for the period
of CIT ownership. Student Loan Xpress has arrangements with certain financial
institutions to sell selected loans and works jointly with these financial
institutions to promote this mutually beneficial relationship.
35
Selected statistics for our education lending portfolio are as follows ($
in millions):
June 30, March 31,
2005 2005
-------- --------
Finance receivables by product type
Consolidation loans.............................. $3,954.8 $3,996.9
Other U.S. Government guaranteed loans........... 322.6 424.6
Private (non-guaranteed) loans and other......... 14.1 13.4
-------- --------
Total......................................... $4,291.5 $4,434.9
======== ========
o Delinquencies (sixty days or more) were $114.3 million, 2.66% of
finance receivables at June 30, 2005 and $112.6 million, 2.60% at
March 31, 2005.
o Top 5 state concentrations (California, New York, Pennsylvania,
Texas, and Illinois) represented an aggregate 36.4% of the
portfolio.
Geographic Composition
The following table summarizes significant state concentrations greater
than 5.0% and foreign concentrations in excess of 1.0% of our owned financing
and leasing portfolio assets. For each period presented, our managed asset
geographic composition did not differ significantly from our owned asset
geographic composition.
June 30, December 31,
2005 2004
-------- ------------
State
California............................................ 10.7% 10.3%
Texas................................................. 7.3% 7.8%
New York.............................................. 6.7% 6.8%
All other states...................................... 54.5% 52.8%
---- ----
Total U.S.......................................... 79.2% 77.7%
==== ====
Country
Canada................................................ 5.1% 5.5%
England............................................... 3.6% 3.9%
France................................................ 1.3% 1.4%
Australia............................................. 1.2% 1.3%
China................................................. 1.1% 1.2%
Germany............................................... 1.0% 1.2%
All other countries................................... 7.5% 7.8%
---- ----
Total Outside U.S.................................. 20.8% 22.3%
==== ====
Industry Composition
The following discussions provide information with respect to selected
industry compositions.
Aerospace
Our commercial and regional aerospace portfolios reside in the Capital
Finance segment.
36
The commercial aircraft all comply with Stage III noise regulations. The
following table summarizes the composition of the commercial aerospace portfolio
($ in millions):
June 30, 2005 December 31, 2004
------------------ --------------------
Net Net
Investment Number Investment Number
---------- ------ ---------- ------
By Region:
Europe......................... $2,226.7 71 $2,160.0 72
North America.................. 1,081.4 61 1,057.7 66
Asia Pacific................... 1,511.0 55 1,242.4 46
Latin America.................. 594.2 23 611.3 25
Africa / Middle East........... 159.8 5 54.2 3
-------- --- -------- ---
Total............................. $5,573.1 215 $5,125.6 212
======== === ======== ===
By Manufacturer:
Boeing......................... $2,708.6 132 $2,558.8 133
Airbus......................... 2,818.9 75 2,536.9 70
Other.......................... 45.6 8 29.9 9
-------- --- -------- ---
Total............................. $5,573.1 215 $5,125.6 212
======== === ======== ===
By Body Type(1):
Narrow body.................... $4,262.8 171 $3,894.9 168
Intermediate................... 920.4 19 842.7 18
Wide body...................... 344.3 17 358.1 17
Other.......................... 45.6 8 29.9 9
-------- --- -------- ---
Total............................. $5,573.1 215 $5,125.6 212
======== === ======== ===
By Product:
Operating lease................ $4,791.5 169 $4,324.6 167
Leverage lease (other)......... 339.7 12 336.6 12
Leverage lease (tax optimized). 219.3 9 221.0 9
Capital lease.................. 130.3 6 137.4 6
Loan........................... 92.3 19 106.0 18
-------- --- -------- ---
Total............................. $5,573.1 215 $5,125.6 212
======== === ======== ===
Other Data:
Off-lease aircraft................ 6 2
Number of accounts................ 96 92
Weighted average age of
fleet (years) .................. 6 6
Largest customer net investment... $ 281.9 $ 286.4
--------------------------------------------------------------------------------
(1) Narrow body are single aisle design and consist primarily of Boeing 737
and 757 series and Airbus A320 series aircraft. Intermediate body are
smaller twin aisle design and consist primarily of Boeing 767 series and
Airbus A330 series aircraft. Wide body are large twin aisle design and
consist primarily of Boeing 747 and 777 series and McDonnell Douglas DC10
series aircraft.
The top five commercial aerospace exposures totaled $1,058.4 million at
June 30, 2005. Each of the top five exposures is to carriers outside of the U.S.
The largest exposure to a U.S. carrier at June 30, 2005 was $165.2 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 levels.
The profitability of the commercial aerospace portfolio has improved
throughout the year reflecting a number of positive factors including: improving
global demand for commercial aircraft, continued recovery in rental rates and
lower tax rates. Additionally, the risk-based capital returns on new aircraft
deliveries (from our existing order book) exceed our targeted hurdle rate. As a
result, we are considering whether to extend our aircraft order book beyond its
current expiration of Spring 2007. Any future order book would likely be
smaller, slightly shorter and more flexible than our previous order.
The regional aircraft portfolio at June 30, 2005 consisted of 119 planes
and a net investment of $349.1 million. The carriers are primarily located in
North America and Latin America. Operating leases account for about 36.8% of the
portfolio, with the remainder capital leases or loans. At December 31, 2004, the
portfolio consisted of 121 planes with a net investment of $302.6 million.
37
At June 30, 2005, six aircraft were off-lease (book value of $106.7
million), five of which we have obtained letters of intent for new leases.
Despite some recent improvement in rental rates, current placements remain at
compressed rental rates, which reflect current market conditions. Generally,
leases are being written for terms between three and five years. Within the
regional aircraft portfolio at June 30, 2005, there were 4 aircraft off-lease
with a total book value of approximately $20.3 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 June 30, 2005:
o UAL Corp. -- United Airlines leases two CIT-owned narrow body
aircraft (Boeing 757 aircraft) with a net investment of $46.0
million. We also 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 $30.3 million. We have an outstanding balance of
$9.4 million (with a commitment of $31.3 million) relating to a
debtor-in-possession facility in connection with United Airlines'
filing under Chapter 11 as of June 30, 2005.
o US Airways -- On September 12, 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, we lease one
CIT-owned 737-300, for a total net investment of $5.9 million.
In total, we have exposures to U.S. commercial airline hub carriers of
approximately $403 million at June 30, 2005. See "Reserve for Credit Losses" for
additional information regarding our reserves and the applicability to
commercial aerospace.
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 should 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
In conjunction with capital optimization and risk management activities,
we are actively managing the composition of the commercial aerospace portfolio
in terms of type and age of aircraft, among other factors. As a result, we may
consider sales of certain aircraft and new aircraft deliveries in the future.
See table in "Risk Management" section and Note 10 -- Commitments and
Contingencies for additional information regarding commitments to purchase
additional aircraft. See Note 4 -- Concentrations for further discussion on
concentrations.
Risk Management
Our risk management process is described in more detail in our 2004 Annual
Report on Form 10-K. Our processes remained substantially the same as outlined
in our 2004 Form 10-K.
Interest Rate Risk Management -- We monitor our interest rate sensitivity on a
regular basis by analyzing the impact of interest rate changes upon the
financial performance of the business. We also consider factors such as the
strength of the economy, customer prepayment behavior and re-pricing
characteristics of our assets and liabilities.
38
We evaluate and monitor various risk metrics:
o Margin at Risk, 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, which measures the net economic value of assets by
assessing the duration of assets and liabilities.
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
---------- ------------- ---------- -------------
June 30, 2005
Assets................................................. 48% 52% 48% 52%
Liabilities (Restated)................................. 54% 46% 41% 59%
December 31, 2004
Assets................................................. 55% 45% 55% 45%
Liabilities............................................ 60% 40% 46% 54%
Total interest sensitive assets were $47.4 billion and $41.7 billion at
June 30, 2005 and December 31, 2004. Total interest sensitive liabilities were
$41.6 billion and $35.9 billion at June 30, 2005 and December 31, 2004. The
addition of the education lending receivables and related debt during first
quarter increased the proportions of floating-rate assets and liabilities at
June 30, 2005, as compared to December 31, 2004.
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 accumulated other
comprehensive loss 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 accumulated other comprehensive loss in the
Consolidated Balance Sheets. 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 accumulated other comprehensive loss (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. CIT also has certain cross-currency swaps which economically hedge
exposures, but do not qualify for hedge accounting.
Liquidity Risk Management and Capital Resources -- 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 $3.3 billion at June 30, 2005,
compared with $4.2 billion at December 31, 2004. Our targeted U.S. program size
remains at $5.0 billion with modest programs aggregating approximately $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 in multi-year facilities. In
addition, we have a separate 364-day unsecured committed line of credit of $154
million, which supports the Australian commercial paper program.
39
We maintain registration statements with the Securities and Exchange
Commission ("SEC") covering debt securities that we may sell in the future. At
June 30, 2005, our registration statements had $6.9 billion of registered, but
unissued, securities available, under which we may issue debt securities and
other capital market securities. Term-debt issued during 2005 totaled $7.5
billion: $3.4 billion in variable-rate medium-term notes and $4.1 billion in
fixed-rate notes. 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 2005,
we issued $0.3 billion under this program having maturities of between 2 and 10
years.
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 June 30, 2005, we had
approximately $5.0 billion of availability in our committed asset-backed
facilities and $5.6 billion of registered, but unissued, securities available
under public shelf registration statements relating to our asset-backed
securitization program.
Our committed asset-backed commercial paper programs in the U.S. and
Canada provide a substantial source of alternate liquidity. We also maintain
committed bank lines of credit to provide backstop support of commercial paper
borrowings and local bank lines to support our international operations.
Additional sources of liquidity are loan and lease payments from customers,
whole-loan asset sales and loan syndications.
We also target and monitor certain liquidity metrics to ensure both a
balanced liability profile and adequate alternate liquidity availability as
outlined in the following table.
Liquidity Measurement Current Target June 30, 2005 December 31, 2004
--------------------- -------------- ------------- -----------------
Commercial paper to total debt............................ Maximum of 15% 7% 11%
Short-term debt to total debt............................. Maximum of 45% 28% 31%
Bank lines to commercial paper............................ Minimum of 100% 211% 150%
Aggregate alternative liquidity* to short-term debt....... Minimum of 75% 115% 108%
--------------------------------------------------------------------------------
* Aggregate alternative liquidity includes available bank facilities,
asset-backed 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 minimum net worth requirement of $4.0 billion.
40
The following tables summarize significant contractual obligations and
projected cash receipts, and contractual commitments at June 30, 2005 ($ in
millions):
Payments and Collections by Period(3) Ending June 30,
------------------------------------------------------------------------
Total 2006 2007 2008 2009 2010+
--------- --------- --------- --------- -------- ---------
(Restated) (Restated) (Restated)
Commercial Paper....................... $ 3,253.4 $ 3,253.4 $ -- $ -- $ -- $ --
Variable-rate senior unsecured notes... 13,556.0 4,505.1 5,625.4 2,217.3 837.7 370.5
Fixed-rate senior unsecured notes...... 22,375.7 4,000.3 1,910.6 3,130.6 1,691.9 11,642.3
Non-recourse, secured borrowings....... 3,938.8 1,157.9 -- -- -- 2,780.9
Preferred capital security............. 252.9 -- -- -- -- 252.9
Lease rental expense................... 320.9 54.1 52.9 46.0 31.4 136.5
--------- --------- --------- --------- -------- ---------
Total contractual obligations....... 43,697.7 12,970.8 7,588.9 5,393.9 2,561.0 15,183.1
--------- --------- --------- --------- -------- ---------
Finance receivables(1)................. 40,507.9 12,047.2 4,362.2 3,717.2 2,460.6 17,920.7
Operating lease rental income.......... 3,443.4 1,118.6 836.4 550.9 378.5 559.0
Finance receivables held for sale(2)... 1,435.9 1,435.9 -- -- -- --
Cash -- current balance................. 2,231.7 2,231.7 -- -- -- --
Retained interest in securitizations
and other investments............... 1,122.0 819.8 124.2 42.9 98.2 36.9
--------- --------- --------- --------- -------- ---------
Total projected cash receipts....... 48,740.9 17,653.2 5,322.8 4,311.0 2,937.3 18,516.6
--------- --------- --------- --------- -------- ---------
Net projected cash inflow (outflow).... $ 5,043.2 $ 4,682.4 $(2,266.1) $(1,082.9) $ 376.3 $ 3,333.5
========= ========= ========= ========= ======== =========
--------------------------------------------------------------------------------
(1) Based upon contractual cash flows; actual amounts could differ due to
prepayments, extensions of credit, charge-offs and other factors.
(2) Based upon management's intent to sell rather than the contractual
maturities of underlying assets.
(3) Projected proceeds from the sale of operating lease equipment, interest
revenue from finance receivables, debt interest expense and other items
are excluded. Obligations relating to postretirement programs are also
excluded.
Commitment Expiration by June 30,
-----------------------------------------------------------------------
Total 2006 2007 2008 2009 2010+
--------- -------- -------- -------- ------ --------
Credit extensions(1)................... $ 9,337.1 $1,725.2 $ 870.6 $ 880.4 $912.6 $4,948.3
Aircraft purchases..................... 1,560.0 794.0 640.0 126.0 -- --
Letters of credit...................... 1,200.6 1,156.9 28.2 0.2 13.1 2.2
Sale-leaseback payments................ 472.4 10.0 31.0 31.1 31.1 369.2
Manufacturer purchase commitments...... 593.1 593.1 -- -- -- --
Guarantees............................. 156.3 144.2 -- 10.5 1.6 --
Acceptances............................ 27.3 27.3 -- -- -- --
--------- -------- -------- -------- ------ --------
Total contractual commitments....... $13,346.8 $4,450.7 $1,569.8 $1,048.2 $958.4 $5,319.7
========= ======== ======== ======== ====== ========
--------------------------------------------------------------------------------
(1) Excludes amounts related to a third-party vendor program that are
cancellable at any time or for any reason by the Company. See Note 10 for
additional explanation.
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 was 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.
During the quarter ended March 31, 2005, we recorded a charge relating to
third-party servicing errors. During the quarter ended June 30, 2005, we
received and reviewed the servicer's internal control enhancements and
remediation plan. The servicer's remediation plan included improved
reconciliation procedures and additional systems change controls. We are
continuing to implement enhancements to our analytical review controls with
respect to information provided to us by the servicer.
See Item 4. Controls and Procedures for further discussion.
41
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):
June 30, December 31,
2005 2004
-------- ------------
Securitized Assets:
Specialty Finance -- commercial................................................ $3,797.2 $4,165.5
Specialty Finance -- home lending.............................................. 1,027.6 1,228.7
Equipment Finance.............................................................. 2,581.1 2,915.5
Corporate Finance.............................................................. 54.0 --
-------- --------
Total securitized assets..................................................... $7,459.9 $8,309.7
======== ========
Securitized assets as a % of managed assets.................................... 12.8% 15.5%
======== ========
Quarters Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2005 2004 2005 2004
-------- ------ -------- --------
Volume Securitized:
Specialty Finance -- commercial..................... $ 787.2 $475.5 $1,462.3 $1,438.8
Equipment Finance................................... 265.5 371.7 519.4 644.8
-------- ------ -------- --------
Total volume securitized.......................... $1,052.7 $847.2 $1,981.7 $2,083.6
======== ====== ======== ========
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.
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 June 30, 2005 of $1.1
billion. Retained interests are subject to credit and prepayment risk. As of
June 30, 2005, 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.
42
The key assumptions used in measuring the retained interests at the date
of securitization for transactions completed during 2005 were as follows:
Commercial Equipment
-----------------------
Specialty Equipment
Finance Finance
--------- ---------
Weighted average prepayment speed................................................. 43.28% 12.32%
Weighted average expected credit losses........................................... 0.50% 0.70%
Weighted average discount rate.................................................... 7.77% 9.00%
Weighted average life (in years).................................................. 1.28 2.10
The key assumptions used in measuring the fair value of retained interests
in securitized assets at June 30, 2005 were as follows:
Commercial Equipment Home Lending
----------------------- and Recreational
Specialty Equipment Manufactured Vehicles
Finance Finance(1) Housing and Boat
--------- ---------- ------------ --------
Weighted average prepayment speed...................... 18.7% 11.7% 25.8% 21.5%
Weighted average expected credit losses................ 0.97% 1.28% 1.52% 1.35%
Weighted average discount rate......................... 7.92% 9.45% 13.09% 15.00%
Weighted average life (in years)....................... 1.15 1.37 3.10 2.66
--------------------------------------------------------------------------------
(1) Includes retained interests transferred to Corporate Finance during 2005.
The education lending business, which was acquired in February 2005, is
funded largely with securitization structures that do not meet the accounting
requirements for sales treatment, and are therefore accounted for as secured
borrowings. Accordingly, the related receivables, restricted cash and debt are
"on balance sheet," and there are no gains on sale or retained interests in
securitizations related to these transactions. See disclosure in Item 1.
Consolidated Financial Statements, Note 1 -- Summary of Significant Accounting
Policies.
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 1. Consolidated Financial Statements, Note 8 -- Certain
Relationships and Related Transactions.
Capitalization
The following table presents information regarding our capital structure
($ in millions):
June 30, December 31,
2005 2004
--------- ------------
(Restated)
Commercial paper and term debt........................................................... $43,123.9 $37,471.0
--------- ---------
Preferred capital securities............................................................. 252.9 253.8
Stockholders' equity(1).................................................................. 6,459.3 6,073.7
Goodwill and other intangible assets..................................................... (903.1) (596.5)
--------- ---------
Total tangible stockholders' equity and preferred capital securities................... 5,809.1 5,731.0
--------- ---------
Total tangible capitalization............................................................ $48,933.0 $43,202.0
========= =========
Tangible stockholders' equity(1) and Preferred Capital Securities to managed assets ..... 10.00% 10.72%
--------------------------------------------------------------------------------
(1) Stockholders' equity excludes the impact of the accounting change for
derivative financial instruments described in Note 7 to the Consolidated
Financial Statements and certain unrealized gains or losses on retained
interests and investments, as these amounts are not necessarily indicative
of amounts that will be realized. See "Non-GAAP Financial Measurements."
43
The education lending acquisition in Specialty Finance -- consumer and a
factoring purchase in Commercial Services drove the increase in goodwill and
acquired intangibles from December 2004.
The preferred capital securities are 7.7% 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. Preferred capital securities are
included in tangible equity in our leverage ratios. See "Non-GAAP Financial
Measurements" for additional information.
See "Liquidity Risk Management and Capital Resources" for discussion of
risks impacting our liquidity and capitalization.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to use judgment in making estimates and assumptions that affect reported amounts
of assets and liabilities, the reported amounts of income and expense during the
reporting period and the disclosure of contingent assets and liabilities at the
date of the financial statements. We consider accounting estimates relating to
the following to be critical in applying our accounting policies:
o Investments
o Charge-off of Finance Receivables
o Impaired Loans
o Reserve for Credit Losses
o Retained Interests in Securitizations
o Lease Residual Values
o Goodwill and Intangible Assets
o Income Tax Reserves and Deferred Income Taxes
There have been no significant changes to the methodologies and processes
used in developing estimates relating to these items from what is described in
our 2004 Annual Report on Form 10-K.
Statistical Data
The following table presents components of net income as a percentage of
AEA, along with other selected financial data ($ in millions):
Six Months Ended June 30,
-------------------------
2005 2004
--------- ---------
(Restated)
Finance income.................................................................... 9.28% 9.64%
Interest expense.................................................................. 3.74% 3.19%
--------- ---------
Net finance income................................................................ 5.54% 6.45%
Depreciation on operating lease equipment......................................... 2.09% 2.53%
--------- ---------
Net finance margin................................................................ 3.45% 3.92%
Provision for credit losses....................................................... 0.40% 0.81%
--------- ---------
Net finance margin after provision for credit losses.............................. 3.05% 3.11%
Other revenue..................................................................... 2.60% 2.47%
Gain (loss) on venture capital investments........................................ 0.05% 0.02%
--------- ---------
Operating margin.................................................................. 5.70% 5.60%
Salaries and general operating expenses........................................... 2.32% 2.63%
Provision for restructuring....................................................... 0.11% 0.00%
Gain on redemption of debt........................................................ -- 0.23%
--------- ---------
Income before provision for income taxes.......................................... 3.27% 3.20%
Provision for income taxes........................................................ (1.18)% (1.25)%
Minority interest, after tax...................................................... (0.01)% --
--------- ---------
Net income...................................................................... 2.08% 1.95%
========= =========
Average Earning Assets............................................................ $45,869.5 $37,499.1
========= =========
44
Non-GAAP Financial Measurements
The SEC adopted Regulation G, which applies to any public disclosure or
release of material information that includes a non-GAAP financial measure. The
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosure about Market
Risk contain certain non-GAAP financial measures. The SEC defines a non-GAAP
financial measure as a numerical measure of a company's historical or future
financial performance, financial position, or cash flows that excludes amounts,
or is subject to adjustments that have the effect of excluding amounts, that are
included in the most directly comparable measure calculated and presented in
accordance with GAAP in the financial statements or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures disclosed in this report are meant to provide
additional information and insight relative to historical operating results and
financial position of the business and in certain cases to provide financial
information that is presented to rating agencies and other users of financial
information. These measures are not in accordance with, or a substitute for,
GAAP and may be different from or inconsistent with non-GAAP financial measures
used by other companies.
Selected non-GAAP disclosures are presented and reconciled in the table
below ($ in millions):
June 30, December 31,
2005 2004
--------- ---------
(Restated)
Managed assets(1):
Finance receivables............................................................... $40,507.9 $35,048.2
Operating lease equipment, net.................................................... 8,642.9 8,290.9
Finance receivables held for sale................................................. 1,435.9 1,640.8
Equity and venture capital investments (included in other assets)................. 31.6 181.0
--------- ---------
Total financing and leasing portfolio assets...................................... 50,618.3 45,160.9
Securitized assets................................................................ 7,459.9 8,309.7
--------- ---------
Managed assets................................................................. $58,078.2 $53,470.6
========= =========
Earning assets(2):
Total financing and leasing portfolio assets...................................... $50,618.3 $45,160.9
Credit balances of factoring clients.............................................. (3,649.2) (3,847.3)
--------- ---------
Earning assets................................................................. $46,969.1 $41,313.6
========= =========
Tangible equity(3):
Total equity...................................................................... $ 6,446.8 $ 6,055.1
Other comprehensive loss relating to derivative financial instruments............. 29.5 27.1
Unrealized gain on securitization investments..................................... (17.0) (8.5)
Goodwill and intangible assets.................................................... (903.1) (596.5)
--------- ---------
Tangible common equity............................................................ 5,556.2 5,477.2
Preferred capital securities...................................................... 252.9 253.8
--------- ---------
Tangible equity................................................................ $ 5,809.1 $ 5,731.0
========= =========
Debt, net of overnight deposits(4):
Total debt........................................................................ $43,376.8 $37,724.8
Overnight deposits................................................................ (1,149.2) (1,507.3)
Preferred capital securities...................................................... (252.9) (253.8)
--------- ---------
Debt, net of overnight deposits................................................ $41,974.7 $35,963.7
========= =========
--------------------------------------------------------------------------------
(1) Managed assets are utilized in certain credit and expense ratios.
Securitized assets are included in managed assets because CIT retains
certain credit risk and the servicing related to assets that are funded
through securitizations.
(2) Earning assets are utilized in certain revenue and earnings ratios.
Earning assets are net of credit balances of factoring clients. This net
amount, which corresponds to amounts funded, is a basis for revenues
earned.
(3) Tangible equity is utilized in leverage ratios. 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 that 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.
45
Forward-Looking Statements
Certain statements contained in this document are "forward-looking
statements" within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. All statements contained herein that are not clearly historical in
nature are forward-looking and the words "anticipate," "believe," "expect,"
"estimate," "target" 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 demographic trends,
o risks inherent in changes in market interest rates and quality
spreads,
o funding opportunities and borrowing costs,
o changes in funding markets, including commercial paper, term debt
and the asset-backed securitization markets,
o uncertainties associated with risk management, including credit,
prepayment, asset/liability, interest rate and currency risks,
o adequacy of reserves for credit losses,
o risks associated with the value and recoverability of leased
equipment and lease residual values,
o changes in laws or regulations governing our business and
operations,
o changes in competitive factors, and
o future acquisitions and dispositions of businesses or asset
portfolios.
46
Item 4. Controls and Procedures
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 13-a15(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 interim quarterly report because of the material
weaknesses discussed below.
Changes in Internal Control Over Financial Reporting
Income Tax Accounting
As previously disclosed, management has determined that the lack of a
control capability 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 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.
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. 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. During the quarter ended June 30, 2005, we continued developing
the transactional-level reconciliations of book to tax differences of our
business units and legal entities, which in turn validated our current
methodology in connection with remediating the material weakness.
We are completing the transactional-level reconciliations, as well as the
computations of other tax basis balance sheet assets and liabilities, including
the net operating loss carryforward. Accordingly, 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
but anticipate a resolution during 2005.
Derivative Hedge Accounting
During the fourth quarter of 2005, we learned of an interpretation with
respect to applying the "matched terms" approach in hedge accounting under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133"). We reviewed our
accounting for certain cross-currency interest rate swaps ("compound swaps" or
"compound derivatives") under SFAS 133.
We determined that certain compound swaps were not appropriately accounted
for, even though these compound swaps were highly effective economic hedges of
the interest rate and currency exchange risks associated with corresponding
foreign denominated debt. We documented these swaps originally as "matched
terms" hedges, which assumes no hedge ineffectiveness. The swaps would have
qualified for "long-haul" hedge accounting with ineffectiveness reflected in
current earnings. However, the swaps did not qualify for hedge accounting
treatment from their inception, as SFAS 133 does not allow for subsequent
documentation modifications.
The elimination of hedge accounting from inception of the compound swaps
resulted in adjustments to originally reported earnings in each of the quarterly
periods of 2005 to reflect a significant component of the mark-to-market on
these swaps in earnings, which was previously reported as an adjustment to the
basis of the corresponding debt. These adjustments to earnings will reduce
future earnings by an equal amount through 2015.
47
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 valuation and documentation of certain of its compound derivative
transactions. Specifically, the Company recognized certain derivative financial
instruments as hedges of interest rate risk without sufficient documentation as
required by accounting principles generally accepted in the United States.
Furthermore, the Company did not perform required periodic hedge effectiveness
testing because it was inappropriately assumed that the hedges were effective.
This control deficiency did not result in a material misstatement to the 2004
annual or interim consolidated financial statements. However, this control
deficiency resulted in the restatement of the Company's 2005 first, second and
third quarter interim consolidated financial statements. In addition, this
control deficiency could result in the misstatement of derivative related
accounts including other revenue, debt and other comprehensive income that would
result in a material misstatement of the annual or interim financial statements
that would not be prevented or detected. Accordingly, management has concluded
that this control deficiency constitutes a material weakness as of June 30,
2005.
In connection with this restatement, under the direction of our principal
executive officer and our principal financial officer, we determined that the
above constituted a material weakness in internal control with respect to our
accounting treatment and related hedge documentation for certain cross-currency
swaps as of June 30, 2005.
Remediation of Derivative Hedge Accounting Material Weakness in Internal Control
Over Financial Reporting
As of the date of this filing, we have fully remediated this material
weakness relating to derivative documentation and hedge accounting treatment.
Our remediation actions included the following:
o All of the subject compound swaps have been replaced with
corresponding stand alone replacement swaps (a cross-currency basis
swap and an interest rate swap, both with zero fair value at
inception), which qualify for hedge accounting treatment under SFAS
133.
o We do not intend to transact compound swaps prospectively and have
communicated a formal prohibition against such transactions to the
appropriate treasury, accounting, legal and internal audit
personnel.
o We have updated our derivative policy manual to specifically
prohibit the use of compound swaps.
o We have conducted training sessions with the appropriate treasury,
accounting, legal and internal audit personnel with respect to the
above to ensure that we evaluate and document derivative
transactions in compliance with SFAS 133.
Other than the changes discussed above with respect to income tax
accounting and derivative hedge accounting, there have been no changes to the
Company's internal controls over financial reporting that occurred since the
beginning of the Company's first quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
48
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NorVergence Related Litigation
On September 9, 2004, Exquisite Caterers Inc., et al. v. Popular Leasing
Inc., et al. ("Exquisite Caterers"), a putative national class action, was filed
against 13 financial institutions, including CIT, which 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 has alleged 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, were filed by NorVergence customers against CIT and other financial
institutions. On June 16, 2005, the Court in Exquisite Caterers denied the
plaintiffs' motion for class certification. Plaintiffs filed a motion for
reconsideration of the Court's denial. Thereafter, the putative class action
suits in Florida and New York and one of the putative class action suits in
Illinois were dismissed as to CIT, leaving pending putative class action suits
in Illinois and Texas.
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 several states commenced investigations of NorVergence and the
financial institutions, including CIT, that purchased NorVergence Leases. CIT
has entered into settlement agreements with all of those Attorneys General
except for California and Texas. Under those settlements, lessees will have an
opportunity to resolve all claims by and against CIT by paying a percentage of
the remaining balance on their lease. CIT has also produced documents related to
NorVergence at the request of the Federal Trade Commission ("FTC"). No further
action by the FTC against CIT is expected. 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 has produced documents in response to that subpoena.
Other Litigation
In addition, there are various legal proceedings that have been brought
against CIT in the ordinary course of business. While the outcomes of the
NorVergence related litigation and the 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table details the repurchase activity of CIT common stock
during the June 30, 2005 quarter:
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 March 31, 2005 ............ 1,348,391 $39.51 931,000
----------
April 1 - 30, 2005 ................ 630,000 $38.99 630,000 5,301,000(2)
May 1 - 31, 2005 .................. 630,000 $40.78 630,000 4,671,000
June 1 - 30, 2005 ................. 765,100 $42.23 765,100 3,905,900
----------
Total Purchases ................... 2,025,100
----------
Reissuances(1)........................ (1,164,686)
----------
Balance at June 30, 2005.............. 2,208,805
==========
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(1) Includes the issuance of common stock held in treasury upon exercise of
stock options, payment of employee stock purchase plan obligations and the
vesting of restricted stock.
(2) Reflects the repurchase program for up to an additional 5 million shares
to be used for employee stock purchase plans and general corporate
purposes that was approved by the Company's Board of Directors on April
18, 2005.
49
In connection with a share repurchase program authorized by the Company's
Board of Directors, on July 19, 2005, the Company entered into an agreement with
Goldman, Sachs & Co. ("Goldman Sachs") to purchase shares of the Company's
common stock for an aggregate purchase price of $500 million under an
accelerated stock buyback program. The buyback agreement provides for the
upfront delivery of $500 million to Goldman Sachs and the initial delivery of
shares to CIT, followed by the potential delivery of additional shares depending
upon the price of CIT common stock during the term of the program. Additional
shares may be delivered to CIT at two subsequent dates, during the third quarter
when minimum and maximum number of shares will be set and in the fourth quarter
at the end of the program. Repurchased shares delivered to CIT will be held in
treasury.
The number of additional shares the Company may receive over the remaining
term of the agreement, which expires during December 2005, will generally be
based upon the volume-weighted average price of the Company's common stock
during the term of the program. However, as part of the agreement, minimum and
maximum share prices will be set, which will serve to determine the number of
shares to be received. The minimum and maximum share prices will be established
based upon the volume-weighted average price during a period that began on July
25, 2005, and will be completed during the third quarter of 2005. The Company
expects that the program will be completed in December 2005, although in certain
circumstances the completion date may be accelerated or extended.
In connection with the program, the Company expects that Goldman Sachs
will purchase shares of the Company's common stock in the open market over time.
Also in conjunction with the program, Goldman Sachs may sell CIT shares in the
open market over time. These activities undertaken by Goldman Sachs are expected
to increase the amount of short interest in the Company's stock, but will be
reversed over the course of the agreement term.
On July 28, 2005, the Company delivered $500 million to Goldman Sachs and
received the initial delivery of approximately 8.2 million shares, while
retaining the right to receive additional shares as explained above. The 8.2
million shares represents 80% of the minimum expected share delivery based upon
preliminary pricing. In no event, will CIT receive less than the 8.2 million
shares.
On July 26, 2005, the Company issued $500 million aggregate amount of
Series A and Series B preferred equity securities. The offering was comprised of
$350 million 6.35% non-cumulative fixed rate Series A preferred stock and $150
million 5.189% non-cumulative adjustable rate Series B preferred stock. Holders
of the Series A preferred shares will be entitled to receive dividends as
declared, at an annual rate of 6.35%. Holders of the Series B preferred shares
will be entitled to receive dividends as declared, at an annual rate of 5.189%
through and including September 15, 2010, and thereafter at an annual floating
rate spread over a pre-specified benchmark rate. Both the Series A and Series B
preferred stock are callable at par at any time after September 15, 2010. The
intended use of proceeds from this offering was to fund the repurchase of our
common stock in conjunction with the previously announced accelerated stock
buyback program.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 11, 2005. The following
table includes individuals, comprising all of the directors of CIT, who were
elected to the Board of Directors, each with the number of votes shown, to serve
until the next annual meeting of stockholders, or until succeeded by another
qualified director who has been elected, along with all other proposals and vote
tallies:
Proposal Votes Votes
No. Description Votes For Withheld Abstain
-------- ---------------------- ----------- ----------- --------
1 Election of Directors:
GARY C. BUTLER 109,977,954 81,012,782 --
WILLIAM A. FARLINGER 189,603,008 1,387,728 --
WILLIAM M. FREEMAN 177,238,830 13,751,906 --
HON. THOMAS H. KEAN 175,048,156 15,942,580 --
50
Proposal Votes Votes
No. Description Votes For Withheld Abstain
-------- ---------------------- ----------- ------------- ----------
MARIANNE MILLER PARRS 189,657,686 1,333,050 --
JEFFREY M. PEEK 185,436,076 5,554,660 --
TIMOTHY M. RING 177,268,799 13,721,937 --
JOHN R. RYAN 189,657,558 1,333,178 --
PETER J. TOBIN 189,646,864 1,343,872 --
LOIS M. VAN DEUSEN 189,661,021 1,329,715 --
2 Ratification of Independent
Accountants 189,704,057 293,217 993,462
3 Other business 74,707,328 103,710,158 12,573,250
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Form 10-Q filed by CIT on August
12, 2003).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Form 10-Q filed by CIT on August 12, 2003).
3.3 Certificate of Designations relating to the Company's 6.350%
Non-Cummulative Preferred Stock Series A (incorporated by
reference to Exhibit 3 to Form 8-A filed by CIT on July 29,
2005).
3.4 Certificate of Designations relating to the Company's
Non-Cumulative Preferred Stock, Series B (incorporated by
reference to Exhibit 3 to Form 8-A filed by CIT on July 29,
2005).
4.1 Indenture dated as of August 26, 2002 by and among CIT Group
Inc., Bank One Trust Company, N.A., as Trustee and Bank One
NA, London Branch, as London Paying Agent and London
Calculation Agent, for the issuance of unsecured and
unsubordinated debt securities (incorporated by reference to
Exhibit 4.18 to Form 10-K filed by CIT on February 26, 2003).
4.2 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).
4.3 Certain instruments defining the rights of holders of CIT's
long-term debt, none of which authorize a total amount of
indebtedness in excess of 10% of the total amounts outstanding
of CIT and its subsidiaries on a consolidated basis have not
been filed as exhibits. CIT agrees to furnish a copy of these
agreements to the Commission upon request.
10.1* Master Confirmation Agreement and the related Supplemental
Confirmation dated as of July 19, 2005 between Goldman, Sachs
and Co. and CIT Group Inc. relating to CIT's accelerated stock
repurchase program.
12.1 CIT Group Inc. and Subsidiaries Computation of Earnings to
Fixed Charges.
31.1 Certification of Jeffrey M. Peek pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Joseph M. Leone pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of 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.
--------------------------------------------------------------------------------
* Portions of this exhibit have been redacted and are subject of a
confidential treatment request filed with the Secretary of the Securities
and Exchange Commission pursuant to rule 24b-2 under the Securities
Exchange Act of 1934 as amended.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CIT GROUP INC.
By: /s/ JOSEPH M. LEONE
------------------------------------------
Joseph M. Leone
Vice Chairman and Chief Financial Officer
By: /s/ WILLIAM J. TAYLOR
------------------------------------------
William J. Taylor
Executive Vice President, Controller
and Principal Accounting Officer
December 13, 2005
52