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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------
Commission File Number
1-1861
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THE CIT GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2994534
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1211 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10036
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 536-1390
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1999: Class A Common Stock - 161,903,765 shares.
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<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
TABLE OF CONTENTS PAGE
----------------- ----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998. 2
Consolidated Income Statements for the three month
periods ended March 31, 1999 and 1998. 3
Consolidated Statements of Changes in Stockholders' Equity for
the three month periods ended March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
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Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, but are not limited to, potential changes in interest rates,
competitive factors, and general economic conditions.
================================================================================
PART I. FINANCIAL INFORMATION
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the December 31,
1998 Annual Report on Form 10-K for The CIT Group, Inc. ("we", "our", "us",
"CIT", or the "Company").
1
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Millions)
March 31, December 31,
--------- ------------
Assets 1999 1998
- ------ --------- ------------
Financing and leasing assets (unaudited)
Loans
Commercial $ 11,715.6 $ 11,415.5
Consumer 4,147.7 4,266.9
Lease receivables 4,212.8 4,173.6
---------- ----------
Finance receivables 20,076.1 19,856.0
Reserve for credit losses (265.8) (263.7)
---------- ----------
Net finance receivables 19,810.3 19,592.3
Operating lease equipment, net 3,178.2 2,774.1
Consumer finance receivables held for sale 985.4 987.4
Cash and cash equivalents 188.9 73.6
Other assets 905.8 875.7
---------- ----------
Total assets $ 25,068.6 $ 24,303.1
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Debt
Commercial paper $ 5,809.3 $ 6,144.1
Variable rate senior notes 4,426.1 4,275.0
Fixed rate senior notes 8,530.7 8,032.3
Subordinated fixed rate notes 200.0 200.0
---------- ----------
Total debt 18,966.1 18,651.4
Credit balances of factoring clients 1,584.3 1,302.1
Accrued liabilities and payables 764.6 694.3
Deferred federal income taxes 729.9 703.7
---------- ----------
Total liabilities 22,044.9 21,351.5
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely debentures of the Company 250.0 250.0
Stockholders' equity
Class A Common Stock, par value $0.01 per share;
Authorized 700,000,000 shares
Issued: 163,202,941 shares in 1999 and
163,144,879 shares in 1998
Outstanding: 161,998,220 shares in 1999 and
162,176,949 shares in 1998 1.7 1.7
Paid-in capital 956.1 952.5
Retained earnings 1,848.5 1,772.8
Treasury stock at cost (1,204,721 shares in 1999
and 967,930 shares in 1998; Class A Common Stock) (32.6) (25.4)
---------- ----------
Total stockholders' equity 2,773.7 2,701.6
---------- ----------
Total liabilities and stockholders' equity $ 25,068.6 $ 24,303.1
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Amounts in Millions, except Net Income per Share)
For the Three Months
Ended March 31,
--------------------
1999 1998
---- ----
(unaudited)
Finance income $541.5 $472.6
Interest expense 273.3 244.6
------ ------
Net finance income 268.2 228.0
Fees and other income 64.7 66.4
------ ------
Operating revenue 332.9 294.4
------ ------
Salaries and general operating expenses 109.0 101.7
Provision for credit losses 21.9 22.5
Depreciation on operating lease equipment 56.1 38.3
Minority interest in subsidiary trust holding
solely debentures of the Company 4.8 4.8
------ ------
Operating expenses 191.8 167.3
------ ------
Income before provision for income taxes 141.1 127.1
Provision for income taxes 49.2 45.4
------ ------
Net income $ 91.9 $ 81.7
====== ======
Net income per basic share $ 0.57 $ 0.50
Net income per diluted share $ 0.57 $ 0.50
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in Millions)
Three Months Ended
March 31,
---------------------------
1999 1998
---- ----
(unaudited)
Balance, January 1 $ 2,701.6 $ 2,432.9
Net income 91.9 81.7
Dividends declared (16.2) (16.3)
Treasury stock purchased (7.2) --
Other 3.6 1.4
--------- ---------
Balance, March 31 $ 2,773.7 $ 2,499.7
========= =========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(unaudited)
CASH FLOWS FROM OPERATIONS
Net income $ 91.9 $ 81.7
Adjustments to reconcile net income to net
cash flows from operations:
Provision for credit losses 21.9 22.5
Depreciation and amortization 73.1 44.3
Provision for deferred federal income taxes 26.2 11.2
Gains on asset and receivable sales (14.0) (21.3)
Increase in accrued liabilities and payables 72.0 44.1
Increase in other assets (53.1) (59.7)
Other 15.7 6.6
------- -------
Net cash flows provided by operations 233.7 129.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans extended (7,827.7) (8,327.8)
Collections on loans 7,485.0 7,847.3
Proceeds from asset and receivable sales 775.2 71.3
Purchases of assets to be leased (472.5) (228.3)
Purchase of loan portfolios (202.0) (250.7)
Net increase in short-term factoring receivables (91.4) (161.7)
Purchases of investment securities (2.7) (2.3)
Proceeds from sales of assets received in
satisfaction of loans 1.6 11.6
Other (5.2) (6.9)
------- -------
Net cash flows used for investing activities (339.7) (1,047.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of variable and fixed
rate notes 2,248.4 1,557.9
Repayments of variable and fixed rate notes (1,598.9) (761.5)
Net (decrease) increase in commercial paper (334.8) 275.9
Repayments of nonrecourse leveraged lease debt (70.0) (52.4)
Cash dividends paid (16.2) --
Purchase of treasury stock (7.2) --
-------- --------
Net cash flows provided by financing activities 221.3 1,019.9
-------- --------
Net increase in cash and cash equivalents 115.3 101.8
Cash and cash equivalents, beginning of period 73.6 140.4
-------- --------
Cash and cash equivalents, end of period $ 188.9 $ 242.2
======== ========
Supplemental disclosures
Interest paid $ 225.7 $ 192.0
Federal and state and local income taxes paid $ 3.4 $ 4.6
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE CIT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Basis of Presentation
We believe all adjustments (all of which are normal recurring accruals)
necessary for a fair statement of financial position and results of operations
for these periods have been made; however, results for interim periods are
subject to year-end audit adjustments. Results for interim periods are not
necessarily indicative of results for a full year.
Note 2--Earnings Per Share
The reconciliation of the numerator and denominator of basic earnings per share
("EPS") with that of diluted EPS is presented below.
<TABLE>
<CAPTION>
===============================================================================================================
For the Three Months Ended March 31,
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- -------
Dollar Amounts in Millions
(except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common shareholders $ 91.9 161,166,060 $ 0.57 $ 81.7 162,225,000 $ 0.50
======== ========
Effect of Dilutive
Securities:
Restricted shares -- 962,291 -- 947,098
Stock options -- 292,676 -- 326,286
------ ----------- -------- -----------
Diluted EPS $ 91.9 162,421,027 $ 0.57 $ 81.7 163,498,384 $ 0.50
====== =========== ======== ======== =========== ========
===============================================================================================================
</TABLE>
6
<PAGE>
Note 3 - Business Segment Information
The following table presents reportable segment information and the
reconciliation to the consolidated totals as of March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Equipment
Financing Commercial Total Corporate Consolidated
and Leasing Finance Consumer Segments and Other Total
----------- ------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999 (Dollars in Millions)
Operating revenue $ 177.2 $ 89.4 $ 58.8 $ 325.4 $ 7.5 $ 332.9
Net income 56.5 28.5 13.0 98.0 (6.1) 91.9
Total managed assets 13,640.2 5,466.4 7,913.4 27,020.0 84.6 27,104.6
March 31, 1998
Operating revenue 146.5 85.5 48.9 280.9 13.5 294.4
Net income 48.1 30.2 9.0 87.3 (5.6) 81.7
Total managed assets 11,906.8 4,514.4 6,810.9 23,232.1 63.3 23,295.4
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 4 - Pending Acquisition
On March 8, 1999, we announced that we would acquire Newcourt Credit Group Inc.
("Newcourt") in an exchange of common stock. Under the terms of the transaction,
which will be accounted for on a purchase basis, 0.92 shares of our common stock
will be exchanged for each outstanding share of Newcourt common stock. The
transaction is expected to close during the third quarter of 1999, and is
conditioned upon, among other things, regulatory and stockholder approval.
On May 5, 1999, we announced the following:
-----------------------
Albert R. Gamper, Jr. President and Chief Executive Officer of The CIT Group,
Inc., (NYSE:CIT) in commenting on Newcourt Credit Group Inc.'s (NYSE:NCT;
TSE:NCT) first quarter earnings announcement, said, "We learned this week that
Newcourt's first quarter earnings would fall short of market expectations. We
have been told by Newcourt management that business volume across all business
lines is strong and that core business remains sound.
7
<PAGE>
The reduced securitization in the first quarter is consistent with CIT's
approach in keeping assets on the balance sheet. In light of the shortfall in
the first quarter earnings, we will be reviewing Newcourt's financials with its
management."
-----------------------
The process of this review began the week of May 10, 1999.
Newcourt is headquartered in Toronto, Canada and its stock is traded on the New
York, Toronto, and Montreal Stock Exchanges. Newcourt is an independent,
non-bank financial services enterprise with worldwide operations primarily in
the United States, Canada and Europe, with a market leadership position in the
vendor financing business. Newcourt focuses on the commercial and corporate
finance segments of the asset-based financing market and originates, co-invests
in and sells asset-based financings including secured loans, conditional sales
contracts, and financial leases.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Net income for the quarters ended March 31, 1999 and 1998 totaled $91.9 million
and $81.7 million, respectively. Earnings per diluted share for the first
quarter of 1999 increased 14.0% to $0.57 from $0.50 in 1998. The improved first
quarter 1999 earnings reflect continued strong portfolio growth, low commercial
net credit losses, and further improvements in operating efficiency.
Return on equity for the first quarter of 1999 was 13.5% compared to 13.2% for
the same period in 1998. Return on average earning assets ("AEA") for the first
quarter of 1999 was 1.63% compared to 1.71% for the first quarter of 1998.
Managed assets, comprised of financing and leasing assets and consumer finance
receivables previously securitized that we continue to manage, totaled a record
$27.1 billion at March 31, 1999, an increase of 16.3% from $23.3 billion at
March 31, 1998 and up 3.4% from $26.2 billion at December 31, 1998. Financing
and leasing assets increased 15.5% to $24.3 billion at March 31, 1999 from $21.1
billion at March 31, 1998, and increased 2.6% from $23.7 billion at December 31,
1998.
9
<PAGE>
NET FINANCE INCOME
A comparison of 1999 and 1998 net finance income is set forth below.
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
March 31, Increase
-------------------------------- ------------------------
1999 1998 Amount Percent
---- ---- ------ -------
(Dollar Amounts in Millions)
<S> <C> <C> <C> <C>
Finance income $ 541.5 $ 472.6 $ 68.9 14.6%
Interest expense 273.3 244.6 28.7 11.7%
---------- ---------- ---------- ----
Net finance income $ 268.2 $ 228.0 $ 40.2 17.6%
========== ========== ========== ====
AEA $ 22,603.8 $ 19,083.3 $ 3,520.5 18.4%
========== ========== =========== ====
Net finance income as a % of AEA 4.75% 4.78%
==== ====
- --------------------------------------------------------------------------------
</TABLE>
Finance income for the three months ended March 31, 1999 increased $68.9 million
or 14.6% from the comparable 1998 period. As a percentage of AEA, finance income
(excluding interest income relating to short-term interest-bearing deposits) was
9.47% for the first quarter ended March 31, 1999 compared to 9.76% for the same
quarter of 1998. The decline in yield of 29 basis points was primarily due to
the decline in market interest rates as well as the highly competitive
marketplace.
Interest expense for the three months ended March 31, 1999 increased $28.7
million or 11.7% from the comparable 1998 period. As a percentage of AEA,
interest expense (excluding interest expense relating to short-term
interest-bearing deposits and dividends related to the Company's preferred
capital securities) for the first quarter of 1999 decreased to 4.72% from 4.98%.
The decline of 26 basis points from the comparable period of 1998 reflects lower
market rates.
We seek to mitigate interest rate risk by matching the repricing characteristics
of our assets with our liabilities. This strategy is, in part, accomplished
through the use of interest rate swaps. A
10
<PAGE>
comparative analysis of the weighted average principal outstanding and interest
rates paid on our debt for the three month periods ended March 31, 1999 and
1998, before and after giving effect to interest rate swaps, is shown in the
following table.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
------------------------------------------------------------
Before Swaps After Swaps
------------------------------ -------------------------
<S> <C> <C> <C> <C>
(Dollar Amounts in Millions)
Commercial paper and variable rate senior
notes $ 10,669.8 5.01% $ 8,335.4 4.97%
Fixed rate senior and subordinated notes 8,498.5 6.21% 10,832.9 6.27%
---------- ----------
Composite interest rate paid $ 19,168.3 5.54% $ 19,168.3 5.71%
========== ==========
Three Months Ended March 31, 1998
------------------------------------------------------------
Before Swaps After Swaps
------------------------------ -------------------------
(Dollar Amounts in Millions)
Commercial paper and variable rate senior
notes $ 8,520.7 5.66% $ 6,052.4 5.61%
Fixed rate senior and subordinated notes 7,056.5 6.41% 9,524.8 6.48%
---------- ----------
Composite interest rate paid $ 15,577.2 6.00% $ 15,577.2 6.14%
========== ==========
</TABLE>
Our interest rate swaps principally convert floating rate debt to fixed interest
rates. We do not enter into derivative financial instruments for trading or
speculative purposes. The weighted average composite interest rate after swaps
increased from the weighted average composite interest rate before swaps in each
period, primarily because a larger proportion of our debt, after giving effect
to interest rate swaps, was subject to a fixed interest rate. However, the
weighted average interest rates before swaps do not necessarily reflect the
interest expense that would have been incurred had we chosen to manage interest
rate risk without the use of such swaps.
11
<PAGE>
FEES AND OTHER INCOME
For the three months ended March 31, 1999, fees and other income totaled $64.7
million, compared to $66.4 million for the first quarter of 1998. Strong growth
in lending fees in our commercial finance and equipment financing businesses, as
well as factoring fees and other income, were offset by lower gains on both
sales of leasing equipment, due to less equipment coming off lease, and venture
capital investments. The following table sets forth the components of fees and
other income.
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
1999 1998
---- ----
(Dollar Amounts in Millions)
Factoring commissions $ 24.0 $23.0
Fees and other income 30.9 22.1
Gains on sales of leasing equipment 9.2 14.8
Gains on securitizations 0.6 --
Gains on sales of venture capital investments -- 6.5
------ -----
$ 64.7 $66.4
====== =====
- --------------------------------------------------------------------------------
SALARIES AND GENERAL OPERATING EXPENSES
Salaries and general operating expenses increased by $7.3 million or 7.2% to
$109.0 million in the first quarter of 1999 from $101.7 million in the
comparable 1998 period. The increase in expenses reflects continued product
expansion in the equipment finance segment, incremental costs relating to the
restructuring of our sales finance business, and normal expense increases.
12
<PAGE>
Management monitors productivity via the efficiency ratio and the ratio of
salaries and general operating expenses to average managed assets ("AMA"). These
ratios are set forth in the following table.
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------
1999 1998
---- ----
Efficiency ratio 40.1% 40.5%
Salaries and general operating expenses
as a percentage of AMA 1.73% 1.90%
- --------------------------------------------------------------------------------
The improvement in the ratios reflects the success of continuing productivity
initiatives and our ability to leverage our existing operating structure and
investment technology.
RESERVE AND PROVISION FOR CREDIT LOSSES/CREDIT QUALITY
The reserve for credit losses is periodically reviewed for adequacy considering
economic conditions, collateral values and credit quality indicators, including
charge-off experience, and levels of past due loans and nonperforming assets.
The reserve increased by $2.1 million to $265.8 million (1.32% of finance
receivables) at March 31, 1999 from $263.7 million (1.33% of finance
receivables) at December 31, 1998. A measure of reserve adequacy and strength
used by us and in our industry is the ratio of the balance sheet reserve for
credit losses to trailing twelve-month net credit losses. This ratio, 3.34 times
at March 31, 1999, remained relatively unchanged from 3.35 times at December 31,
1998. The relationship of the reserve for credit losses to nonaccrual finance
receivables was 121.8% at March 31, 1999 compared to 124.7% at December 31,
1998.
13
<PAGE>
The provision for credit losses for the first quarter of 1999 was $21.9 million,
down slightly from $22.5 million in the first quarter of 1998.
For the quarter ended March 31, 1999, net credit losses were $20.9 million
(0.42% of average finance receivables) as compared to $20.0 million (0.45% of
average finance receivables) for the same period last year.
The following table sets forth net credit losses as a percentage of average
finance receivables (annualized), excluding consumer finance receivables held
for sale.
- --------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------
1999 1998
---- ----
Equipment Financing and Leasing 0.11% 0.30%
Commercial Finance 0.43% 0.18%
---- ----
Total Commercial 0.22% 0.27%
---- ----
Consumer 1.17% 1.17%
---- ----
Total 0.42% 0.45%
==== ====
- --------------------------------------------------------------------------------
Overall, commercial net credit losses were down slightly from 0.27% in 1998 to
0.22% in 1999, and consumer net credit losses were unchanged at 1.17%. Equipment
Financing and Leasing net credit losses declined on continued good credit
quality. The increase in Commercial Finance net credit losses was primarily due
to a large recovery in the first quarter of 1998.
As a percentage of average consumer managed finance receivables, consumer net
credit losses were 0.97% during the first quarter of 1999 compared to 0.90% for
the same period in 1998.
14
<PAGE>
PAST DUE AND NONPERFORMING ASSETS
The following table sets forth certain information concerning past due and total
nonperforming assets (and the related percentages of finance receivables) at
March 31, 1999 and December 31, 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
--------------------------- ------------------------------
(Dollar Amounts in Millions)
<S> <C> <C> <C> <C>
Finance receivables, past due 60 days
or more
Equipment Financing and
Leasing $ 176.5 1.69% $ 149.9 1.41%
Commercial Finance 40.6 0.74% 32.1 0.64%
-------- ---- --------- ----
Total Commercial Segments 217.1 1.36% 182.0 1.17%
-------- ---- --------- ----
Consumer Finance 147.9 3.57% 166.0 3.89%
-------- ---- --------- ----
Total $ 365.0 1.82% $ 348.0 1.75%
======== ==== ========= ====
Total nonperforming assets
Equipment Financing and
Leasing $ 131.4 1.26% $ 135.2 1.27%
Commercial Finance 22.5 0.41% 14.5 0.29%
-------- ---- --------- ----
Total Commercial Segments 153.9 0.97% 149.7 0.96%
-------- ---- --------- ----
Consumer Finance 128.4 3.09% 129.0 3.02%
-------- ---- --------- ----
Total $ 282.3 1.41% $ 278.7 1.40%
======== ==== ========= ====
</TABLE>
- --------------------------------------------------------------------------------
Nonperforming assets reflect both finance receivables on nonaccrual status and
assets received in satisfaction of loans.
From time to time, financial or operational difficulties may adversely affect
future payments relating to certain operating lease equipment. Such operating
lease equipment is not included in the totals for past due and nonperforming
assets. At March 31, 1999, operations at an oil refinery were subject to such
difficulties. The aggregate carrying value of this asset was
15
<PAGE>
approximately $26 million. We do not believe these difficulties will have a
material adverse effect on our consolidated financial position or results of
operations.
OPERATING LEASE EQUIPMENT
The operating lease equipment portfolio was $3.2 billion at March 31, 1999, up
14.6% from December 31, 1998 and up 54.7% from March 31, 1998, driven primarily
by growth in rail transport, construction, and commercial aircraft equipment.
Depreciation for the quarter ended March 31, 1999 was $56.1 million, up from
$38.3 million for the same period in 1998 due to growth in the portfolio.
INCOME TAXES
The effective income tax rates for the first quarters of 1999 and 1998 were
34.9% and 35.7%, respectively. The decrease in the 1999 effective tax rate was
primarily the result of lower state and local income taxes.
16
<PAGE>
FINANCING AND LEASING ASSETS
Managed assets grew $888.3 million (3.4%) to $27.1 billion during the first
quarter of 1999, and financing and leasing assets increased $624.9 million
(2.6%) to $24.3 billion, as presented in the following table.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31, At December 31, Change
1999 1998 Amount Percent
----------- --------------- ------ -------
(Dollar Amounts in Millions)
<S> <C> <C> <C> <C>
Equipment Financing:
Finance receivables $ 8,456.4 $ 8,497.6 $ (41.2) (0.5%)
Operating lease equipment, net 862.9 765.1 97.8 12.8
----------- ---------- ------- ----
Total 9,319.3 9,262.7 56.6 0.6
----------- ---------- ------- ----
Capital Finance:
Finance receivables 1,603.3 1,655.4 (52.1) (3.1)
Operating lease equipment, net (1) 2,289.5 1,982.0 307.5 15.5
----------- ---------- ------- ----
3,892.8 3,637.4 255.4 7.0
Liquidating portfolio(1) (2) 428.1 466.9 (38.8) (8.3)
----------- ---------- ------- ----
Total 4,320.9 4,104.3 216.6 5.3
----------- ---------- ------- ----
Total Equipment Financing & Leasing 13,640.2 13,367.0 273.2 2.0
----------- ---------- ------- ----
Commercial Services 2,863.5 2,481.8 381.7 15.4
Business Credit 1,609.6 1,477.9 131.7 8.9
Credit Finance 993.3 1,036.5 (43.2) (4.2)
----------- ---------- ------- ----
Total Commercial Finance 5,466.4 4,996.2 470.2 9.4
----------- ---------- ------- ----
Total Commercial Segments 19,106.6 18,363.2 743.4 4.0
----------- ---------- ------- ----
Other - Equity Investments 84.6 81.9 2.7 3.3
----------- ---------- ------- ----
Consumer Finance 2,342.8 2,244.4 98.4 4.4
Sales Financing 2,790.3 3,009.9 (219.6) (7.3)
----------- ---------- ------- ----
Total Consumer Segment 5,133.1 5,254.3 (121.2) (2.3)
----------- ---------- ------- ----
Total Financing and Leasing Assets 24,324.3 23,699.4 624.9 2.6
----------- ---------- ------- ----
Finance receivables previously securitized:
Consumer Finance 554.9 607.6 (52.7) (8.7)
Sales Financing 2,225.4 1,909.3 316.1 16.6
----------- ---------- ------- ----
Total 2,780.3 2,516.9 263.4 10.5
----------- ---------- ------- ----
Total Managed Assets - Consumer Segment 7,913.4 7,771.2 142.2 1.8
----------- ---------- ------- ----
Total Managed Assets $ 27,104.6 $ 26,216.3 $ 888.3 3.4%
=========== ========== ======= ====
</TABLE>
(1) Operating lease equipment, net, of $25.8 million and $27.0 million are
included in the liquidating portfolios at March 31, 1999 and December 31,
1998, respectively.
(2) Consists primarily of oceangoing maritime and project finance.
- --------------------------------------------------------------------------------
17
<PAGE>
Strong originations in rail and construction resulted in first quarter 1999
growth in the Equipment Financing and Leasing operating lease portfolios. The
growth in the Commercial Finance segment resulted from strong 1999 new business
generation and seasonal growth in factoring.
Consumer managed assets increased to $7.9 billion at March 31, 1999 from $7.8
billion at December 31, 1998, up 1.8%.
Financing and Leasing Assets Composition
Our ten largest financing and leasing asset accounts at March 31, 1999 in the
aggregate accounted for 4.7% of the total financing and leasing assets, all of
which are commercial accounts secured by equipment, accounts receivable or
inventories.
Geographic Composition
The following table presents financing and leasing assets by customer location.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31,1999 At December 31, 1998
------------------------------- -------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollar Amounts in Millions)
<S> <C> <C> <C> <C>
United States
West $ 5,675.5 23.3% $ 5,583.2 23.6%
Northeast 5,254.7 21.6 5,143.9 21.7
Midwest 5,091.2 20.9 4,895.3 20.7
Southeast 3,522.7 14.5 3,492.3 14.7
Southwest 3,155.7 13.0 2,993.3 12.6
Foreign (principally commercial aircraft) 1,624.5 6.7 1,591.4 6.7
---------- ----- ---------- -----
Total $24,324.3 100.0% $ 23,699.4 100.0%
========= ===== ========== =====
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
Our managed asset geographic diversity does not differ significantly from our
owned asset geographic diversity. Additionally, our financing and leasing asset
portfolio is diversified by state. At March 31, 1999, only California (12.5%),
Texas (8.9%), and New York (7.8%) accounted for more than 4.4% of financing and
leasing assets.
Industry Composition
The following table presents financing and leasing assets by major industry
class.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
--------------------------------- -------------------------------
Amount Percent Amount Percent
(Dollar Amounts in Millions)
<S> <C> <C> <C> <C> <C>
Manufacturing(1) $ 5,375.7 22.1% $ 5,117.0 21.6%
Home mortgage(2) 2,342.8 9.6 2,244.4 9.5
Commercial airlines(3) 2,314.6 9.5 2,325.4 9.8
Retail 2,191.4 9.0 1,882.1 7.9
Construction equipment 2,047.3 8.4 1,947.4 8.2
Transportation(4) 1,990.4 8.2 1,777.6 7.5
Manufactured housing(5) 1,516.6 6.2 1,417.5 6.0
Other(6)(7) 6,545.5 27.0 6,988.0 29.5
------------- ------ ------------ -----
Total $ 24,324.3 100.0% $ 23,699.4 100.0%
============= ===== ============ =====
</TABLE>
- --------------------------------------------------------------------------------
(1)Includes various categories of manufacturers, including steel and metal
products, textiles and apparel, printing and paper products and other
industries. No individual category is greater than 4.1% of total financing
and leasing assets.
(2)On a managed asset basis, home mortgage outstandings were $2.9 billion or
10.7% of managed assets at March 31, 1999 as compared with $2.9 billion or
10.9% at December 31, 1998.
(3)Commercial airlines were 8.5% of managed assets at March 31, 1999. See
"--Concentrations" below for a discussion of the commercial airline
portfolio.
(4)Includes rail, bus, over-the-road trucking and business aircraft.
(5)On a managed asset basis, manufactured housing outstandings were $1.8
billion or 6.6% of managed assets at March 31, 1999 as compared to $1.7
billion or 6.5% at December 31, 1998.
(6)Includes various categories, none of which is greater than 4.1%.
(7)On a managed asset basis, recreation vehicle outstandings were $1.9 billion
or 7.0% of managed assets at March 31, 1999 as compared to $1.9 billion or
7.2% at December 31, 1998. On a managed asset basis, recreational boat
outstandings were $1.1 billion or 4.0% of managed assets at March 31, 1999 as
compared to $1.0 billion or 4.0% of managed assets at December 31, 1998.
- --------------------------------------------------------------------------------
19
<PAGE>
Concentrations
Commercial Airline Industry
Commercial airline financing and leasing assets totaled $2.3 billion (9.5% of
total financing and leasing assets) at March 31, 1999, unchanged from $2.3
billion (9.8%) at December 31, 1998. These financing and leasing assets relate
to commercial aircraft and ancillary equipment. Over the past few years, we have
been growing this portfolio, and more recently we decided to expand our product
offerings to include newly manufactured commercial aircraft. Early in the second
quarter of 1999, we entered into an agreement with Airbus Industries to purchase
30 aircraft, with options to acquire additional units. Deliveries of these new
aircraft are scheduled to take place over a five year period starting in the
fourth quarter of 2000.
The following table presents information about the commercial airline industry
portfolio. See also "Operating Lease Equipment".
- --------------------------------------------------------------------------------
At March 31, 1999 At December 31, 1998
----------------- --------------------
Finance Receivables (Dollar Amounts in Millions)
Amount outstanding(1) $ 1,208.0 $ 1,230.7
Number of obligors 50 54
Operating Lease Equipment, net
Net carrying value $ 1,106.6 $ 1,094.7
Number of obligors 36 33
Total $ 2,314.6 $ 2,325.4
Number of obligors(2) 69 65
Number of aircraft(3) 197 206
(1) Includes accrued rents on operating leases that are classified as finance
receivables in the Consolidated Balance Sheets.
(2) Certain obligors are obligors under both finance receivable and operating
lease transactions.
(3) Regulations established by the Federal Aviation Administration (the "FAA")
limit the maximum permitted noise an aircraft may make. A Stage III
aircraft meets a more restrictive noise level requirement than a Stage II
aircraft. The FAA has issued rules that phase out the use of Stage II
aircraft in the United States by the year 2000. Similar restrictions in
Europe phase out the use of Stage II aircraft by the year 2001. At March
31, 1999, the portfolio consisted of Stage III aircraft of $2,246.0
million (97.0%) and Stage II aircraft of $50.8 million (2.2%), versus
Stage III aircraft of $2,246.0 million (96.6%) and Stage II aircraft of
$55.9 million (2.4%) at year-end 1998.
--------------------------------------------------------------------------
20
<PAGE>
We continue to reduce our Stage II commercial aircraft exposure and increase our
Stage III exposure because FAA rules phase out the use of Stage II aircraft by
the year 2000 in the United States. At March 31, 1999, Stage II aircraft totaled
2.2% of our commercial aircraft portfolio, divided equally between aircraft on
operating lease and collateral for full pay out debt obligations.
Foreign Outstandings
We are primarily a domestic lender, with foreign exposures limited mainly to the
commercial airline industry. Financing and leasing assets to foreign obligors
are U.S. dollar denominated and totaled $1.6 billion at both March 31, 1999 and
December 31, 1998. The largest exposures at March 31, 1999 were to obligors in
Belgium, $141.8 million (0.58% of financing and leasing assets), France, $133.9
million (0.55%), Canada, $117.1 million (0.48%), Ireland, $103.0 million
(0.42%), Mexico, $102.3 million (0.42%) and Brazil, $96.8 million (0.40%). The
remaining foreign exposure was geographically dispersed, with no other
individual country exposure greater than $90 million.
Highly Leveraged Transactions ("HLTs")
We use the following criteria to classify a buyout financing or recapitalization
which equals or exceeds $20 million as an HLT:
o The transaction at least doubles the borrower's liabilities and
results in a leverage ratio (as defined) higher than 50%, or
o The transaction results in a leverage ratio higher than 75%, or
o The transaction is designated as an HLT by a syndication agent.
21
<PAGE>
HLTs that we originated and in which we participated totaled $577.2 million
(2.4% of financing and leasing assets) at March 31, 1999 as compared to $561.1
million (2.4%) at December 31, 1998. The increase in HLT outstandings during the
first quarter of 1999 was due to new originations. Our HLT outstandings are
generally secured by collateral, as distinguished from HLTs that rely primarily
on cash flows from operations. Unfunded commitments to lend in secured HLT
situations were $343.1 million at March 31, 1999, compared with $287.6 million
at year-end 1998.
LIQUIDITY
We manage liquidity risk by monitoring the relative maturities of assets and
liabilities and by borrowing funds, primarily in the U.S. money and capital
markets. We use such cash to fund asset growth (including the bulk purchase of
finance receivables and the acquisition of other finance-related businesses) and
to meet debt obligations and other commitments on a timely and cost-effective
basis. The primary sources of funding are commercial paper borrowings,
medium-term notes, and other term debt securities, supplemented by asset-backed
securitizations.
During the first three months of 1999, commercial paper outstanding decreased by
$334.8 million from $6.1 billion at December 31, 1998 to $5.8 billion at March
31, 1999. During this period, we issued $1.4 billion of variable rate term debt
and $0.9 billion of fixed rate term debt. Repayments of debt totaled $1.6
billion for the first quarter of 1999. At March 31, 1999, $7.6 billion of
registered, but unissued, debt securities remained available under shelf
registration statements, including $2.0 billion of European Medium-Term Notes.
22
<PAGE>
At March 31, 1999, commercial paper borrowings were supported by $5.0 billion of
committed revolving credit-line facilities, representing 85.5% of operating
commercial paper outstanding (commercial paper outstanding less short-term
interest-bearing deposits).
As part of our continuing program of accessing the public and private
asset-backed securitization markets as an additional liquidity source, $470.5
million of recreational boat finance receivables were securitized during the
first quarter of 1999. At March 31, 1999, $1.8 billion of registered, but
unissued, securities were available under shelf registration statements relating
to our asset-backed securitization program.
CAPITALIZATION
The following table presents information regarding our capital structure.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
------------ ---------------
(Dollar Amounts in Millions)
<S> <C> <C>
Commercial paper $ 5,809.3 $ 6,144.1
Term debt 13,156.8 12,507.3
---------- -----------
Total debt 18,966.1 18,651.4
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company 250.0 250.0
Stockholders' equity 2,773.7 2,701.6
---------- -----------
Total capitalization $ 21,989.8 $ 21,603.0
========== ===========
Total debt to stockholders' equity and Company-
obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company 6.27x 6.32x
Total debt and Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding
solely debentures of the Company to stockholders' equity 6.93x 7.00x
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
We believe we are well capitalized and that our capital structure is adequate to
support current operations and anticipated growth.
YEAR 2000 COMPLIANCE
Institutions around the world are reviewing and modifying their computer systems
to ensure they are Year 2000 compliant. The issue, in general terms, is that
many existing computer systems, both information technology systems and
non-information technology systems, contain date-based functions which use only
two digits to identify a year in the date field with the assumption that the
first two digits of the year are always "19". Consequently, on January 1, 2000,
systems that are not Year 2000 compliant may read the year as 1900. Systems that
calculate, compare or sort using the incorrect date may malfunction.
We continue to address the Year 2000 issue as it relates to our systems and
business. We have developed a comprehensive Year 2000 project to remediate our
information technology ("IT") systems and to address Year 2000 issues in our
non-IT systems. The process of remediation includes the following phases:
o Planning
o Assessing
o Designing (as necessary)
o Programming (as necessary)
o Testing and validation
24
<PAGE>
We have categorized our IT systems as high, medium or low priority with respect
to our ability to conduct business. As of March 31, 1999, we had successfully
completed:
o the planning, assessing and designing phases for all of our IT
systems
o the programming phase for all of our high and medium priority IT
systems and 97% of all our IT systems
o the testing and validation phase for 99% of our high and medium
priority IT systems and 95% of all our IT systems.
We estimate that, at March 31, 1999, our Year 2000 project was approximately 99%
completed for our high and medium priority IT systems and 95% completed with
respect to all our IT systems. Our Year 2000 project is substantially completed.
A majority of the software used in our IT systems is provided by outside
vendors. As of March 31, 1999 for our high and medium priority systems, all of
our vendor provided software or software upgrades have been designated by the
software vendors as Year 2000 compliant.
We continue to formulate a contingency plan for business continuation in the
event of Year 2000 systems failures. This contingency plan formulation is based
upon our existing disaster recovery and business continuity plans with
modifications for Year 2000 risks. We expect to complete our IT systems Year
2000 contingency plan by June 30, 1999, and to test this contingency plan
thereafter.
25
<PAGE>
Our non-IT systems used to conduct business at our facilities consist primarily
of office equipment (other than computer and communications equipment) and other
equipment at our leased office facilities. We have inventoried our non-IT
systems and have sent Year 2000 questionnaires to our office equipment vendors
and landlords to determine the status of their Year 2000 readiness.
Since 1997, we have been actively communicating with third parties concerning
the status of their Year 2000 readiness by, among other things, sending written
Year 2000 inquiries. These third parties include our borrowers, obligors, banks,
investment banks, investors, vendors, manufacturers, landlords and suppliers of
telecommunication services and other utilities. As part of the process of
evaluating our options and attempting to mitigate third party risks, we continue
to collect and analyze information from third parties. It is difficult to
predict the effect of any such third party non-readiness on our business.
Significant Year 2000 failures in our systems or in the systems of third parties
(or third parties upon whom they depend) could have a material adverse effect on
our financial condition and results of operations. We believe that our
reasonably likely worst case Year 2000 scenario is (i) a material increase in
our credit losses due to Year 2000 problems for our borrowers and obligors and
(ii) disruption in financial markets causing liquidity stress to us. The amount
of these potential credit losses or the degree of disruption cannot be
determined at this time.
The total cost of our Year 2000 project is expected to be approximately $7
million, of which approximately $5.9 million has been incurred through March 31,
1999. This amount includes the costs of additional hardware, software and
technology consultants, as well as the cost of our
26
<PAGE>
systems professionals dedicated to achieving Year 2000 compliance for IT
systems. We have included the cost of the Year 2000 project in our annual
budgets for information technology. We have postponed some non-Year 2000 IT
expenditures and initiatives until after 2000 in order to concentrate resources
on the Year 2000 issue. We do not expect that this will have a material adverse
effect on our financial condition and results of operations.
All Year 2000 information provided herein is a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act and is
subject to the terms thereof. This Year 2000 information is provided pursuant to
securities law requirements and it may not be taken as a form of covenant,
warranty, representation or guarantee of any kind.
27
<PAGE>
STATISTICAL DATA
The following table presents components of net income as a percentage of AEA,
along with other selected financial data.
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------
1999 1998
---- ----
Finance income(1) 9.47% 9.76%
Interest expense(1) 4.72 4.98
---- ----
Net finance income 4.75 4.78
Fees and other income 1.14 1.39
---- ----
Operating revenue 5.89 6.17
---- ----
Salaries and general operating expenses 1.93 2.14
Provision for credit losses 0.39 0.47
Depreciation on operating lease equipment 0.99 0.80
Minority interest in subsidiary trust holding solely
debentures of the Company 0.08 0.10
---- ----
Operating expenses 3.39 3.51
---- ----
Income before provision for income taxes 2.50 2.66
Provision for income taxes 0.87 0.95
---- ----
Net income 1.63% 1.71%
==== ====
Average earning assets (in millions) $22,603.8 $19,083.3
========= =========
(1) Excludes interest income and interest expense relating to short-term
interest-bearing deposits.
- --------------------------------------------------------------------------------
28
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 12 - Computation of Ratios of Earnings to Fixed Charges.
(b) Exhibit 27 - Financial Data Schedule.
(c) A Form 8-K report dated January 28, 1999 was filed with the
Commission reporting the Company's announcement of financial
results for the year ended December 31, 1999.
A Form 8-K report dated February 22, 1999 was filed with the
Commission setting forth a form T-1 Statement of Eligibility for
Harris Trust and Savings Bank, as trustee for CIT Marine Trust
1999-A.
A Form 8-K report dated March 8, 1999 was filed with the
Commission reporting the Company's announcement of an agreement
to acquire Newcourt Credit Group Inc. and filing a copy of the
Agreement and Plan of Reorganization, dated as of March 7,
1999, and certain information presented to analysts.
A Form 8-K report dated March 22, 1999 was filed with the
Commission containing pro forma financial statements prepared
by the Company reflecting the pending acquisition of Newcourt
Credit Group Inc.
29
<PAGE>
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.
The CIT Group, Inc.
-------------------
(Registrant)
BY /s/ J. M. Leone
---------------
J. M. Leone
Executive Vice President and
Chief Financial Officer
(duly authorized and principal
accounting officer)
DATE: May 14, 1999
30
EXHIBIT 12
THE CIT GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollar Amounts In Millions)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Net income $ 91.9 $ 81.7
Provision for income taxes 49.2 45.4
------ ------
Earnings before provision for income taxes 141.1 127.1
------ ------
Fixed charges:
Interest and debt expense on indebtedness 273.3 244.6
Minority interest in subsidiary trust holding solely
debentures of the Company 4.8 4.8
Interest factor - one third of rentals on
real and personal properties 2.3 2.3
------ ------
Total fixed charges 280.4 251.7
------ ------
Total earnings before provision for income
taxes and fixed charges $ 421.5 $ 378.8
======= =======
Ratios of earnings to fixed charges 1.50x 1.50x
===== =====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Income Statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 189
<SECURITIES> 0
<RECEIVABLES> 20,076
<ALLOWANCES> 266
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,069
<CURRENT-LIABILITIES> 0
<BONDS> 13,157
250
0
<COMMON> 2
<OTHER-SE> 2,774
<TOTAL-LIABILITY-AND-EQUITY> 25,069
<SALES> 0
<TOTAL-REVENUES> 606
<CGS> 0
<TOTAL-COSTS> 109
<OTHER-EXPENSES> 61
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> 141
<INCOME-TAX> 49
<INCOME-CONTINUING> 92
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
